Welcome to the Quest Diagnostics Third Quarter 2018 Conference Call. At the request of the company, the 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 like to introduce Shawn Bevec, Vice President of Investor Relations for Quest Diagnostics. Please, go ahead..

Thank you, and good morning. I am 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 was adopted on a retrospective basis.

Under the new rules, the company now reports uncollectible balances associated with patient responsibility, which we will refer to as patient concessions, as a reduction in net revenues when historically these amounts were classified as bad debt expense within SG&A expenses. Now, here is Steve Rusckowski..

Thanks Shawn, and thanks everyone for joining us today. This morning, I’ll provide you with the highlights of the quarter and review progress on our two-point strategy. Then Mark will provide more detail on third quarter performance and give you an update on our outlook for 2018.

We grew revenues and continued to deliver strong earnings growth in the quarter. Revenues were up nearly 2%, despite the effect of industry headwinds we called out last quarter. Reported EPS was up more than 32% from 2017. Adjusted EPS grew more than 25%.

As you saw, we have revised our full-year revenue guidance to reflect lower than expected revenue performance this year, which was affected primarily by two factors. First, as we detailed in the second quarter, we faced headwinds in the areas of prescription drug monitoring, hepatitis C, and vitamin D testing.

While we made some progress, these testing areas continued to impact revenue growth in the third quarter. Second, in the third quarter, we also saw a rise in patient concessions, which Mark will touch on later.

Before getting into the details of the progress we’ve made in the quarter, I'd like to provide context on some market trends, starting with an update on PAMA. Last month, a US District Court judge dismissed on narrow procedural grounds our trade association’s lawsuit over the implementation of new Medicare pricing for lab tests under PAMA.

The Court’s opinion, however, acknowledges that ACLA’s arguments on the merits raise important questions, about HHS’s actions. This is, of course, disappointing for our industry; and it is potentially harmful to Medicare beneficiaries. Last week, ACLA appealed the District Court’s decision, demanding a hearing on the merits.

At the same time, the industry continues to pursue a legislative fix. Additionally, CMS and our industry continues to work together on addressing the current PAMA issues. So, as we sit here today, PAMA is having an impact on Quest and the rest of the lab market.

Increasingly, smaller independent labs and hospital outreach labs are struggling financially, due to lower Medicare reimbursement, not only directly due to PAMA, but also under contracts with pricing indexed to Medicare. Some have begun to exit the business, citing PAMA as a factor.

We’re continuing to plan and manage our business as if PAMA is here to stay. At the same time, there has been increasing scrutiny of the wide variation in health care pricing in the popular press. Consumers and employers, who pay for most of healthcare, are becoming more price sensitive.

Last month, the Wall Street Journal reported that health plans that exclude costly providers can be much less expensive for consumers and employers.

Quest offers a great customer experience, and coupled with our scale and efficiency, it makes us an exceptional value in the market, compared with hospital outreach labs, which often charge two-to-five times more than Quest.

So, in short, there are three reasons we believe the market will continue to consolidate and therefore afford us an opportunity to accelerate growth. First, reduced reimbursement through the Medicare Clinical Lab Fee Schedule is beginning to have an impact on the laboratory industry.

Second, health plans are embarking on a new strategy, looking to national labs to help drive efficiency in lab spending. And the finally, consumers and their employers are more attuned to the variation in healthcare pricing. Turning to the third quarter, I’ll review our execution against the 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 announced three acquisitions in the third quarter, which strengthen our capabilities in several key areas.

First, our acquisition of PhenoPath, which has a strong record of innovation, provides several capabilities that complement and extend our own, particularly in the area of pathology and molecular oncology. It also expands our presence in the Pacific Northwest. Our acquisition of the U.S.

laboratory services business of Oxford Immunotec will extend our capabilities in infectious disease diagnostics. It will also bring us greater choice to physicians who seek innovative blood-based tuberculosis and tickborne disease testing. And then finally, our acquisition of ReproSource expands our expertise in reproductive diagnostics.

Since the third quarter close, we have also announced the acquisition of Hurley Medical Center’s outreach lab operation in Flint, Michigan. In this case the seller indicated reimbursement pressure as a factor in deciding to exit the business. Additionally, we acquired the assets of Provant Health to strengthen our employer wellness business.

So, the acquisitions we have announced and will close in 2018, already position us within our 1% to 2% revenue growth target for next year. And, as I indicated, PAMA should further contribute to our strong M&A pipeline. Under the second element of our growth strategy, we continue to expand relationships with health plans and hospital health systems.

We continue our preparations to take advantage of the opportunity to offer a first-class customer experience for UnitedHealthcare providers and their members when we become an in-network lab provider on January 1.

Our commercial team has already been proactively reaching out to educate physician customers about their ability to use Quest for their UnitedHealthcare members. The revenue opportunity presented by the United contract will ramp over time. We do expect some portion of this new work to transition quickly.

However, the larger opportunity to help UnitedHealthcare drive lower lab spend is expected to be realized over the next several years. The third element of our growth strategy is to offer the broadest access to diagnostic innovation.

Our announced acquisitions in the quarter mentioned earlier will enhance our capabilities in advanced diagnostics, especially in the areas of Women’s Health and Infectious Disease. We continue to see strong growth in prescription drug monitoring and Quantiferon tuberculosis testing.

Additionally, this quarter we saw solid growth in Cardio IQ, as well as testing for sexually transmitted diseases. On our second quarter call, we highlighted several market headwinds that impacted growth in prescription drug monitoring, hepatitis C and vitamin D testing. We saw modest improvement in the third quarter.

For example, PDM denials have steadily improved each quarter this year. We’ve also started to lap hep C headwinds we began to experience roughly a year ago. In aggregate, the issues we have mentioned related to these three tests contributed approximately 100 basis points of headwinds this year against our original revenue expectations.

