Shawn Bevec – Vice President-Investor Relations Steve Rusckowski – Chairman, President and Chief Executive Officer Mark Guinan – Chief Financial Officer.

Patrick Donnelly – Goldman Sachs Ricky Goldwasser – Morgan Stanley A.J. Rice – Crédit Suisse Jack Meehan – Barclays Brian Tanquilut – Jefferies Lisa Gill – JPMorgan Kevin Ellich – Craig-Hallum Dan Leonard – Deutsche Bank Mark Massaro – Canaccord Genuity Ann Hynes – Mizuho Securities Ralph Giacobbe – Citi.

Welcome to the Quest Diagnostics Second Quarter 2018 Conference Call. At the request of the company, this call is being recorded. The entire contents of the call, including the presentation and question-and-answer session that will follow, are the copyrighted property of Quest Diagnostics with all rights reserved.

Any redistribution, retransmission or rebroadcast of this call in any form without the written consent of Quest Diagnostics is strictly prohibited. Now I’d like to introduce Shawn Bevec, Vice President of Investor Relations for Quest Diagnostics. Go ahead, please..

Thank you, and good morning. I’m here with Steve Rusckowski, our Chairman, President and Chief Executive Officer; and Mark Guinan, our Chief Financial Officer. During this call, we may make forward-looking statements and will 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 our most recent annual report on Form 10-K and subsequently filed quarterly reports on Form 10-Q and current reports on Form 8-K.

For this call, references to reported EPS refer to reported diluted EPS and references to adjusted EPS refer to adjusted diluted EPS, excluding amortization expense. As a reminder, adjusted diluted EPS excludes excess tax benefits associated with stock-based compensation.

Additionally, net revenues and selling, general and administrative expenses have been restated for the basis of prior-year comparisons to reflect the impact of the new revenue recognition standard that became effective January 1, 2018, and were adopted on a retrospective basis.

Under the new rules, the company now reports uncollectible balances associated with patient responsibility as a reduction in net revenues when historically these amounts were classified as bad debt expense within selling, general and administrative expenses. Now here is Steve Rusckowski..

Thanks, Shawn and thanks everyone for joining us today. This morning I’ll provide you with the highlights on the quarter and review progress on our 2-point strategy, which continues to drive results. And then Mark will provide more detail on second quarter performance.

The highlight of the quarter was establishing, our long-term strategic partnership with UnitedHealthcare, I’ll share more on this relationship in a few minutes. We delivered strong earnings growth in the quarter driven by revenue growth and the benefits of tax reform.

Here are some key highlights from the quarters; revenues were up 3%, despite some headwinds in the marketplace, reported EPS was up more than 14% from 2017, the adjusted EPS grew more than 20%. Before I describe the progress we’ve made, I like to provide an update on PAMA.

We continue to support efforts by our trade association to implement a market-based laboratory reimbursement schedule. On the legal front, ACLA has sued CMS, and both sides have submitted their briefs to the court, we’re awaiting the judge to rule on the briefs or set the date to hear or oral arguments.

In the meantime, we continue our outreach efforts to find the legislative solution. Earlier this month we were pleased to learn that CMS is asking stakeholders to provide comments and also improve future data collection and reporting periods on their PAMA.

This is a proper step since as we said all along, PAMA’s current reporting requirements undermine any effort to establish a sustainable market-based PAMA model and deliver the care that patients need. But the key will be what CMS does with the requested comments. And moreover the need for change is now.

Changing data collection for the future reported periods does not undo the harm caused by the flawed data collection process that was used in connection with establishing the current rates. Turning to the second quarter, we delivered on all five elements of our strategy to accelerate growth.

The first element of our growth strategy is to grow 1% to 2% through strategically aligned accretive acquisitions. We completed our previously announced acquisition of the outreach laboratory services business of Cape Cod Healthcare in Massachusetts the leading provider of healthcare services for residents and visitors of Cape Cod.

Our integration efforts from acquisitions completed in 2017, continue to drive revenue growth and our M&A pipeline remain strong. As we continued our conversations with hospital system CEO’s from around the country, it’s clear from those discussion there is a growing awareness of PAMA and the impact it has on their outreach laboratory business.

CEO’s are increasingly interested in talking more about how we can help them execute their last strategy. As you recall, this can involve improving their hospital lab operations, working with us on reference testing and potentially selling their outreach laboratory business to us.

In addition to PAMA, hospital CEO’s are also seeing the trend in health plans like Aetna and UnitedHealthcare partnering with high value providers like Quest to reduce laboratory spend and bring down the cost of care. Under the second element of our growth strategy, we continue to expand relationships with health plans and hospital health systems.

In May we announced our long-term strategic partnership with UnitedHealthcare beginning on January 1, 2019, plus we’ll be participating as a national provider of laboratory services for all UnitedHealthcare plan participants.

We’re excited about this partnership, as it includes a broad range of value-based programs rewarding high quality, easily accessible laboratory services at the best value and real-time data sharing to drive more personalized health.

We’re positioning ourselves to be well prepared to provide UnitedHealthcare members with a first-class customer experience. Our commercial team has already begun proactively reaching out to physician and customers to let to know, we’ll be in that work with UnitedHealthcare on January 1.

Additionally, we’ll be fielding inquiries from customers who are committed to selling us an increasingly share of their UnitedHealthcare patient specimens in 2019. We’re delivering on the third element of our growth strategy, which is to offer the broadest access to diagnostic innovation.

We continue to see strong growth in prescription drug monitoring, QuantiFERON, tuberculosis test, noninvasive prenatal screening. In the second quarter, we did experience three dynamics which impacted the marketplace.

First, the growth we saw in prescription drug monitoring marketplace although strong, it was less than expected because of policy changes opposed by some payers to limit testing. We’re engaging directly with these payers to show the medical necessity of this testing and so far have had success getting at least one payer to reverse its policy change.

Second, in the hepatitis C market, we saw a faster than expected decline in genotyping and resistance testing. This was largely due to the rapid acceptance, so that these new hepatitis C therapy which works across multiple genes and does not require the same level of testing as previous therapies.

