Quest Diagnostics (DGX) Earnings Report: Q4 2015 ... · Event Description: Q4 2015 Earnings Call Market Cap as of Event Date: 9.49B Price as of Event Date: 64.15 ... Welcome to the

CompanyName:QuestDiagnosticsIncCompanyTicker:DGXSector:HealthCareIndustry:HealthServices

EventDescription:Q42015EarningsCallMarketCapasofEventDate:9.49BPriceasofEventDate:64.15

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QuestDiagnostics(DGX)EarningsReport:Q42015ConferenceCallTranscriptThefollowingQuestDiagnosticsconferencecalltookplaceonJanuary28,2016,08:30AMET.Thisisatranscriptofthatearningscall:

CompanyPart icipants

DanHaemmerle;QuestDiagnosticsIncorporated;ExecutiveDirectorofIRSteveRusckowski;QuestDiagnosticsIncorporated;PresidentCEOMarkGuinan;QuestDiagnosticsIncorporated;SVPCFO

OtherPart icipants

RickyGoldwasser;MorganStanley;AnalystMitchellPetersen;BarclaysCapital;AnalystLisaGill;JPMorgan;AnalystJasonPlagman;Jefferies&Co.;AnalystA.J.Rice;UBS;AnalystNickJansen;RaymondJames&AssociatesInc.;AnalystBillQuirk;PiperJaffray&Co.;AnalystJoelKaufman;GoldmanSachs;AnalystElizabethBlake;BofAMerrillLynch;AnalystDonaldHooker;KeyBankCapitalMarkets;AnalystBillBonello;Craig-HallumCapitalGroup;AnalystAmandaMurphy;WilliamBlair&Company;AnalystMichaelCherny;EvercoreISI;Analyst

MANAGEMENTDISCUSSIONSECTION

Operator :

WelcometotheQuestDiagnosticsfourth-quarterandfull-year2015conferencecall.

Atthistime,attherequestoftheCompanythiscallisbeingrecorded.Theentirecontentofthecall,includingthepresentationandquestion-and-answersessionthatwillfollow,arethecopyrightedpropertyofQuestDiagnosticswithallrightsreserved.Anyredistribution,retransmission,orrebroadcastofthiscallinanyformwithouttheexpresswrittenconsentofQuestDiagnosticsisstrictlyprohibited.

NowI'dliketointroduceDanHaemmerle,ExecutiveDirectorofInvestorRelationsforQuestDiagnostics.Goahead,please.

DanHaemmerle (ExecutiveDirectorofIR):

Thankyou.Goodmorning.I'mherewithSteveRusckowski,ourPresidentandChiefExecutiveOfficer,andMarkGuinan,ourChiefFinancialOfficer.

Duringthiscall,wemaymakeforward-lookingstatementsandalsodiscussnon-GAAPmeasures.Actualresultsmaydiffermateriallyfromthoseprojected.RisksanduncertaintiesthatmayaffectQuestDiagnostics'futureresultsinclude,butarenotlimitedto,thosedescribedinQuestDiagnostics'2014




annualreportonForm10-K,quarterlyreportsonForm10-Q,andcurrentreportsonForm8-K.Ourearningspressreleaseisavailable,andthetextofourpreparedremarkswillbeavailablelatertodayintheInvestorRelationsQuarterlyUpdatessectionofourwebsiteatwww.QuestDiagnostics.com.APowerPointpresentationandspreadsheetwithourresultsandsupplementalanalysisarealsoavailableonthewebsite.

Now,here'sSteveRusckowski.

SteveRusckowski(PresidentCEO):

Thanks,Dan,andthanks,everyone,forjoiningtoday.ThismorningI'llprovideyouwithhighlightsofthequarter,shareafewcommentsonindustrydynamics,andreviewprogressonourfive-pointstrategy.ThenMarkwillprovidemoredetailontheresultsandtakeyouthroughguidance.