We continue to make progress executing the fourth element of our growth strategy, which is to be the provider of choice for consumers. Quest Walmart locations continue to see increased traffic and generate great feedback from our customers.

In fact, for locations open more than 6 months, we’ve seen an uptick in volumes compared to the patient service centers they replaced. We are currently operating inside 21 Walmart stores in Florida, Texas and now Illinois.

We combined with our partnership with Safeway, we expect to have well over 200 patient service centers in retail store locations by the end of 2018. Consumers continue to embrace our digital experience.

We now have more than 6 million users on our MyQuest app that lets them view and analyze test results, schedule their appointments, see patient service center wait times, and then finally pay their bills. The fifth element of our growth strategy is to support population health with data analytics of extended care services.

We’re seeing continued interest in Quest Clinical Trials Connect, which we launched in June. This is a new patient recruitment service to help pharma companies and CROs increase the speed of commercializing new therapies. We’re working with several pharma, biotech and CRO companies with this new solution.

The second element of our two-point strategy is to drive operational excellence. At the end of September, we launched a new appointment scheduling system for our patients. This new system utilizes best-in-class technologies to help patients schedule appointments at a convenient location.

In the second week of deployment alone, we saw appointment-related calls into the National Customer Service center drop by more than 10%. Our Online Specimen Pickup option has been a big hit with our physician customers with nearly 20% of routine pickup requests now handled electronically versus making a call.

Physicians have given us positive feedback on the ease, efficiency, and simplicity, compared to waiting on the phone and writing down those confirmation numbers. And then finally, our Invigorate program remains strong, and we’re on track to over-deliver on expected savings for 2018.

Overall, we continue to make excellent progress on our operational excellence strategy and our leaders will be sharing more insights, successes, and plans with those that attend our Investor Day, which will be held November 29, in New York. Now, let me turn it over to Mark, who will take you through the financial performance.

Mark?.

investments related to tax reform savings, which had a 60-basis point adverse impact on operating margin; integration efforts of acquisitions, which take time to deliver a full margin contribution; and the impact of PAMA. Reported EPS was $1.53 in the quarter, compared to $1.15 a year ago.

Adjusted EPS was $1.68, up approximately 25% from $1.35 last year. During the quarter, patient concessions, previously recognized as part of bad debt, were up as a percentage of revenue year-over-year.

We continue to see an increase in patient revenues as a percentage of total revenue, due to the ongoing trend of rising patient deductibles and an uptick in uninsured patients. Cash provided by operations year to date was $905 million versus $852 million last year.

Capital expenditures year to date were $232 million, compared to $170 million a year ago, which is in-line with the higher CapEx spend planned for 2018. Now, turning to guidance. We are updating our outlook for 2018 as follows. Revenue is now expected to be approximately $7.62 billion, an increase of approximately 3% versus the prior year.

Reported EPS to be between $5.57 and $5.64, and adjusted EPS to be between $6.53 and $6.60. Cash provided by operations continues to be approximately $1.3 billion; and capital expenditures continue to be between $350 million and $400 million. Our updated guidance reflects the industry headwinds we’ve experienced versus our expectations in 2018.

While we aren’t prepared to share 2019 guidance, there are some elements I’d like you to keep in mind. First, we have a significant opportunity to grow with our new UnitedHealthcare contract. However, moving in network comes with lower reimbursement versus the out of network services we provide to UHC patients today.

Second, as Steve mentioned earlier, we are already on track to deliver 1% to 2% revenue growth from M&A next year. Third, as you are already aware, the impact from PAMA is expected to increase from a headwind of approximately 50 basis points this year to more than 100 basis points in 2019.

And finally, we expect approximately 150 basis points of reimbursement pressure beyond PAMA from our third-party payers, which includes the impact of becoming an in-network provider for United and other health plan contract changes; as well as hospitals and physicians that we bill directly.

After considering all these headwinds and tailwinds, we are well- positioned to grow revenue and earnings in 2019. We look forward to sharing more detail with you at Investor Day. I will now turn it back to Steve..

Thanks, Mark. Well to summarize, revenues grew and we delivered strong earnings in the third quarter. We're excited about our M&A activity in the quarter, and are well-positioned for top and bottom-line growth in 2019. Finally, we look forward to seeing many of you at our upcoming Investor Day on November 29.

Now, we’d be happy to take any of your questions.

Operator?.

Thank you. [Operator Instructions] Our first question comes from Ross Muken with Evercore ISI. Your line is open..

Hi, good morning, gentlemen.

So, it seems like one of the incremental updates, Q-on-Q was sort of the concept of patient concessions being an incremental headwind, could you just give us a little bit more color, just sort of how that’s playing out and why that sort of incrementally was sort of a surprise that popped up? And then, as we think about, sort of, in the next year, just a little bit more color, I know you don't want to give guidance on sort of the headwind you are expecting vis-a-vis sort of some of the network pricing pressures, inclusive of sort of the added networks United business getting repriced just kind of put the full picture together on, from what you were trying to get across in maybe those two points?.

Well, Ross, on patient concessions, you know we have a larger percentage of our revenue coming from patients. And as we’ve shared in the past, the un-collectability, so it is bad debt for other sources what we call patient concessions from patients proportioned is much, much higher from patients than it is from any others source.

So, we all have almost 0 bad debt from all the other revenue sources. So, really what was previously bad debt and now is patient concessions is largely a factor of collecting bills from patients.

And again, a little bit of it is from the uninsured and most of it really comes from patients who have insurances, who are in the deductible and so they are paying a large proportion on all of their medical cost or it is from their coinsurance.