We still see a tremendous opportunity in hepatitis C screening. Our screening business continues to grow and we estimate two-thirds of more than 70 million baby boomers still have yet to be screened. Finally on vitamin D testing, it did slow the quarter due to increased reimbursement denials.

We’re working with payers and providers to ensure the appropriate testing is being performed for patients who need it. We continue to make strong progress, executing the fourth element of our growth strategy, which is to be the provider of choice for consumers. Our Walmart locations continue to see increased traffic and the well received by customers.

We’re now operating in 12 Walmart locations in Florida and Texas and we’ll be providing more around our consumer strategies including MyQuest, our digital experience and our consumer offering at our Investor Day in November. The fifth element of our growth strategy is to support population health with data analytics and extended care services.

I’m excited about last month’s launch of Quest Clinical Trial Connect a new patient recruitment service to help pharma companies and sterile to speed the development of new therapies. We have already engaged several pharma, biotech and sterile companies with this solution.

In the area of population health in June, we released a study on employer wellness and screening at the American Diabetes Association Scientific Session showing a strong association between wellness participation and healthcare outcomes.

The study showed that a third of the at-risk employees identified by screen who then participated in a behavioural health program to reduce diabetes risk, reduce glucose and hemoglobin A1c to normal levels. Also more than one-quarter participants lost 5% or more of body weight reducing the risk of many of BCD related conditions.

This news is catching the attentions of both employers and health plans as they proactively look for opportunities to vendor healthcare cost curve. We’re strengthening already strong position in the marketplace. The second element of our 2-point strategy is to drive operational excellence.

We’re continued to drive efficiency and effectiveness within Quest to cover the cost of wage inflation and reimbursement pressure. I referenced to digitize our processes are improving the customer experience. So here are two simple real examples of improving opportunities in front of us.

First, as we shared previously, processing a paper requisition takes approximately 4 minutes, the enablement allows us to improve both efficiency and quality.

We’re making progress in our efforts to get clients systemic, electronic requisitions today more than 70% of the requisitions we received are sent electronically and this is up from approximately 60% in 2016. Second, we have developed a client from lead application, which allows physicians and their staffs to order specimen pickups.

Since the launch of early last year over 5,000 clients have converted to online tick up through what we call, Quanum HCP Portal and we’re adding 200 clients each week. Each day more than 13% of routine on-demand, pick up requests are received electronically through our new application. And we expect this rapid adoption will continue.

Well this translates into – if you recall to our call centre in a significant fewer occurrences of our couriers arriving to find an empty lot box. Now let me turn it over to Mark, who’ll take you through the financial performance.

Mark?.

Thanks, Steve. Consolidated revenues of $1.92 billion were up 3% versus the prior year. As a reminder, we now report uncollectable balances associated with patient responsibility as a reduction of net revenues instead of bad debt due to a change in revenue recognition accounting.

Revenues for Diagnostic Information Services, or DIS for short, grew 3.3% compared to the prior year, driven largely by acquisitions. Volume, measured by the number of requisitions, increased 2.5% versus the prior year with acquisitions contributing approximately 200 basis points.

Volume was softer than expected due in large part to the specific market dynamics highlighted by Steve earlier. Revenue per requisition in the second quarter grew by 20 basis points versus the prior year.

As a reminder, revenue per req is not a proxy for price, it includes a number of variables such as unit price variation, business mix, test mix and test per req.

During the second quarter, unit prices headwinds remain consistent with those observed in the first quarter with a headwind of approximately 50 basis points from PAMA and less than 100 basis points from all other factors. After netting changes to PAMA, Medicare reimbursement pressure will increase in 2019, as we have indicated previously.

Beyond unit price, other mix elements remained strong in the quarter and more than offset reimbursement headwinds. Reported operating income for the quarter was $305 million or 15.9% of revenues compared to $319 million or 17.1% of revenues a year ago.

On an adjusted basis, operating income was $340 million or 17.7% of revenues compared to $343 million or 18.4% of revenues last year.

The decline in operating margin was due to several factors including investments using tax reform savings that had a 60 basis point adverse impact on operating margin, some of our larger acquisitions which are in the early stages of integration and therefore not yet delivering full margin and contribution and PAMA.

Reported EPS was $1.57 in the quarter compared to $1.37 a year ago. Adjusted EPS was $1.75 up more than 20% from $1.45 last year. During the quarter uncollectable balances associated with patient responsibility, which we now call patient price concessions were flat year-over-year.

Cash provided by operations year-to-date was $503 million versus $490 million last year. Capital expenditures year-to-date were $151 million compared to $107 million a year ago, which is in line with a higher CapEx spend planned for 2018. Now turning to guidance.

We are narrowing our outlook for 2018 as follows; revenues now expected to be between $7.7 billion and $7.74 billion an increase of 4% to 4.5% versus the prior year; reported diluted EPS to be between $5.50 and $5.64; and adjusted EPS to be between $6.53 and $6.67; cash provided by operation continues to be approximately $1.3 billion and capital expenditures continue to be between $350 million and $400 million.

In addition, keep in mind that the investments in the business we are making related to tax reform savings will continue to ramp up as we progress throughout the remainder of 2018. Some of these investments are related to preparing to be a national in network provider for UnitedHealthcare.

Our narrowed revenue guidance reflects our performance through the first half. As you think about the second half of the year consider the following; first, the actions we are taking in the areas of PDM and vitamin D testing; second, as Steve mentioned health systems are talking to us more about how we can help them execute their lab strategy.

We have a few professional lab services agreements we expect to close in the second half. Taken together we expect the benefit of these items will build as we progress through the remainder of the year. Finally, last year severe hurricane impacts should make for an easier comparison this year.

The majority of the impact was in the third quarter with some carryover in the fourth quarter as well. To sum it up, we expect growth to accelerate throughout the second half and remain confident in our ability to achieve our 2018 outlook. I will now turn it back to Steve..