Well,wecontinuedtomakeprogressonourpathforward,deliveringastrongyearandpositioningourselvesverywellfor2016.Beforeturningtothequarter,letmerecapourperformancefortheyear.

Revenuesgrewby2%onanequivalentbasis.Adjustedoperatingincomeasapercentageofrevenuesexpandedbyabout110basispoints,andadjustedEPS,excludingamortization,grewby6%.

Duringthefourthquarter,revenueswere$1.85billion,growingby60basispointsonanequivalentbasis.AdjustedEPS,excludingamortization,was$1.19,andthisrepresentsourseventhconsecutivequarterofyear-on-yearEPSgrowth.

BeforeIgetintoourstrategyupdateI'dliketotalkaboutourindustrydynamics,startingwiththerecentCMSproposalrelatedtothePAMAlegislation,whichasyouknowstandsforProtectingAccesstoMedicareAct.Asyouhaveheardmesaybefore,PAMAneedstobebuiltonarepresentativeviewofthemarket.Thecurrentproposallimitsthedefinitionofanapplicablelabtoexcludealargeportionofthemarket.

Wealsobelievethata2017effectivedatewillbeasignificantchallengeforallparties.WithstrongsupportfromtheAmericanHospitalAssociation,theAmericanMedicalAssociation,andmembersofCongress,weremainoptimisticthattogetherindustryandgovernmentcanstillachieveareasonableoutcome.

Second,IwouldliketodiscusstheproposedFDAguidanceonregulationoflaboratory-developedtests.WeunderstandtheFDA'sconcerns,butwecontinuetobelievewhattheFDAhasproposedwouldresultinlabsbeingsubjecttobothCLIAandFDAregulationsthatmaybeoverlapping,duplicative,andsometimescontradictoryintheirrequirements.Thishasthepotentialtoraisehealthcarecostsforpatientsandpotentiallyhindermedicalinnovation.

TheHousedraftlegislationisagoodfirststepinthelegislativeprocess.WeshareACLA'sgoalsofpromotingandsupportingdiagnosticinnovationsthatprovidephysicianswiththeinsightsnecessarytoadvancepatientcareandsavelives.WewanttoworkwithCongresstogettherightbalanceinlegislation:rightfortheindustry,rightforphysicians,andrightforpatientswhodependuponourdiagnosticinsightstomakeinformedhealthcaredecisionseveryday.

Nowletmeshifttotheprogresswe'remakingonourfive-pointstrategy,whichistorestoregrowth,driveoperationalexcellence,simplifytheorganization,refocusonourDiagnosticInformationServicesbusiness,anddeliverdisciplinedcapitaldeployment.Startingwithgrowth,justthreeyearsagothisbusinesswasshrinkingbymorethan4%.Weslowedtheorganicdeclineto2%in2014andhavenowgrownorganicallyonanequivalentbasisforthefifthconsecutivequarter.

Wegrew2015full-yearrevenuesby2%onanequivalentbasis,andwearewellpositionedfor2016.Our




gene-basedandesoterictestingbusinessgrewbyapproximately5%to$1.8billionfortheyear.Wecontinuetoseestronggrowthinourinfectiousdiseasetestingandprescriptiondrugmonitoring.

Additionally,inlate2015welaunchedtwocompaniondiagnosticssolutionsfornon-smallcelllungcancer.Thisweekweannouncedanothercomplementarydiagnostictestformelanoma.

Quest'sexpertise,scale,andcollaborationswithtoporganizationssuchasDakoandBristol-MyersSquibbpositionustoprovidecompanionandcomplementarydiagnostictestservicesforimmunotherapiesonascaleotherproviderscan'tmatch.Weareencouragedbytheprogressofourclinicalfranchiseteamsandexpecttocontinuetobuildmomentumgoingforward.

Second,overthepastfewyearswehaveoutlinedourstrategytopartnermoreeffectivelywithhospitalsystems.Wehavesharedourviewthathospitalswilllooktopartnerwithustodevelopandexecutetheirlabstrategy.