And so, as that mix changes, unfortunately even though we are improving and continue to improve the bad debt rate or patient concession rate, through some of the things we’ve done such as putting in our Easy Pay in our office phlebotomist and also our patient service centers also giving more transparency of price ahead as we talked about with our transparency tool with large amount of payers or patients know the cost, know the responsibility they have and it gives us a chance to collect upfront.

Just because of mix that has been a headwind and as you know now with the accounting changes it’s not just a headwind to operating margin, but it’s a headwind to revenues as well.

To your question why we couldn’t see this coming, I mean we really don't know until we start doing collections and so given the cycle itself of performing the service, and then billing the payer, potentially having some back-and-forth claims on the adjudication, and ultimately billing the patient and seeing our collectability, you know it takes some time.

And so, we obviously don't know if there is any definition of what’s driving this, but when you look at some of the recent information that’s come out from several sources around deductible, amounts are actually going up on average, so patients are paying a greater proportion of their healthcare, especially the patients that use a lot of our services because large majority is for healthy patients who go to the physician for a regular checkup.

Therefore, we believe that that’s a factor and a second one, there has been a small increase in the number of uninsured patients that we’re serving. Obviously, we don’t know whether that was driven by some changes in the Affordable Care Act recently or what’s driving that, but we definitely have seen that. So that’s on the patient concessions.

On the pricing, that’s what I was trying to do, was to give you all the moving pieces. So, when you look at the totality, obviously we’re looking at a very attractive volume opportunity from network access with United, and it does come with a lower price, it comes to more of a market price for in-network laboratory.

So, it’s a good price, but it is lower than we were being paid previously. We just wanted to make sure people have that understanding in their models and then the other price, which we talked about of being 100 basis points or less will continue.

A fair proportion of that is not from third party payers it is coming in very competitive hospital market, and also from physicians where we client bill or directly bill that physician and they bill the third-party as opposed to us billing the third-party. So, we wanted to make sure that people understood all the dynamics that are driving price.

So, when you add all those pieces up, they said, PAMA is going to be approximately 100 basis points and we’ll have about 150 basis points from other sources in 2019.

However, given the M&A pipeline that we have and the deals that we’ve already signed and have closed recently, and along with the access and continued improvement in some of the market headwinds that are hitting competitors, as well as I ended that section we’re very confident of our ability to grow revenue and to grow our earnings in 2019, and I’ll shed some more color on that at the Investor Day..

Yes. And this is something on the patient concession thesis. I’m reminding everyone that close to two years ago where we teamed up with Optum and UnitedHealthcare around our revenue cycle management or building operations. So, we're working hand-in-hand with Optum on what we could do to affect bad debt, as well as denials.

We have really enjoyed the working relationship. Matter of fact, this week I’ll be with that team. We’ll talk about what we’re seeing and how they can help us here as well. So, that relationship continues to be strong and that’s going to help us as there is more and more pressure on this side of our business..

Thanks.

And maybe just quickly on the offset side, you had some incremental investments you made this year that offset some of the tax benefit, and there is also the potential to maybe push back a bit on the supplier side, so I guess how are you thinking about, you know those are the pushes, the pulls that you have to try to maybe recapture some of that margin you are seeing hit by both PAMA and the other [indiscernible]?.

Well, I will take that at the beginning of this which is related to investments. We continue to make those investments we think are prudent for the capacity we're going to need giving what we anticipate is volume increases in 2019.

This is as we would expect at the real granular level thinking about where we are at present, where we are going to pick up lives with United and therefore where we will pick up some shares. So, that’s happening and it’s in our numbers.

Second it is we continue to honor our commitment to our employees paying out a bonus that will come up in November, that is an investment to share with our employees, we feel good about making sure we have a good workforce that feels good about working at Quest and that continues.

And then finally, the opportunity to continue to grow the business in the five growth strategies outlined continue to be a promising opportunity for us as we come out of this year and we enter 2019. So, none of that is changing and we’re making excellent progress on all those elements..

Yes. So, Ross when you walk through those three, you know the bonus was a one-time bonus, so that’s not going to repeat in terms of the investments for network access expansions. Those become cost of sales.

So, when you’re adding [indiscernible] people from the laboratory adding patient service across centers then all of that is investment ahead, but then it becomes our cost of sales. And then finally, on the other investments that Steve referenced, we will make those decisions along with everything else.

We decide in terms of long-term, short-term results and also affordability to get into that year. And of course, I’ll turnover over to Steve the most important piece..

Yes. You asked also about the offset of working with our providers, excuse me, our suppliers and yes, this is all in an ongoing approach we have had with our invigorate program. As I mentioned in our prepared remarks, we exceeded our goals for this year, part of that is what we do with our suppliers.

Our suppliers are well aware of what’s happening with PAMA, matter of fact they are working with us on a legislative solution. This is through the AdvaMed organization, which is the device trade association. So, they are actively working this with us and are very much aware of the pressure there will be on this industry.

And beyond what we do with our suppliers, we continue to look at efficiencies and we hope that many of you will come to our Investor Day, because we’ll be outlining more of the opportunities we see beyond 2018 into 2019, 2020 and 2021 with more efficiency gains, because as we shared over the past several years, even though we did hit that $1.3 billion goal, we see more opportunities in front of us to continue to run a higher quality more efficient operation going forward.

So, we look forward to you joining us to secure more about that..

And just very quickly, two of the items that Steve referenced in his prepared remarks about appointment related calls dropping by more than 10% and specimen pickups being ordered online versus call, those are part of the efficiency and obviously we expect to continue to reduce the amount of phone calls we get and actually drive you the more efficiency going forward..

Operator, next question..

Our next question comes from AJ Rice with Credit Suisse. Your line is open..