Thanks Mark. And to summarize, we grew revenues and delivered strong earnings in the second quarter. We’re excited to build on the strategic relationship that we now have with UnitedHealthcare Group. And we remain focused on executing our 2-point strategy and we are confident, we’ll meet our commitments for the remainder of 2018.

Now we’d be happy to take any questions.

Operator?.

We will now begin the question-and-answer session. [Operator Instructions] Thank you. Our first question comes from Patrick Donnelly with Goldman Sachs. Your line is open. You may ask your question..

Great. Thanks..

Hey Patrick..

How are you?.

Good..

When we think about the shifting payer contracts to nonexclusive, can you just talk through your initial discussions with United ahead of the contract opening up in January? How quickly you think you can capture share? And then just from the outside, what are the key dynamics to understand around the ramp up of business and your focus points going into January?.

Yes. So Patrick, thanks for the question. We have a tremendous opportunity in front of us. When we had launched the new relationship, we talked about the opportunities that have access to over 40 million lives. And we’ve already started, and we’ve started working on this aggressively.

So we have detailed out by thousands of accounts which sales reps and which geographies will engage with customers. First of all, making them aware of the contractual changes, talk about what we need to do to potentially serve them in a broader way. And finally is, to be prepared to ramp this up as quickly as possible.

And so what I will share with you is we’ve already left the blocks, we’re off and running. We’re engaging with customers throughout the United States. The receptivity of this is quite good. They’re waiting for someone for some time for us to be back on contract.

And the biggest opportunity for us is, for those accounts that might have another laboratory because we were not contract with United, now have an opportunity to continue to bring us more of their laboratory services work. And then second is, we have an opportunity just broadly in many accounts to gain more share.

So we’re optimistic about it and working hard at it..

Okay. That’s helpful. And then maybe just on the capital allocation side, pretty light quarter in terms of M&A activity, can you just update us what you are seeing in the market.

Are things developing slower than you anticipate around PAMA driving consolidation or is it more just around the processes inside the hospitals taking a long time to get deal consummated..

Yes. Patrick, just to underscore my comments, the conversations have increased. We’re engaged in many more conversations today with CEO’s of integrated delivery systems around their lab strategy.

And in that regard, they are considering given what’s happening with PAMA and given the change they see happening with health plans, for what they – should they going forward with their outreach business if they have it. So we’re optimistic by the prospect. Again, there’s three parts of our strategy.

First is what we call professional laboratory services business. As Mark said, we’ve got a few opportunities in front of us. We’re hopeful in the back half to be announcing a couple of these at least. Second is, it affords us an opportunity to do more other sophisticated testing, which we call reference testing in the hospitals.

And usually, when we have those conversations, we then have a conversation around outreach. So there’s more conversation today than a year ago in that funnel and that whole opportunity list continues to build for us..

Operator, next question..

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

Hi, Ricky..

Hey, good morning..

Good morning..

So first of all, a point of clarification.

When we think about the guidance for second half of the year, does that incorporate continued weakness with drug monitoring, hep C and vitamin D?.

So Ricky, the hep C impact, we don’t expect to be reversed. So that is kind of a permanent change. So we’ll continue to have some headwinds on that particular part of hep C. But as Steve mentioned, screening continues to grow. So it’s still an attractive business, it’s just that the genotypic testing, which is largely going to go away.

So continued headwinds on hep C but certainly, mitigating because there will be some business that obviously will remain in other drugs that do require that testing. On the prescription drug monitoring, we mentioned that we’ve got one payer who changed their position.

We are well down the road in discussing that with a couple of other payers who made those changes. We’re optimistic because we think that our view is the medically appropriate approach to this very necessary important area of testing.

So we have some plans in place, and we’re counting on not just the one payer being reversed, but there are couple of others we’re feeling like we’re making progress in that space. And then on vitamin D, it’s really a market that has probably not always been coded appropriately.

There’s changes in vitamin D that make a lot of people eligible for vitamin D testing. And there’s some practices where people are still using old coding, not understanding that it’s going to have an impact on the providers.

So I think there is an increasing education around the appropriate use of vitamin D testing, which, of course, we support but then ensuring that you coded accurately as well to ensure that the providers could pay. So we’re optimistic that some of that will be mitigated as well.

And over time, and that’s why we talked about increasing momentum throughout the back half of the year..

So the guidance for the full year does contemplating, obviously, what happened in the first half but what we will address for these three issues that we talked about in our remarks in the second half as well. So yes, it’s in..

Okay, great. And then two thoughts here.

First of all, when we think about a step up in SG&A investment in preparation for bringing on the United volume, should we think about that as incremental to the $75 million in investment that are related to tax reform savings that you talked about in the past? And should we think about this as a new SG&A base that will carry over for 2019 or do you just onetime investments? And then the second thought is just on unit price.

In the prepared remarks, you talked about the mix versus the unit price headwinds and you mentioned that 2019 reimbursement pressure will accelerate on the unit price.

I know it’s a little bit early, but how should we think about the mix versus the unit price in 2019?.

Yes. So thank you for the questions. First off, the investments that we talked about ramping up are included in that $75 million. So it’s not incremental from the $75 million we talked about. We, in the beginning of the year, we talked about a portion of that being invested in our people in that $500 onetime bonus.

We talked about some investments in the areas of accelerated growth, around advanced diagnostics and PBM. Well we didn’t talk about the third piece and we couldn’t because that was really earmarked for United. So it’s still all contained within the initial $75 million we talked about. And then importantly, it’s not all SG&A.

A large portion of it is actually cost of sales. And its investment before the volume comes, but then once the volume comes, it’s just cost of sales. So as we add incremental to draw centers incremental phlebotomist, couriers and laboratory tax ahead of that volume to ensure we’re fully prepared for what we expect to come its in investments.

But then over time, obviously, it’s just the normal support you need to deliver our business. And then in terms of 2019, Ricky, I’m not yet going to give any guidance for 2019. But I can assure you that when we gave the multiyear outlook when I presented in 2016 and we reaffirmed when PAMA was announced last fall, that all of that is contemplated.