InNovemberweannouncedtheacquisitionofHartfordHealthCare'soutreachbusiness.Wehavebeenworkingondetailedintegrationplansandnowexpecttherelationshiptocloselaterinthefirstquarterof2016.

InDecember,weannouncedaprofessionallabservicesrelationshipwithBarnabasHealth,NewJersey'snumber-onehealthsystem.UnderthisrelationshipwewillmanageinpatientlaboratorytestservicesforsevenoftheirlocationsthroughoutNewJersey.Wearecurrentlyworkingthroughthetransitionplans.Weexpectclinicaltestingvolumestobefullytransitionedbymidyear2016.

Thesearetwostrongproofpointsofourevolvingmarketwherehospitalsarelookingforhigh-valueworld-classpartners.Wecontinuetobeencouragedbytherobustpipelineofopportunitieswehavedeveloped.

Inaddition,wearebuildingourportfolioofhealthinformationtechnologysolutions.Ourcapabilitieshelppayers,providers,andpatientstoimprovepatientcare,loweringcosttomanagepopulations.We'rerollingoutournewsuiteofsolutionscalled[Quantum]internallytooursalesforcethisweek.

AgoodexampleofQuantum'ssolutionisourrecentpartnershipwithInovalontodeliverreal-timeinsightsatthepointofcare,whichwecallDataDiagnostics.WelaunchedthissolutioninDecember,areseeingstronginterest,andhavealreadybeguntosignbusiness.

Weareveryencouragedbytheopportunity.You'llhearmoreaboutourDataDiagnosticsandourQuantumsolutionlaterthisquarteratHIMSS.

Thesecondelementinourstrategyisdrivingoperationalexcellence.AtourInvestorDayinNovember2014,weoutlinedourgoaltoincreaseourcumulativerun-ratesavingsto$1.3billionbytheendof2017.Toachievethat,weneededtodeliveranadditional$600millioninrun-ratesavingsbytheendof2017,andwe'vemadeprogressonourmajorobjectivesofourprogram,whichincludebuildinge-enablingservices;standardizingourprocesses,data,andsystems;andimprovingcashcollections.

Wedeliveredover$200millioninrealizedsavingsin2015.Thisenabledustodeliver10%growthinpretaxearningsfortheyearaswecontinuetomoveclosertoourInvigorategoalof$1.3billion.

Now,we'redoingallthisasweimproveourcustomerexperience,atthesametimethatwelowerourcostsbyremovingwastefromthesystem.Wecontinuetosimplifyandstrengthenourorganization,whichisthethirdelementofourstrategy.

Duringtheyear,welaunchedournewbrandpromise.WecallitActionfromInsight.Ourbrandpromisesmorethanarefreshedlogo;it'sreallyaboutrecommittingtoasuperiorcustomerexperience.




WerecentlylaunchedEverydayExcellence,anewinitiativethatfocusesonourcustomers.We'vealreadyrolleditouttomorethanone-thirdofourworkforce.

Butit'snotjustaboutourfront-lineemployees.EverydayExcellenceisforallofus,allofouremployees,anditstartswithme.

We'vealsoinvestedandtrainedover150seniorleadersatourLeadingQuestAcademy.Andwe'vedeployedourQuestmanagementsystemstocreateastandardframeworkforrunningourbusiness.

Our44,000employeesarekeytooursuccess.Actually,inarecentcompanywidesurveyweexperiencedarecordrateofengagementfromouremployees,andtheresultsputusonparoraboveperformanceofhigh-performingcompaniesinseveralkeyareas.

Thereisaclearlinkbetweenemployeeengagementandperformanceatthemostsuccessfulcompanies.Ouremployeesareprovidinguswithvaluablefeedback,andwearelistening.OnarecentvisittoourfacilitiesinCalifornia,aswithsomanyvisitswithouroperations,Icameawaybothimpressedandgratefulforouremployees'passionandcommitmenttoourcustomers.