Hi, everybody. Maybe I will ask about the retail initiative.

I know Walmart recently had an Investor Day where the just talked about the 15 locations that you work with them on expanding to the Midwest and envisioning over 100 location, ultimately in place, any comments you guys have about timing of that? And then also I know you're working on some pilot stuff with Aetna CVS, any update on that? And then how much is the retail? At this point, is it enough to move the needle in terms of its contribution to revenues, how would you describe where you are at on that?.

First of all, AJ thanks. I mentioned in the script, we continue to add stores. We're happy with the progress there. We are at 21 stores now and it continues to build and I tell you that that number will be much higher than that by the end of this year.

And we focus on the big states of Florida and Texas and also, I said that we moved into the Illinois as well. So, there will be other states beyond those throughout the rest of this year. So that continues to build. So, what you heard from Walmart is aligned with our view. Second is, the experience has been quite good.

It’s been good for our patients; those patients are also Walmart consumers. Walmart likes the volume in the stores or volume is like the experience as an employee serving their customers better.

And in fact, when we look at the volumes that we see in those sites that have been open long enough, we think it actually does have an effect on our market share within that geography.

So, all around good presence, but we're not stopping there, the opportunity we talked about continuing to work with this joint venture with Walmart is how we provided other healthcare services and some of those locations, in fact we were detailing that out with Walmart and you will hear more about that.

We hope to provide more color around those services at our Investor Day in November.

And then equally, what CVS, now with the planned merger with Aetna will do with their strategy is a continuation of what we’ve done with them in the MinuteClinic, and we're hopeful, as well as they continue to walk on those integration plans with Aetna given our great relationship with Aetna, great relationship with CVS, they do see an opportunity with the brick and mortar they have and with some of our capabilities of providing basic healthcare services.

So, when we come to Investor Day, what we will do is, walk you through what we call our diagnostic services, which includes how we use our data and how we use the services and capabilities of Quest to help bend the cost curve.

And some of that will be done with our Walmart joint venture and some of it will be done with other partners like CVS, but we do believe it’s a great opportunity for growth in the near-term, but also for the long-term because we're just getting started frankly. So, more to come on that and we hope that you show up for the Investor Day in November..

Alright, thanks..

Our next question comes from Patrick Donnelly with Goldman Sachs. Your line is open..

Hi, Patrick..

Hi, how are you? Maybe just on the three headwinds, PDM, hep C, and vitamin D, you know headwinds persisting here throughout the end of the year, can you maybe just update us on the trends and visibility on that turning around, I'm just trying to figure out how much that could leak into 2019 as we think about numbers kind of going forward for next year?.

Sure. On the hep C as we mentioned, that is starting to mitigate because we’ve lapped year when, you know the [indiscernible] drug started to take significant share.

So, at some point, most of that business goes away or it stabilizes or maybe even the drugs make a comeback, I know there is some pricing competition and an area that might change the competitive landscape. So, that should not continue to be significant into 2019.

On PDM, I want to be clear as Steve mentioned, it continues to be a growth engine for us. Unfortunately, we’re doing more volume than we are - revenues. So, revenue is growing, the following is growing faster and that’s because of some of these denials. I can't put a stake on the ground at this point as how quickly we’re going to address that.

I guess the important thing is that even though that headwind may or may not get addressed in the near-term future. As Steve also referenced, it’s stabilized. So, we're not growing in denials. So, we are reaching a point where the denials are still much higher than it should be and much higher than we find acceptable.

It’s not going to be continuing to be a year-over-year headwind. And certainly, we make some progress there could actually be a tailwind moving forward. And then on vitamin D, I’d say it’s still early.

As we mentioned, we still believe that a number of these denials are because of miscoding based on a long history of physician coding practices, and not necessarily denials to patient eligibility. And so, how many of these things will be rectified when the physician community understands.

For instance, either of these patients is now eligible for vitamin D and I need to use the appropriate code versus now this was just a screening and now it’s other others including, as we mentioned, Cigna starting to apply Medicare type of approaches to their coding that this actually would be a denied task.

But at some point, again, as you mentioned, you get that behind you and it all continues to be a headwind once the market adjusts and patients are appropriately getting prescribed with the right diagnosis code and then vitamin D continues to move with the market as it has been doing historically..

So, as just to reinforce what we said in the script is that, we have the three together, we looked at our expectations for this year and how it has affected us. It’s about 100 basis points and that’s our business and I’ll just to remind everyone, we’ve talked about this before. We are the market leader on prescription drug monitoring.

So, very strong in that category, continues to grow, but we clearly have more exposure than a lot of people on that space. So, therefore, any effect of those three have a bigger impact on us. So, the 100 basis points is our estimated. And as Mark said, we continue to work this. We started working this in Q2. We’ve made some modest progress.

As I said in my remarks, we will continue that throughout this year and then again as we start to lap it, we'll have less of impact year-on-year, but different than what we expected, but still growing in these three categories..

And then just to add to what Steve mentioned, those three had about 100 basis point negative impact versus our expectations and then the patient concessions were another 30 basis points..

Okay, that’s helpful.

And maybe just a quick one on the payer shifting with United, you’ve talked about a few different buckets of customers, just framing that opportunity, I guess now that we're a few months in, and you’ve done more work on the market on United itself, what fragment of that market do you think you're kind of viewing as early adopters, you know shifting quickly in 2019, just trying to frame that opportunity?.

Yes. The business opportunity we have is, those customers of ours that have the majority of their laboratory testing coming to us already, but might just have another laboratory because we are not in network with United.

So, those are the accounts we’ve already knocked down their doors, we have shared with them the great news that we’re going to be in network starting January 1. We have worked on what we need to do of anything in terms of IT integration, we get those orders in-house and those will come to us early in 2019. Those types of customers.