So we’ll give you more granularity on that – on all those pieces at the Investor Day later in the year..

Thank you very much..

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

Good morning, Amanda..

Hi. This is actually Max on for Amanda. Good morning and thank you for taking my questions..

Good morning..

Just wanted to follow-up a little bit around some unit price headwinds, I know you mentioned the other 50 basis point headwinds from PAMA and 100 basis points from other factors. Can now we speak around what exactly those other factors are.

How transitory do you think those factors are going to be moving forward? And that maybe also just some additional context around the benefits from mix in the quarter in terms of how much that contributed?.

Sure. So the – we didn’t say it was 100. To clarify, it’s less than 100. So that’s kind of in the normal course of the last couple of years of some of the nongovernmental pricing headwinds that we’ve had.

And it has to do with any other part of our business, whether it’s extending third-party commercial contracts, whether it’s the direct business in which we compete through hospital reference testing, or it can even be in the stage where it’s permitted where we are actually billing physicians directly as a client who then mark up that work and then bill it to the third-party.

So we have certainly competition amongst all these areas and while we’ve certainly turned the tide of where pricing was some years ago, as we said, there’s still some degree of headwinds in the balance of our business.

And that’s generally going somewhere between 50 and 100 basis points over the last several years quarter-to-quarter and continues to be less than 100 basis points. And we mentioned that when you take price and all the mix elements together, with favorable revenue per req of 20 basis points.

So obviously with 50 basis points of PAMA, somewhere south of 100 basis points on other pricing, we have significantly lift from the other mix elements. And then finally, we’ve talked about professional laboratory services, which is an increasing part of our growth.

It is a business that has lower revenue per req because of the unique nature of what it is. It’s basic testing done for hospital in-patients, where typically, we have fewer tests per req and more basic testing. We’re not doing advanced diagnostics in that business and so on.

So revenue per req tends to be lower and so that creates the mixed headwinds, it’s math in terms of our revenue per req. It doesn’t in anyway speak to its profitability. It’s still a very attractive, profitable business. It just has a low req volume and more basic routine testing..

Yes. Just to reiterate something we always say, and Mark said in his prepared remarks, we do this calculation on revenue per requisition. But really, when you get into managing the business and understanding how that eventually yields margins, there’s a lot of other considerations.

Some of this lower revenue per req business actually BNP more profitable than higher req – higher dollar per requisition. So it’s not necessarily a surrogate for margins at all, so something to keep in mind.

So in the quarter, we improved our revenue per requisition by 20 basis points, but you saw our margin were quite good in consideration for what we had to do with a lot of the different moving pieces, as Mark outlined..

Got it. Appreciate the color on that. And following-up on a little bit of a related note. We saw a little over a week ago with the preliminary physician rule that CMS has proposed, tweaked a few thresholds to define what’s an applicable lab for reporting purposes.

Just wondered if there’s been any discussions around what the implications could be of this internally or externally as you continue to adopt PAMA here in 2018?.

As I said in my prepared remarks, we’re encouraged that they’re asking us for input related to how to improve the data reporting. Albeit, we still believe what they did with the current Clinical Lab Fee Schedule was wrong and that needs to be corrected and we’re challenging CMS in that regard. Prospective, we do need to get it right.

We are pursuing a legislative solution to that. And we’re engaging, as we have all along, with CMS, on how we conclude more labs and how do we get the statistics to really reflective of the market-based approach to laboratory services. So we’re encouraged by that. Second, on the physician fee schedule there will be modest tweaks in that.

We think it’s for 2019 not necessarily that notable for our business. That was a small piece of our anatomic pathology business that had billed that way. But nothing that’s material for us..

Got it. Thank you..

Thank you. The next question comes from A.J. Rice with Crédit Suisse. You may ask your question..

Hi, everybody. First all, just cleanup questions from previous ones.

Is there any way that we can quantify the headwind you saw from the drug testing hep C, vitamin D in terms of maybe percentage headwind that represented?.

Yes. So we have been at a pretty steady rate of organic improvements in organic growth over the last number of quarters. And then obviously, we’ve fallen back from that. Really, the things that we talked about are really the primary drivers of that difference, A.J. So I’m not going to give a specific number.

What I would say is those are the reconciliation between kind of the run rate organic performance we’ve been delivering consistently and what we delivered in the second quarter..

Yes. So we outlined the three areas A.J., in the remarks. And if you look at the issues that we saw reflect what we thought we could have done versus what we really did do. So those three, we will quantify exactly of the three buckets the total will be broken down from.

But they do outline the difference between expectations to the market, our expectations and what we actually delivered..

Okay. And then my follow-up….

Now with that said, we are taking actions for a few of those to reverse it in Q3 and Q4. We mentioned the work we’re doing with payers on the prescription drug monitoring, the work we’re doing with payers around vitamin D.

As Mark said, the hep C care business, which is the genotyping and resistance testing business will essentially slow down because it’s no longer needed to give the new therapy for AbbVie. But the screening business continues to be a big opportunity and there’s plenty of baby boomers left that need to be screened.

So even though it did slow in the quarter, we’re working on things to reverse that in the second half..

Okay. And then my follow-up, I just want to ask you about a couple of growth opportunities. We talk a lot about United, Optum is in the process of buying DaVita Medical Group. I know lots of that medical group practice that volume tends to go to you.

Have you look at opportunity that might present for you and given any sizing of that? And then is there any update on your work with HCA, I know about a year, 1.5 years ago, you started working with them in Denver and the idea was just sort of exploring opportunities and that could extend.

Any update on those– that discussion?.

Yes. So first of all, on Optum, when we talked about our relationship with UnitedHealthcare group, it’s well. We currently are now back in network in 2019 with UHC as an in-network provider laboratory services. That’s big. As you know, we have partnered with them on revenue cycle management. We’re one of their biggest customers.