ThefourthelementofourstrategyistorefocusonourDiagnosticInformationServicesbusiness.Duringtheyear,wecontributedourclinicaltrialstestingbusinessintothenewlyformedjointventurewithQuintilescalledQSquaredSolutions.TheJV'sperformanceisontrackwithourexpectations,andwe'reexcitedtobepartofthisgrowingbusiness.

Thenfinally,weremaincommittedtothefifthelementofourstrategy,deliveringdisciplinedcapitaldeployment.In2015wereturnedover$400milliontoourshareholdersthroughacombinationofdividendsandsharebuybacks.Wereturned80%ofourfreecashflowtoshareholdersin2015,wellinexcessofourcommitmenttoreturnthemajorityofourfreecashflowtoourshareholders.

Duringthequarter,weincreasedtheCompany'ssharerepurchaseauthorizationby$500million,andthenearliertodayweannounceda5%increaseinourquarterlydividend.Thisisourfifthdividendincreasesince2011.

Alongwithallthiswecontinuetoinvestinourbusiness.WeannouncedtheHartfordHealthCareoutreachacquisitioninthequarterandclosedtoacquisitionsearlierin2015.TheseacquisitionsarealignedtoourobjectiveofgrowingrevenueswithstrategicallyalignedM&A.

NowMarkwillprovideanoverviewonourfourth-quarterfinancialperformanceandwalkyouthroughthedetailsofour2016outlook,whichconsidersseveraloftherecentlyannouncedrelationshipsInotedearlier.Mark?

MarkGuinan (SVPCFO):

Thanks,Steve.Startingwithrevenues,consolidatedfourth-quarterrevenuesof$1.85billionincreased0.6%versustheprioryearonanequivalentrevenuebasis--thatis,excludingthefourth-quarter2014clinicaltrialsrevenue.Onareportedbasis,revenueswerelowerby1.8%.

RevenuesforDiagnosticInformationServicesgrewby40basispointsversusayearago.Volume,measuredbythenumberofrequisitions,grewby30basispointsversustheprioryear.Volumegrewonanorganicbasisby20basispoints.

Revenueperrequisitionwas10basispointsbetterthantheprioryear.Reimbursementpressurewasmoderateinthequarterandfortheyear,whichisconsistentwithwhatwesharedatourInvestorDayin2014.




Bothtestandbusinessmixcontinuetohavenetpositiveimpact,reflectingourstrategytogrowouresoterictestinganddriveprofitablegrowth.

Adjustedoperatingincomeforthequarterwas$288millionor15.5%ofrevenues,comparedto$283millionor15%ofrevenuesayearago.Theimprovementof50basispointscanbeprimarilyattributedtoefficienciesfromourInvigorateprogramandbusinessmix.

Forthequarter,adjustedearningspershareexcludingamortizationwas$1.19,or80basispointsbetterthanayearago.Fourth-quarter2015reportedincomefromcontinuingoperationsincludesanetbenefitof$31millionor$0.21persharerelatedtodeferredincometaxbenefitsrecognizedduringthequarter,partiallyoffsetbychargesprimarilyrelatedtorestructuringandintegrationcosts.Inthefourthquarterof2014,reportedincomefromcontinuingoperationsincludedanetbenefitof$27millionor$0.18persharefromthefavorableresolutionoftaxcontingencies,offsetbychargesrelatedprimarilytorestructuringandintegrationcosts.

Baddebtexpenseasapercentageofrevenueswas3.5%,30basispointsbetterthanlastyearand40basispointsbetterthanlastquarter.Thisisprimarilyduetoaone-timebaddebtbenefitinthefourthquarter.

Itremainsachallengingcollectionenvironment,andweremainfocusedonimprovingouroperationalactivities.OurDSOswere47days,onedaylowerthantheprioryearandthreedayshigherthanlastquarter.