The second group of customers that I’ll broadly put in this category is that might have multiple laboratories, and our job is to make sure we gain share.

And given the access that we have starting in 2019, which is really remarkably better, we believe there is also an equal opportunity for us to gain share beyond those great customers we have for all customers to pick up share.

Particularly some of the large states we’ve talked about this, when you look at Florida, Texas, California, New York, our access is going to be north of 95%. So, great access in the marketplace, great value proposition or quality service, and also pricing, we believe we have an opportunity to pick up share in those accounts..

Operator, next question..

Next question comes from Derik de Bruin with Bank of America Merrill Lynch. Your line is open..

Hi, good morning. A couple of questions.

One, first on housekeeping, if I missed it, my apologies, but what is the all-in organic revenue growth number for the quarter and the specific contribution from M&A?.

So, the revenue growth was pretty much all M&A in the quarter..

Got it. Okay.

And if you – two follow-up questions, I guess, did your volumes get effected this quarter by some seasonality and consumer genomics testing? I know that’s been a tailwind for the business, I know there is some – this is a weak quarter for that one and then follow-up on that one is going to be just on deal valuations, are things coming in? Thanks..

Yes, so we didn’t experience any meaningful change, due to seasonality in the quarter around genetic testing.

And then, sorry your second question Derik?.

Basically, just valuations on deals in the fact that people – people are they getting involved a more bit attractive?.

Yes. No, I think the valuations really haven’t changed materially. Obviously, you’ve got to price in the PAMA headwinds. Although, we are hopeful that we can positively impact that at this point. More pricing things as if those PAMA cuts will happen, that’s the way we are valuing things.

So, therefore, if anything, valuations have come down, and the seller, or potential seller recognizes that as well..

Yes, just, I believe your question is around consumer genetics. Just to remind everyone, we do have a relationship with Ancestry and we provide a genotyping for their ethnicity offering. It’s a modest portion of our business and continue to get growth, but it is modest for us.

We’re optimistic about the opportunities with the Ancestry because we still believe it is an opportunity for us to work together with that around building awareness overall, around the importance that everyone knowing our family health history, and that’s an opportunity for the future, but just with the context, in terms consumer generic testing it is a small portion of business with modest growth this quarter..

Operator, next question..

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

Hi, thanks.

I wanted to dig in a little bit more on the volume commentary, so I think you mentioned that it was around 70 basis points when you excluded M&A, how much did weather contribute to the year-over-year growth? And I guess just my math would suggest the underlying utilization was down year-over-year? I know you have talked about some of the issues, but what’s your level of conviction that that can improve in the fourth quarter into 2019?.

So, most of the fourth quarter ‘improvement’ is really coming from the M&A we did, so that’s giving us some lift. We don’t expect a step change improvement in utilization what we call same account volumes.

And then in terms of weather, we have some impact, but it wasn’t material enough to call out, but certainly it was a slight headwind to us in the quarter..

Sorry, weather was a headwind?.

Sorry, I was talking about the hurricanes this year.

So, we talked about the fact that versus last year we had a favorable compare, I thought you were asking us weather the hurricanes that took place in Carolinas in the third quarter were significant factors? So, we did call out that we had a favorable compare and it was about 150 basis points in the quarter, but there was a slight negative impact this year from hurricanes in 2018..

Great, and then just as my follow-up, I wanted to see if you could elaborate a little bit more on your pricing comments at the end of the script Mark? Can understand the PAMA stepping up, but the 150 basis points beyond PAMA, I know in the past you’ve talked about 100 bips normal unit price, is that 50 bips kind of incremental related to United and then as you size it all up just do you think mid-to-high single digit earnings growth is doable for 2019?.

Yes. So, the 50-basis point isn’t tied directly to the United, but certainly directionally United is one of the major drivers there, and I’m sure you are familiar with the way pricing works. So, we had significantly higher reimbursement from United as an out of network provider than what typical in-network takes on and what we negotiated with United.

So, yes that’s a big driver, but it’s not entirely United. And at this point, I’m not going to give any guidance for 2019. So, what I will reconfirm is that the Investor Day outlook that we provided of having a 3% to 5% topline CAGR, and a mid-to-high single digits EPS CAGR from 2017 through 2020, we still stand by that.

Obviously, we have got one full-year and three quarters of a year behind us and when you look at our guidance, it so puts us within that range and so what we’re saying is that we work through the next two years. We are certainly still confident that we can deliver within that CAGR range without giving any specific guidance for a given year..

Yes. Just to reiterate, we will grow topline and bottom line in 2019. We have said that.

What we have also said is that, the M&A that we have already shared will get us to comfortably in that 1% to 2% growth in 2019 and when you couple that with the United opportunity that we’ve speaking about gives us confidence on our ability to say, yes, we will grow top and bottom line next year..

Thank you, Steve..

Operator, next question..

Our next question comes from Bill Quirk with Piper Jaffray. Your line is open..

Great. Thanks. Good morning everybody..

Hi Bill, good morning..

Good morning.

First question, Mark, just not to beat a dead horse here on 150 basis points that you signaled for 2019, but is any of that related to additional plans kind of following or trying to follow some of the PAMA rates down, I know historically you’ve indicated that you don’t have a lot of contracts that are tied to Medicare, but just trying to tease any nuances out here?.

No, it isn’t. There are some small changes in some Medicaid rates that states have made, specifically Ohio. I mean, you can argue whether that was in any way related to PAMA. I think they actually had a budget issues, they wanted to fund some Women’s Health initiatives and they slammed the laboratory reimbursement rates.