Third is, we provide wellness services for Optum. So we are their somewhat exclusive provider of wellness services for OptumCare when they sell those to payers. Also, we’re – they’re becoming one of our biggest customers. To your specific question in OptumCare, as you said, their buying physicians and they’re buying many of our existing customers.

And the opportunity to beat up the physician business supports yet another opportunity. So if that closes, they’ll be close to – they have close to 50,000 physicians, and we’re actively working with them on how we can better serve all their physicians, the existing accounts but also growing – their growing list of physicians in OptumCare.

So this relationship continues to build, and we see a good growth prospect of building a bigger and better relationship with OptumCare as they consolidate those practices into their business going forward. Second part of the question….

On HCA..

HCA. The Denver opportunity which is called the continental division is going well. We’re optimistic that we can leverage that relationship throughout the rest of HCA. We continue to work that. And as Mark said, there will be more professional laboratory services relationships announced in the second half. So stay posted..

Yes. I would just add, A.J., and certainly you can ask them, but I’m very confident they would tell you that we’ve delivered the quality and the cost savings that they were looking for target up front.

So now, of course, the question is what does that mean? Could it mean we expand to other sites? I would think, at the point in time, if we have something to announce, we are happy to announce it. But I think the good news is that both parties are happy with what was delivered and it’s worked out very well..

Okay, great. Thanks a lot..

Thanks, A.J..

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

Hey, good morning..

Good morning..

My first question, I was curious if you could weigh in on the Women’s Health Business in the quarter? I think there was some impact in the first quarter from the weather and the flu.

Just what were some of the trends you were seeing in the second quarter there?.

Yes. First of all, as we’ve mentioned in our remarks, the prenatal testing business continues to grow nicely. So we’re optimistic about that. Second is if you look at just ongoing activity, and we’ve showed this many, many times, if you look at our existing accounts and we do the same account or same-store analysis.

And if you look at activity within those accounts that we know we have, we haven’t lost any share. I would say, just in general the market’s stable. And I would say, just in general, that’s true for let’s just call it the more routine portion of our Women’s Health business.

We continue Jack to see a continuation of the slow decline in our path business. The change in practice guidelines back in 2013 did affect the marketplace, where women in the past used to go annually for their check, that’s happening less frequently and that continues to be phased in, even though it’s been about five years.

But just in general, the general volume from our Women’s Health business continues to be stable..

Great. And then I had two follow-ups on capital deployment. I caught M&A added 2% of volume, what was the total revenue contribution? And then on share repurchase, I think this is the first quarter with no repurchase since 2011.

So just if you could give any color on what you think the pacing is from here and why no repurchase in the quarter?.

Yes. So the contribution from M&A was similar, so there wasn’t a big difference. Obviously what we’re buying, Jack, is a business that’s very similar to our core business. So you wouldn’t see a tremendous mix difference that are differential between the volume and revenue contribution..

And then on share repurchase..

Yes. So share repurchases, we actually were quiet in the quarter. We stepped out of the market due to what we thought was the impending announcement of UnitedHealthcare. So going forward, as we said, we’re going to do the minimal level to meet our 50% or at least half commitment of cash returned to our – or free cash flow returned to our shareholders.

Certainly, you should expect that level of activity. But any other share repurchases would be dependent on the amount of M&A activity we have in the back half..

Great. Thank you, Mark and Steve..

Thanks, Jack..

Thank you. The next question comes from Brian Tanquilut with Jefferies. You may ask your question..

Hey good morning guys..

Hey, Brian..

Steve, so I guess, as I think about the recent rule that came out of CMS, the rule proposal, and how they’re still viewing, obviously, PAMA as excluding the hospitals.

How do you – assuming that holds, right? How do you view the recent changes in manage your contracting, with you getting to United, and LabCorp getting to Aetna? How does that impact the repricing of PAMA a few years down the road?.

Well, what they used, Brian, for the majority of the data points for what we got in a refresh of a clinical fee schedule, the vast majority of the data points were from the two large nationals. So that was what was used. And we think that was incredibly flawed in its approach.

Imagine what CMS buys from all the laboratories they buy it from thousands of laboratories, roughly 20% of what they buy is from the nationals. So the date they collected was a distortion of what they really buy. And so this is one of the biggest points we have. They got to collect more data from more laboratories.

And as you know, there’s wide variation in this marketplace and the best value is from a company like Quest Diagnostics. So that was the data they collected. We’re hopeful. Given this current request for more data, now they can collect more data.

The advocacy by asking the question, they got it wrong and they need to get it right the next time they collected data. And again, we’re challenging what they did in the first time around lawsuit. It’s still in the court. We’re hopeful that, that will progress, and we’ll have a favorable consideration there.

But in parallel with that, we’re also looking for a legislative solution. So we’re currently continue to work this because we believe, at its core, the refreshed clinical – the lab fee schedule was done wrongly.

But given all that, what we’ve outlined in our guidance for this year, what we’ve outlined in our outlook for 2019 and 2020 is assuming worst case. That is if this sticks and it continues to be the case then that in fact will be what we’ll absorb, and we will be able to manage the business and hit our outlook despite it.

So hopefully, we’ll have better news in that regard, but we’re assuming the worst case. And then into the future, yes, there will be data points gathered from payers. But again, hopefully there’ll be more laboratories included in data collection process, so therefore, that will move the needle quite a bit. So hopefully, that answers your question..

Yes. So let me just quickly comment, Brian, on its impact on PAMA. So as we shared, we’re very vocal with all the payers, not just getting United, and I certainly can’t speak for our competitor. But I can tell you that when we go in there and say, hey, now there’s full transparency.

We know where the weighted volume median is amongst the national provider, we know we provide the best prices. And the fact that you already get the best prices from us and that we’re going to be paying for potentially twice, with PAMA, means like you’re not getting any better prices.

And if anything, it’s an opportunity – it has been opportunity for us to talk about getting paid for more because these are getting paid more because they think we paid a little bit more than we have been recently or historically, it’s still a less better value than the majority of the people they’re paying.