Reportedcashprovidedbyoperationswas$271millioninthefourthquarterof2015,comparedto$303millioninthefourthquarterof2014.Cashprovidedbyoperationswaslowerthanayearagolargelyduetoanadditionalpayrollcyclethisyear.Excludingthenetcashchargesrelatedtotherecentdebtrefinancing,adjustedcashprovidedbyoperationswas$899millionforthefull-year2015.

Capitalexpenditureswere$94millioninthequarter,comparedto$89millionayearago.Totalcapitalexpendituresin2015were$263million.

Beforemovingtoguidance,I'llshareafewcommentstohelpyouthinkaboutouroutlook.First,afewofyourecentlyaskedaboutthe8%to10%earningsCAGRsharedatourInvestorDayin2014.Reflectingon2015,wedelivered6%adjustedearnings,excludingamortization.

Keepinmindthatthecomparein2015wasnegativelyimpactedbyamortizationandadiscretetaxbenefitin2014.Thesetwoitemsreducedourreportedearningsgrowthbyabout2%,mostlybecausewebeatour2014estimateby$0.05.Takingtheseitemsintoconsideration,wefeelweareontrackcomparedtoourobjectivesoutlinedatInvestorDayin2014.

Second,becauseofthenewreformedQSquaredSolutionsJV,wenolongerconsolidatetheclinicaltrialsrevenue.Ourclinicaltrialsbusinessreportedrevenuesof$85millioninthefirsthalfof2015thatyoushouldconsiderasyouupdateyourmodel.

Finally,asyouthinkaboutourrevenueprojections,wehavebeenonafavorabletrajectory,butonethathasbeenbuildingovertime.Weexpectthatwewillcontinuetoshowimprovementasweprogressthroughtheyear.Specifically,youshouldconsidertheBarnabasHealthopportunitythatwillphaseinoverthefirsthalfoftheyearandtherecentlyannouncedoutreachacquisitionwhichweexpecttobecompletedlateinthefirstquarter.

Movingtoguidance,wenowexpectfull-year2016resultsbeforespecialitemsasfollows.Revenuesareexpectedtobebetween$7.52billionand$7.59billion,anincreaseof1.5%to2.5%onanequivalentbasis.Forcomparativepurposes,equivalentrevenueswillexcludethe2015revenuesassociatedwithour




clinicaltrialsbusiness.

AdjusteddilutedEPS,excludingamortization,tobebetween$5.02and$5.17.Cashprovidedbyoperationstoapproach$1billion.Andcapitalexpenditurestobebetween$250millionto$300million.

NowletmeturnitbacktoSteve.


Well,thanks,Mark.Well,webelievewehavetherightstrategytorestoregrowthandbuildvalueforourshareholders.Wedeliveredanothersolidquarterandagoodyear.

We'rebuildingmomentumwithourfocusonadvancedtesting.Hospitalpartnershipsarebuilding,andourexpansionofourhealthinformationsolutionsactivitiesispromising.

WehavenowdeliveredadjustedEPSgrowthfortheseventhconsecutivequarter.Wearewellpositionedtodeliveronourcommitmentsfor2016.

Nowwiththat,we'dbehappytotakeanyofyourquestions.


Operator?

QUESTIONS&ANSWERS

Operator :

(OperatorInstructions)

RickyGoldwasser,MorganStanley.

RickyGoldwasser (Analyst-MorganStanley):

Regardingtheunderlyingassumptionsonguidance,obviouslyyouhaveuppedyourbuybackallocationtoover$1billion.

Canyoujustsharewithuswhatislikeyourassumptionsforcapitaldeployment?Areyouassuminganybuybacksnow,andifsolikethemagnitude?


Yes.Ricky,thankyouforthequestion.Goodmorning.

IntheEPSguidance,itassumesaflatsharecount.Soatthispointdepending,aswealwaystalkabout,thebestvalue-creationopportunitybetweenM&Aandsharebuybacks,wemayendupdeployingmoretowardsbuybacks.Wemayendupreducingthesharecount.

Butatthispoint,EPSguidanceassumesaflatsharecount.