There certainly was some dialogue around where Medicare was going in some of the states, if not many of them look at Medicare as a signal for where the Medicaid rates should be, but in terms of commercial plans, no, there isn’t any incremental headwinds because the commercial plans are trying to take advantage of PAMA.

In fact, as we have shared the dialogue we’ve been having with the commercial plans as they see that as an issue for them because the more pressure we get from other sources, the more we need to get from them, and therefore it’s in their own best interest not to see that because they know in the next collection period that the potential recalculation could be even more severe if we give lower commercial rights.

And so, they are very sensitized to that and I can assure you that we are holding very firm in those discussions and make sure that they understand the world where you have a significant difference between commercial rates and government, and certainly Medicare rates is going to go away.

The whole intent of PAMA is to move go rates to a market type rate, which says that we need to talk about other ways to create value beyond price and that’s what we’re doing.

Increasingly, we’re walking in and talking about all the other ways we differentiate ourselves positively, but then I fully appreciate and then some of the things that Steve highlighted in his remarks, around the patient experience, the technology we’re putting in our patient service centers, the ability to build a relationship through the MyQuest app schedule appointments make things easier.

Because at the end of the day, the payers want their patients to get appropriate necessary testing done, and so therefore that’s definitely a good thing. It’s also our data the way we feed data and the more critical mass we have the easier it is one them to do the analytics in a world where data is increasingly important for population management.

So, there is a lot of ways that we talk about our value proposition. And then finally it is as Steve mentioned or where they recognized that they have a cost curve.

They need to start working with the best value providers and certainly will want those and starting to move volume as a high cost less attractive value providers into the better laboratories and that’s the way they are really going to save money and drive better value for their members versus continuing to look to extract price out of those who already have the best prices in the market..

Got it. Thank you..

Operator, next question..

Question comes from Ricky Goldwasser with Morgan Stanley. Your line is open..

Good morning, Ricky..

Yes, hi, good morning and thank you for all the details.

So, one question that I have, if we go back Steve to your comments about the UnitedHealthcare converting from out of network high price to in network lower price, I think something that would be very, very helpful for us is we think about the opportunity next year in longer term, if you can give us some sense of your share as an out of network provider with United ?And I understand that you might not be able to give us the United data, maybe some sort of a framework for us to think about, what type of share do labs typically have in an out of network relationship?.

Yes, so let me do this.

I remind many of you on this call of what we talked about of the opportunity we see with the United, which if you go back and you recall, we’ve talked about the opportunities that many of the health plans see, it is by working with one of the nationals as ourselves we can do a better job of helping them reduce their laboratory cost.

And what we talked about with the United define the opportunity in front of us is, we have talked about Untied estimates that they spend anywhere from $7 billion to $8 billion in laboratory spend a year, and most people have estimated that the nationals maybe providing about a billion of that.

So, therefore, there is a big opportunity as they think about how they do a different job and a better job of serving their membership with Quest and at least one other national provider to reduce that spend. So, when you look at that 1 billion versus the 7 billion or 8 billion you see the opportunity in front of us.

And the biggest opportunity in the short run is, as I said earlier is to go after those great Quest accounts, we will do that early, but this is why we believe that this affords us a nice growth opportunity, not just for 2019, but for 2020 and 2021 because it’s going to take some time to gain that share and move that work away from the more expensive labs, and this is true for United, but I will also argue, we will be doing this with other health plans as well.

So, it’s an opportunity to continue to pick up share. So, we will again be coming back together in November, we'll help – provide more visibility to what we believe the opportunity would be within reason, but hopefully at least those remarks will help you kind of size the opportunity in front of us given where we sit today..

And Ricky, it's a little more complicated being with United and Quest because we had some in network volumes. So, as we shared historically, in our pathology business, we had a couple of states that have been in in-network.

And then obviously if you're trying to look at a model for out of network labs' share within large national payers, the fact that it's such a strong business of United a decade ago, we never lost all of that because of the loyalty of some of the providers, and the fact that they could look even out of network, our prices were still better than hospitals and many others.

So, it's a little bit different than if you want to look at other payers and say, hey, how much volume is there out of network.

I think Quest had a disproportionate share of volume relative to what other labs might have out of network, but it's still not huge because you are an out of network provider, certainly when they have only insured patients, we don't get paid at all.

So, it's really only their administered plans when they have out-of-network benefits where it makes sense for us to keep that volume and continue to try to compete..

Understood. So, just as a follow-up, and I understand that you had more share than a typical out of network, but it would be really helpful for us if you can give us a data point for a typical out of network is, at least it will help us establish a floor from which you can build on. That's one.

And then the second question that I had is regarding the acquisitions, can you remind us how long does it take for an acquisition to reach company margin? And if you can quantify what was the negative impact on margin from acquisition integration?.

So, let me answer the acquisition question. We've shared in the past 12 to 18 months. I'd say on the outreach purchases, they tend to happen a lot more quickly. They're more simple and straightforward.

It's really just integrating them into our local laboratory, and then the cost of serving those patients is basically the cost of serving all the other patients we currently do in those markets. So, those might even happen a little quicker in the 6 to 12-month window.

And some of these other, I'll call them technology acquisitions, and that could involve site shutdown, it could involve moving the test menu to multiple locations. Obviously, it's working through the sales force issues, reimbursement issues and so on and so forth.

So, those tend to be on the longer end, and you'll notice that number of the deals that we did in the latter part of 2017 were more like that as opposed to outreach purchases. So, we take a little bit longer. And then on the volume question, Ricky, I know you'd like some great specificity.

All I can share is that typically there is a tiny share for an out of network lab in terms of their share of volume within a national payer and we were not tiny, but we certainly were not large..

And just on the acquisition, remember, we had this feathering going on that we have a nice slug of acquisitions in 2018. We're again giving you some perspective on the outlook that we have for 2019. The acquisitions would definitely be in that 1% to 2%.