And in fact, in the United contract, when we talk about value-based contracting, as we move volume away from those high-cost providers, part of the contract is what you’d call a bonus rate.

So basically, we share the savings with our partner and that will ensure that as we’re saving the healthcare system patients and the payers all money that it doesn’t damage us from a PAMA perspective, but actually, it should be neutral to positive depending on how we’re performing and where that volume growth comes from..

No. I appreciate that. And I guess the follow-up to that is as we think about the networks built around United and Aetna, how do you think about the pace of market share shift? Not necessarily from your national competitor but from the regional’s.

What is that opportunity and how hard of a lift or how heavy of a lift is that?.

Well, that’s the opportunity in front of us, this relationship with United, and we we’re having conversations with all the payers. Despite the two nationals having strong presence, there’s still an opportunity to pick up share for the rest of the marketplace.

We talk about the opportunity, when we talk about United, you have roughly more than 40 million lives, you go quickly through the mathematics of that. We basically have shared that their spend – laboratory spend is north of $7 billion in that regard. If you look at the two large nationals, it’s still a minority.

It’s still the opportunity given the trend in general in healthcare is to move more of those higher cost, more expensive laboratory volumes to us. And so what we’re detailing right now is precisely that. We’re knocking on the doors of many – thousands of customers, Brian.

And they have many laboratories and many of those laboratories aren’t the two large nationals, but there are many others. And in some cases, they have those laboratories because we were not in network with United. They no longer need those laboratories to serve them and therefore, those supporters are big opportunities.

So we need to think about this not just between us and the other large national but more importantly, the opportunity to really continue to gain share, particularly for the regional portion of this market..

I appreciate. Thanks Steve..

Thank you..

Thank you. The next question comes from Lisa Gill with JPMorgan. Your line is open. You may ask your question..

Great. Thanks and good morning..

Good morning, Lisa..

Good morning. In your prepared comments, when talking about United, you talked about value-based program.

When we think about the contracting for the new relationship, is it a traditional lab relationship when we think about being paid for the req? Or are you seeing changes in the way that your contracting around value-based programs? That’s my first question.

And then secondly, if that’s not the case, can you help us understand what some of the opportunities are around value-based programs, especially with United and Aetna as you think about the new contracts?.

Yes. So Lisa, it is a traditional relationship. We’re paid for activity. Generally, obviously, there’s some portions where they’re fully insured where they have an HMO plan. But for the most part, this is a traditional fee-for-service contract. The difference is that the rate is variable dependent on our performance.

So when we talk about value-based contracting, and as I referenced earlier, there is incentive payments that we can earn by saving the money. When I say saving them, I’m talking about not just the United but obviously, the healthcare system and especially the patient. So there’s an awful lot of work going to high-cost providers.

Some of it’s because they have significantly higher prices. So we’ve talked about hospitals and physician-owned laboratories but even some regional players. The other thing is that the payers are becoming increasingly aware that we don’t all conduct ourselves in the same way.

So price is one thing but the level of activity for a patient with for a patient with a given condition is also a driver. So you can have some labs that might have lower pricing with same pricing as we do but they’re actually charging more because there’s more activity for a given condition.

So really, the focus around what is the total cost per interaction with a patient in saving money on that by doing things medically appropriate at a good price. And to the extent that, that saves money for the system and overall stakeholder, some of that will come back to us. So there’s incentives for us. A lot more detail will come down the road.

We believe that, around the middle of next year or maybe a little ahead of that, United will talk about their preferred network and what some of the conditions are to be a preferred provider.

But also some of the structures, including things that we are hopeful about including planned benefit design, where there is actually incentives for patients and others in the decision process financially to drive things towards that preferred network because that preferred network will be at the highest quality and the best value of any of the options within the network.

So that’s about what we can share right now. And we’re very excited about it because that is different from, historically, where we would get a network and to a large extent, it would be kind of good luck, I hope you do well because you have great value.

In this case, United and certainly we’re talking with other payers about some of the relationships actually is going to be partnering with us, working to drive that, not just sitting on the sidelines and opening we do all of that on our own..

Great. That’s very helpful.

And then secondly, you did comment on the Walmart relationship but is there any update on or any other retail relationships that you have the market?.

Well, first of all, Safeway continues to go very well. We’ve said that we’re approaching 200 stores. The results in those stores have been great. So we’re very encouraged there. Second is we continue to build out the presence in Walmart. And the number will be a significantly higher than 12 stores, I can assure you of that.

And yes, it’s putting a draw stations in, but it’s also providing better healthcare, more healthcare services, with what we call extended healthcare services. The conversation has become very broad and deep. Matter of fact, today, I’m meeting with a very Senior Executive from Walmart about that about that opportunity.

Our JV and specifically Walmart is doing in the healthcare. So we continue to build that out. And then third is we are testing. We’re doing some pilots with some other retailers. As we mentioned in the past, we’ve done work with CBS in the Mediclinic’s with their pending potential merger with Aetna.

We have great relationship with Aetna, we have a great relationship with CBS. The opportunity that they see also is what we’ve been talking about here. So we’re optimistic of working more productivity potentially with CBS and Aetna as they expand the potential merger with those two companies as well. So a lot in front of us.

We have the right strategy, we’re executing it and we’re making a lot of progress..

Thank you..

Thank you. The next question comes from Kevin Ellich with Craig-Hallum. Your line is open. You may ask you question..

Good morning. Thanks for taking the questions. Hey Steve, just wanted to follow-up on your consumer comments to Lisa’s question.

I guess, as we think about it big picture and holistically, over time, how much do you think all of these consumer initiatives can really add to your growth, whether it’s to volume or revenue?.

Well, we think – if you take a step back and look at where we’re going. Our access with United would be greater than 90%. So we ought to remove the obstacles of not being in network with many of the majority health plans throughout the United States.

And in the big states, as we mentioned, when we announced united relationship, the big states of New York, Texas, Florida and California, our access is greater than 95%, so a very strong access. So when we have access, we have an opportunity to compete for laboratory services and accounts. So that’s number one.