Andthetoplineassumessomecapitaldeployment?


Right.Thetoplineatthispointisbuiltbasedonsomeorganicgrowth,includingtheBarnabasHealth




deal,andthentheonlyM&AthatwehaveexplicitlyinthereatthispointistheHartfordoutreachacquisition.Butobviouslywegivearange,andsowithinthatrangethere'svariousscenariosbetweenorganicandinorganicgrowth.


Okay.CanIhavejustonefollow-up?Justwhenyouthinkaboutliketheearlyhospitalpartnershipsthatyou'vesigned--notthisyearbuttheyearbefore--wethinkaboutitascasestudies.Whattypeofgrowthareyouseeingfromtheselikeearlypartnershipsthatwecanthinkaboutaslikeaframeworkforthenewdealsthatyouhavesignedrecently?


Well,we'rebuildingthebusiness,Ricky,sowithbuildinganybusinessthisispartofourgrowthstrategy,istofocusonthesehospitalpartnerships,andwefindthereceptivityofhospitalsystemsquitepromising.We'vetalkedaboutinthepastwenowhaveanumberofdealsthatarealreadyinourrevenuesin2015.WeannouncedBarnabasinthefourthquarter,sothatwillstarttoshowupin2016.Again,thesearegrowthratesofourorganicrevenuesthatMarktalkedabout.

Thenfinally,aswehaveanicerobustfunnel,moreprospectsin2016.SowebelievethatthisbusinesswillcontinuetobuildandcontributetoourgrowthprospectsfortheCompanygoingforward.Sothat'sthewaywelookatit.


Okay,thankyou.

Operator :

JackMeehan,Barclays.

MitchellPetersen (Analyst-BarclaysCapital):

Hi.Thanks.ThisisactuallyMitchellPetersencallinginforJackthismorning.

Lastquarter,Iknowyouguystalkedaboututilizationlevelsandhowtheyarelittlebitweakerin3Qbuttrendingpositively.

Iwaswonderingifyoucouldcalloutthetrendsyou'vebeenseeingonutilizationpercustomerthroughoutthequarter?


Yes,sure.We'vetalkedaboutitinthepast.Wedothistestwherewetakealookatourknownaccountsthatareouraccounts;wehaveabout1,000.Welookatyear-on-yearcomparison.

WedidthatinQ3andwesaidthatvolumespickedupattheendofthequarter.We'vedonethatagaininQ4,andwhatwe'llsayatthistimeiswhenwelookatthatit'sfeelinglikeQ4wasstablewithprioryear.Nonotablechangeinthat,andthat'sthebestinsightwehavearoundutilizationinthemarketthatweserve.


Great,thanks.Thenjustonemorequickone.

Obviously,PAMAcomingupandthenthemarginimpactsfromtheesotericmixshifts.Arethereanyother




noticeablepricingtrendsthatyou'reseeinginthemarket?


Mark,youwantto--?


Notrendsperse.Obviouslythere'smixwetalkabout,andthatincludestestmix;italsoincludespayermix.WehavementionedpreviouslythatwehaveseensomegrowthinourMedicaidvolumes,probablymostlikelyinresponsetotheAffordableCareAct,butalsoareductioninouruninsuredmixaswell.

Someofthatwasmorepronouncedseveralquartersago.Iwouldn'tsayrecentlyanyotherthingofnote.

AsIsharedattheInvestorDay,weexpected2016tobemorelike--andin2017aswell--tobemorelike2014.You'veseentheresultsforthepastyear.

Youcanseethattherewassomepricingpressure.Itwasfairlytame,certainlycomparedtoseveralyearsago.AndevenwithPAMAwe'restillconfidentthatthrough2017there'snotgoingtobeanythingnoteworthy;andaswesaiditshouldbeconsistentwiththelastcoupleyears.


Great.Thankyou.

Operator :

LisaGill,JPMorgan.