Those 2018 acquisitions, another year under their belt, 2019 where we get some of the integration done that helps us, and you layer that on top of the new acquisitions we bring in 2019. But we're hopeful we have a more regular cadence around that 1% to 2% that you already see in our numbers.

So, as they come in, they take some time to mature with the integration coupled with the ones that are just showing up, that's already in our numbers for past years as well..

Operator, next question..

Our next question comes from Lisa Gill with J.P. Morgan. Your line is open..

Hi, Lisa..

Good morning, Lisa..

Lisa, we can't hear you..

Sorry about that. Can you hear me now? Thank you for all the detail. I just wanted to follow up on a couple of things. You've talked a lot about revenue growth as we think about 2019, you talked about having EPS growth.

When we think about some of the efficiency gains that you think about in 2019 and beyond, how does the retail strategy fit into that? Can you remind us if that is more economically better for Quest versus your own patient service centers? And two, are you seeing incremental test volume through that? I just want to better understand how you're thinking about the retail setting as we think about 2019, 2020 and beyond..

Yes. So, what we said about the retail strategy, it's a better location in these sites. So, it serves our patients in the market better and therefore it's beneficial to the patients, it's beneficial to our employees, and our partners. In one case, it's Safeway; in the other case, it's Walmart are happy as well.

Now, with all that, we've shared in the past, from a rent perspective, the cost of using that space, there is not a big difference between the two. However, we're getting much better space. Many of our patient service centers that we could collapse or patient service centers with one or two phlebotomists.

This affords us an opportunity to take down those locations and put them into a better location, and that's better again for all stakeholders. And so, it's not a cost savings, but what it provides us is a better quality and better patient experience.

And what I said in my remarks, what we do now have enough data points where we look six months of what we close versus what we open, we believe the volumes are better in those locations. So, it is positive financially for us and it's one of the ingredients of us gaining share. Now, we said, again, this is for our core business.

We also believe this is an opportunity for us, particularly with the Walmart JV to tag on to those physical locations more healthcare services that we'll be working with Walmart, with local partners to be able to bend the cost curve for whatever partner we're working with.

So that just affords us another opportunity beyond our core diagnostic service business. So, hopefully that's helpful..

Yes.

And just to add, we have shared in the past that in Safeway, because we've leveraged some of the overhead, there is some cost savings, the greatest cost is the phlebotomists and that doesn't change when we go into a retail setting, but there is some cost savings despite the fact that the rents generally is somewhat comparable, smaller space, higher rates for more attractive market, but the overall footprint costs us relatively the same.

But this is a business with small details. So, little bit of cost savings combined with, as Steve mentioned, some volume upside certainly can make a difference, especially as we continue to expand. And then Walmart is a JV. So, it is different.

It's not just putting a phlebotomist draw center within a retail outlet versus one of our independent patient service centers, and what we are starting with phlebotomy, we are definitely intending to add more healthcare services together with Walmart to build their presence within the healthcare. And it is a JV.

So, therefore we've got a majority position to who are going to be sharing the economic value creation of that venture with Walmart..

Operator, next question..

Next question comes from Donald Hooker with KeyBanc. Your line is open..

Great. Yes. I'll just ask one real quick question here. Maybe just a little bit more elaboration on the M&A environment. I know you guys target 100 to 200 basis points of inorganic growth annually. It sounded like from your comments, just to clarify, you are already there for next year. And we still have obviously a lot of time.

So, maybe kind of an update on your acquisition pipeline. Is there potential for you to potentially exceed that 200 basis points of growth next year? Thanks..

Yes. So, what we said is what we've announced so far, puts us in that 1% to 2%, which, you know it is a good place to be at this point. We also said that given the environment and given the pressure that we see on hospital outreach operations, we think that's a catalyst to afford us a nice pipeline.

We just announced another deal of buying an outreach business this week, an outreach activity called out of the Hurley Medical Center in Flint, Michigan, and there will be more to come. So, yes, we will share this point 1% to 2%. We're comfortably there for next year, but we do have a funnel that can add to that going into 2019..

Operator, next question..

Our next question comes from Ann Hynes with Mizuho Securities. Your line is open..

Good morning, Ann..

Good morning. Hi. So, two quick questions. One, obviously in 2019, you said you expect top line in EPS growth and that is in the face of 200 basis points of, I guess, incremental pricing pressure.

Can you let us know how much market share gain from the UNH contract and some of the Aetna loss you're assuming in that to get to that? And I guess my second question would be around cash flow and share repurchase. Obviously, your stock is very weak today, but it's been down since the last earnings when you had to reduce guidance slightly.

You have a great balance, you did enhance cash flow. I guess, at what point will you go into the market and do some incremental share repurchase? Thanks..

Sure, Ann. So, first off, let me clarify. We don't have an incremental 250 basis points of price going into next year. What we talked about was a total of 250 versus something that's more in the lines of 150 this year. So, I want to make sure that I'm clear on that.

And about 50 basis points of the increased pricing pressure is PAMA related and the other 50 basis points related to other things. In terms of share, obviously we don't get into that level of detail. We're very cognizant of the need to retain our Aetna business. We've got people who have been actively working for the last several months.

We continue to work to make sure that we serve those customers appropriately and we retain as much of that Aetna business as possible and certainly have United, as we mentioned earlier. We're very excited about the opportunity.

Steve mentioned, we expect that in some of these very loyalist accounts who would be sending us to United, if we were in network and would have been sending it to us, we'll flip very quickly.