So great access, it’s improving every day. Second is the consumer is becoming increasingly important, particularly as employers have pushed more of the cost in healthcare to consumers. Consumers, patients are asking questions of what they could do to lower their out-of-pocket cost and also serve themselves in a better way.

And so our consumer strategy addresses that, that is making sure that we have a great experience for that patient and the consumer. So many aspects are factored into that. One is what we’ve done with our electronic, our e-tools, we call it MyQuest. We not only have over 5 million registered users, the application continues to get stronger every day.

You now can get to lab results, you can schedule an appointment. You could see late times in a Patient Service Center throughout any area you’re in and there will be more to come. So that’s exciting, looking more and more like a contemporary consumer application every day. Second, our access gets better and better.

We’re refreshing over Patient Service Centers. You will see that if you go into a number of your Patient Service Center throughout the United States and then we augment that with the access through retailers, so we’ll have more retail-like settings, making it much more physically easy for consumers to go to Quest Diagnostics.

Third is we’ll have products. And we have taken our experience in Arizona and also in Colorado, in Missouri with the direct-to-consumer offering. We now believe that’s close to 20 states that we can go direct to consumers. We’re working on driving that solution there’ll be more to come in that regard in the fall.

And with all that, when you take a step back and you say when the physician eventually knows that we’re on network and they ask their patient, who would you like to go to, Quest or someone else? They remember that great experience. We have experiences as far as their data.

And they also know that it’s not ordered by the physicians, they can order product directly from us like a check up on their cholesterol or their diabetes and hemoglobin A1c. So we think directionally, it’s going to help us gaining share in the marketplace because healthcare is becoming increasingly more of a consumer marketplace..

Got you. That’s super helpful, Steve..

Thank you..

And then just a quick follow-up on the headwind that you called out earlier on the call, hep C, drug testing, vitamin D.

What – did that have any impact on your – or what impact did it have on your revenue per requisition, if any?.

Yes, really not anything substantive. I mean, those businesses are within the same that cover the overall revenue per req..

Sounds good. Thanks, Mark..

Yeah, the one difference is obviously, when you get denials that’s going to have a negative impact. So when you don’t and the tests aren’t ordered like in a hep C case, then it kind of has a neutral impact. But certainly, when we do work and then get denied, obviously, that’s a headwind to revenue per req..

Yes, thank you..

Thank you. You next question comes from Dan Leonard with Deutsche Bank. You may ask your question..

Hi, Dan..

Hello. Just one question on the pacing of M&A.

So how much of a catalyst you think UnitedHealthcare contract is going to be by itself with its value-based components? And how quickly do you think that could accelerate some of the discussions you’re having with healthcare system CEOs?.

Well, the first catalyst is PAMA, okay? So PAMA is a substantial change for hospitals renting outreach businesses. So in many hospital system outreach businesses, their Medicare mix is 25%, 30%, so not insignificant. And when they’re looking at essentially a 30% cut over three years, it’s a notable difference. That’s number one.

Second is they are seeing what’s happening with United and also with Aetna. And they there are hearing that what those two large nationals have done will carry over to the rest of the health insurance market place.

So they’re realizing there will be pressure on their commercial race going forward for ancillary services and in this case, laboratory services.

So with all that, so long as – we’ve already – we’ve always had great access around this – talking to them around their last strategy, but it is accelerating the pace of them considering their options going forward..

Okay. Thank you..

Thank you. Our next question comes from Mark Massaro with Canaccord Genuity. You may ask you question..

Hey thanks guys. So your large lab competitor will be coming in that network lab provider to Aetna beginning in 2018.

Is there anything your team can or need to do to defend your share of that business? And then secondly, do you expect a resolution from the PAMA lawsuit perhaps in Q3?.

Yes. So first of all, we’re actively detailing out account by account what we need to do. The way we broadly think about is in three categories. One, we have great accounts.

And account – a client might be using an old laboratory that they have to, because we work with the United, and we’re going directly for those accounts and we’ll try to flip those as quickly as possible. So as I said earlier, we’ve left the blocks and we’re running.

And we’re detailing our thousands of accounts throughout United States with our sales force and with our regional teams. Number two, there is accounts kind of a mixed model where they’re using multiple labs.

And now where we have much more of significant share of their laboratory volume because we’re back in network, it’s an opportunity where they potentially get to a tipping point, and we potentially could become the majority of their lab service providers. So we have a number of accounts that the categories that way.

And the third category as we’ve outlined is, in some cases, we are not the majority in our another national competitor has more share.

And we’re also detailing out those to make sure we defend what we deliver, our value that we deliver everyday is quite good, our quality gets better, our service performance is outstanding, our consumer strategy is resonating. And so we think we have a very, very strong requisition – value proposition to defend that piece of our marketplace as well..

Are you ready for the next question?.

Yes..

Thank you. That comes from Ann Hynes with Mizuho Securities. You may ask the question..

Hi, good morning..

Good morning, Ann..

Good morning..

Just a couple of follow-up questions.

One is, your DSOs are up year-over-year four or five days and then up sequentially, is that due to acquisitions? Or is that a lot to do with increased denials for the vitamin D in the drug monitoring testing?.

Yes. So Ann, the denials are not increasing our DSOs. The denials we don’t recognize revenue. So what’s really driving it is handful of things, one of them is we’re doing a significant laboratory conversion in one of our major labs and billing just ends up being a little more delayed. It’s a rhythm of things that we’ve done over time.

It’s nothing to be concerned about. In fact, if you look at the aging of the DSOs, the profile has not really changed. So if you look at the key metric and what proportion of our DSOs are over 90 days, it hasn’t changed even though the DSOs have gone up.

So this is just a temporary spike and something that we’re not concerned at all about and very confident that we’re going to hit our $1.3 billion operating cash flow guidance that we provided..

Okay. And then I think in your prepared remarks, you talked about you think the growth will accelerate in the second half and you’re confident, you’ll make your guidance.

So is that driven by acquisitions? Or do you think that organic growth will improve from the 0.5% that you reported this quarter?.

So our organic growth will markedly improve. We walked through the drivers. Obviously, it’s an easier compare so that’s part of it. We just to remind everybody about that, the majority of that compares in Q3, but we had a little bit of impact in Q4. So each of the quarters are going to get some lift from that.

We mentioned, both Steve and I, that we have some professional laboratory services deals that we feel are very close. That’s organic. And we’re expecting to get some volume for that in the back of the year, with that accelerating sequentially.

And then the actions that we talked about that we’ve taken around prescription drug monitoring and vitamin D denials, where we’ve gotten some of those addressed, and we’re optimistic that a couple others are in the cusp that they will help as well.

And then of course, as we near the entry to the United contract, we would expect that some of that volume will flip over a little bit early. So when you put all of those pieces together, that’s why we’re highly confident.

So we’re not depending on executed M&A but obviously, to the extent that we do some deals between now and the end of the year that would just be additional upside..

Okay, great. And just one last test. With the hepatitis C testing, I think you highlighted that the drug monitoring testing and the vitamin D should come back once you work with the payers, but the hep C won’t.

Is that a huge percentage of volume as a percentage hep C testing?.

No. It’s not a huge percent. It’s a small percentage. But every several million dollars makes a difference in quarterly performance. I think a lot of that is behind us, because we’re not experts, but we believe that AbbVie has more than half the market already. And therefore, a lot of that is already behind us..

And the other part is – there’s two parts to what we call a hep C care, which is the testing we do if you’ve been prescribed the drug that is going to decline. Second part is the screening piece of this.

So we did see a small decline in the growth rate, and we’re hopeful there’s still a tremendous opportunity in front of us that we’re going to work with the pharmaceutical companies to continue to build on the awareness necessary in the marketplace.

Because as I said in my prepared remarks, there’s still a majority of baby boomers, 70 million of us, that still need to be screened. So that’s slow as well in Q2. And we’re hopeful in the back half with some of the work we’re doing to build awareness with pharma, that should pick up as well..

But just to be clear, it’ still growing, it just didn’t grow as fast..

Grow fast. Yes..

Okay. Okay, great. Thank you so much..

Thank you..

Thank you. Our final question comes from Ralph Giacobbe with Citi. You may ask your question..

Thanks. Good morning.

Hopped on a little bit late, so I’m not sure if you gave this, but do you have a baseline of how much drug monitoring, hep C and vitamin D all in makeup of total requisitions? Just a rough ballpark?.

Ralph, we haven’t provided that. We have other franchises, other testing segments that are obviously a lot larger. Certainly, our chemistry panels and our lipid panels and so on. I think these are already – obviously areas, not Vitamin D as much, but the Hep C and prescription monitoring are major growth drivers for us.

And prescription drug monitoring, as Steve mentioned and I did as well, continues to be a growth driver. It’s just slowed somewhat because of these policy changes that we, again, feel are inappropriate. It really has to do everything with – around covering definitive testing after screening.

The traditional practice has been, if you do a screen and it’s positive, you move automatically or revert to the definitive on the same day with the same sample. And some of the payers for reasons that we are pushing back on deciding they would change that and make the patient come back in for a second trial.

We don’t think that’s medically appropriate. So that was a big headwind in PDM why we slowed our growth. And then on hep C, certainly, we expect that to continue to grow. It’s a nice business, but certainly, it’s nowhere near some of the routine testing or other requisition volume that we see within our business..

Yes. So what we did is we outlined three areas that caused us to have less than what we had expected in Q2. We started working already on Q2 on some of the remedies for that slow down.

And so the ones that we outlined particularly around prescription drug monitoring, the growth rate was strong but not nearly as strong in the past, and again, what we talked about with Vitamin D. So we’ve already started to work on these in Q2 that will carry over and will have some rebound in the portion of this.

But what we want to do is provide visibility where we thought we were going to do – have a stronger performance in Q2, we did not. And we outlined those in the three that we provided to you..

Okay. And is there anything separately – is there anything with the timing of the UNH contract we need to be aware of? In other words, I know the contract starts Jan 1, 2019.

So you remain out-of-network for this year with UNH and sort of still charge the out-of-network rate or have you agreed to sort of annual network rate sooner even without the open network?.

Yes. So I’m not going to comment on any specifics around rates, but we remain out-of-network, we’ve been adjudicated out-of-network for the balance of the year. And then as we said, starting January 1, we’ll be in for majority of their plans, there’s still some HMO plans that we are working for the details.

But for the vast majority of United, we’re going to be in network as of January 1..

Okay. Last one if I could squeeze it in. Just – and I know you’re going to guide for 2019 at this point, but can you give us a directional sense of margin as we think about next year? There’s a lot of moving parts, obviously, with PAMA headwinds, UNH coming on, Aetna opening up, the investments you’re making.

In your mind, does that mean that make there’s sort of a revenue boost and we should think about margins as generally flat? Or do you think you can get margin expansion or vice versa? Do you think there could be some margin contraction as we think just directionally of the margin trend for 2019?.

Yes. So Ralph, as I am sure you would expect, I can’t comment on 2019 in any way specifically. But what I did talk about was on a multi-year basis that we would grow earnings, not earnings per share, but earnings faster than the top line over multi-year. So certainly, from a given year-to-year, that formula might be a little bit different.

So we – that obviously implies continued margin expansion. Now margin – net margin, so obviously with tax reform, we took advantage of that and made some investments, which actually reduced our – before tax margin slightly this year, had some impact on that.

But we would expect to continue that over multi-year look, and we’ll give an update on that in November on our Investor Day..

Okay. All right, thank you..

Okay. Well, thanks for joining us today. We appreciate your support, and have a great day..

Thank you for participating in the Quest Diagnostics Second Quarter 2018 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) 483-9044 for domestic callers or (203) 369-1586 for international callers. Telephone replays will be available from approximately 10:30 A.M. Eastern Time. Thank you..