There are those accounts that have multiple providers and we believe together with our value proposition, all the things we've walked through, which does differentiate us from almost all the other providers in a meaningful way around the patient experience, with our app, with certainly the pricing transparency, which is a huge win-win for the physician and the patients to be able to go into one of our draw centers at no upfront, whether something is covered and how much of cost, it’s just there aren't many labs that can do that.

And therefore the –argument around simplicity, why we want to do business with multiple labs, you got five or six labs you're sending work through today, we could do almost all that if not all of that, we've got more lives covered in a given geography. So, you don't have to worry about problems with the patients for the high cost out of network work.

And we think that's pretty compelling, but that's not going to happen as quickly as the first piece. And then obviously the third piece is where we don't have business today.

So, now we feel very strong with that same value proposition that we can go in and we can compete more strongly than we could have in the past and flip some of those accounts where we may not have any or very much work at all. So, that's going to take even longer. So, this is a multi-year growth opportunity.

It's not all about 2019, and we have plans in place and we have strategies to go after each of those, and we're working hard to make sure that that all comes. So, certainly excited about that and very confident about that..

And just to clarify, that incremental 50 basis points of price pressure next year outside of PAMA, that's primarily going to be coming from the United price headwinds..

Okay.

So, the total incremental is 50 or 100?.

100..

50 from PAMA and 50 from primarily United..

Okay. And just on share repurchase question, please..

Yes. So, obviously I can't talk about any specific plans around share repurchases, but given the fact that we have announced and are closing a number of transactions this quarter, we're going to be spending a fair amount of cash on those deals and we certainly are excited about the pipeline coming up.

So, at this point, we haven't announced anything specific. We'll continue to follow our strategy, which says with half of our free cash flow that's not committed to our shareholders every year, we're going to make situational decisions depending on the M&A opportunities and the attractiveness of those returns versus share repurchases..

Operator, next question..

Our next question comes from Brian Tanquilut with Jefferies. Your line is open..

Hi, good morning. Mark, just a quick question on United. Thanks for all that color.

So, as we think about 2019, putting it all together, out of network, going in network and then the volume expectations that you have in the ramp, is United a net positive revenue contributor in 2019?.

Yeah, absolutely..

Okay. Got it. Alright. Thank you..

Operator, next question..

Our next question comes from Kevin Ellich with Craig-Hallum. Your line is open..

Hi, guys. Just ….

Good morning..

With the strong M&A pipeline, hi Steve, given what you've done, do you have any, I guess, strategic focus at things that you'd like to add, Steve as we think about your pipeline?.

Yeah. Continue with what we've been focused on. One is, the opportunity to run hospital outreach. We think it's a – of course it's a nice opportunity to continue to consolidate the market and we do believe that we'll continue to build. And as I said, we just announced another deal this week.

Number two, you saw that we just announced a number of acquisitions that afford us new capabilities. The Immunotec acquisition gives us blood tuberculosis testing capability with tick-borne capabilities. That was a nice add.

ReproSource gives us nice women's health capability and then we also talk about PhenoPath up in the Pacific Northwest that has some capabilities around pathology and molecular. So, we'll always look for new capabilities.

And then the third piece is, there's still regional laboratories that we believe we are going to have difficult times than – more difficult time than hospital outreach, and you'll see some regional opportunities. So, if you look back in the last five years and you look at the acquisitions, they fit in those three categories.

There's been ebbs and flows of each of the three, but generally, that's what we continue to look and they're all strategically aligned to what we do and we have to have a path to value creation and hopefully you agree with us that we've built up credibility around that. So, we will continue to work on that and go into next year.

We already hit that 1% to 2%, and we've got a nice funnel to continue to pursue ideas that we can make money of..

Operator, next question..

Our next question comes from Dan Leonard with Deutsche Bank. Your line is open..

Thank you. Just one final one on the UnitedHealth volume opportunity. I think previously you talked about some potential increased volumes flipping into 2018.

Is that something you're contemplating in your guidance for the year or no?.

Yes. So, there is certainly some early transitions. It's not significant enough to call out, but I didn't want you to think we're waiving on everything till January 1. So yes, we absolutely already have some accounts that have moved and some accounts that are committing to move, but at this point, it's still relatively small..

Okay. Thank you..

Operator, last question..

Our last question comes from Eric Coldwell with Baird. Your line is open..

Hi, thanks. Most of mine have been covered, but there is one in your footnotes, which is, obviously M&A is a big piece of the call today and I'm seeing that you're writing off the fair value contingent consideration on MedXM.

I'm just curious if we can get an update on that acquisition and then maybe just kind of a broader swath on how other acquisitions have been doing. You've announced quite a few here in the last few months. Thanks..

Sure. So, we're happy with MedXM. As I'm sure you're familiar, the reason you put in an earnout into a deal was when the buyer and the seller have markedly different views of the potential, it's one way to get two transactions coined that shares the risk appropriately.

So, at this point, not quite 9 months into the acquisition, we feel from an accounting standpoint that it's highly unlikely to pay out the earnout. That doesn't mean that we haven't achieved what we were expecting to achieve. It just means that the seller had a very different view of where that might go. And so that's all you should read into there.

We're very happy with MedXM thus far. It's been a great addition to our portfolio, and I can tell you that as we're talking to payers about our laboratory testing, this is another opportunity to talk to them about ways that we can really help them beyond just the laboratory testing we're doing with great reach and population health and so on.

So, it's another point why they want to do business with Quest..

That's great. Thanks very much..

Okay. I think we've handled all the questions. We thank all of you for joining us today. We appreciate your support. You have a great day and hope to see many of you at our Investor Day in November..

Thank you for participating in the Quest Diagnostics third quarter 2018 conference call. A transcript of prepared remarks on this call will be posted later today on the 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 AM Eastern Time on October 23, 2018 until midnight Eastern Time on November 6, 2018. Goodbye..