LisaGill(Analyst-JPMorgan):

Thankyou.Iwaswonderingifyoucouldmaybejustgiveusanupdate.YoutalkedalittlebitabouttheQuintiles'JVQ2.But,Mark,canyoutelluswhatyouhavebuiltintotheguidancefor2016forthat?

Thenmaybe,Steve,ifyoucanspendaminute,haveyoubeensuccessfulinsigningsomenewdealsunderthenewrelationship?


Sure.


Yes,sure.Lisa,toansweryourquestiondirectly,I'msureyourecognizednothingontherevenuelinesincewecan'tconsolidate.Ontheearningsline,certainlyaswediscussed,weexpectedtodeliversomesignificantsynergiesthisyearin2016,andIhavethatbuiltintoourguidance.

Wedon'tbreakthatoutspecifically.It'snotlargeenoughorsubstantiveenoughtoprovidespecificdetail.Butthatisconsidered,andwearepleasedandlookingforwardtohavingmoreearningsin2016thanwedidin2015fromclinicaltrials,andthenalsohavingmorethanwethinkwewould'vehadhadwekeptthatbusinessasstandaloneQuest.


Great.Lisa,toyourpointaboutthebusinessprospects,actuallyIwasdownthereearlierthisweekwithQuintiles'managementteam.Asyouknow,westartedthisjointventureQ2Solutionsinthesecondhalf.We'reverypleasedwiththeintegrationthat'sgoneonsofar.




We'vebuiltanicemanagementteam.Wenowhaveagoodintegrationplan.Wefeelgoodaboutthecadence.

Andinparallelwiththeintegrationwefeelgoodabouttheprospectsthatwe'reseeinginourfunnelandthebusinessthatwe'veretained.We'renotgoingtocommentspecificallyanynewbusiness,butwe'reencouragedaboutthebeginningofthejointventureandtheworkingrelationshipsbetweenbothcompanies.

Betweenbothofus,ourselvesandQuintiles,we'llgiveyoumorecolorasitevolves.Butsofarsogood.


Isthereanywaytoquantifyanyofthat?Thesizeofthefunnelor--Iknowthatyousaidit'sbiggerthanwhatyouthoughtpreviouslyonyourown.Butjustaswethinkaboutthatasbeingafutureopportunityforyourbusiness,isitsomethingthatcouldbeakeydriverovertime?Oryoujustthinkthisissomethingthat'sasmaller,incrementaldrivertoyourbusiness?


Ijustwanttorefresheveryone'smemory.Itwas2%ofouroverallrevenues.Whatwesharedatthatpointwasthatitsoperatingmarginwasfairlyrepresentativeoftheoverallenterprise,sonothingmateriallyhigherorlower.

Thereforeyoucanframeaboutwhatthecontributionwas.Weexpectsignificantlylargergrowthonthatthanwecouldhavedoneourselves,butstilloffa2%base.

Sowe'repleasedwithitandcertainlyeverycouplepenniesisnicetohave,butit'snotgoingtobeagame-changeroverall.ButasStevesaid,relativetotheexpectationsgoingintothepartnership,we'reverypleasedwiththefirstsixmonthsandlookingforwardto2016.


Sincewedon'tconsolidaterevenueswe'regoingtoseeitbackinourearningsgrowth.Andalotofthatearningsgrowthwillcomefromthecostsynergiesthat'simpliedin--oraportionofit'simpliedinourguidance.


Okay.That'shelpful.Thankyou.

Operator :

BrianTanquilut,Jefferies.

JasonPlagman (Analyst-Jefferies&Co.):

Hey,guys.ThisisJasonPlagmanonforBrian.Morning.AquestionontheBarnabaspartnershipandthehospitalmanagementsegmentingeneral.Howshouldwethinkaboutthemarginprofileforthatsegmentbothoverthenextyearortwoandthenhowyou'rethinkingaboutitlongerterm?


Well,youknowthewaywelookatthisiswebelievethemarketiscontinuingtolookforpartnerships.Isaidthisinmyopeningcomments.Hospitalsarelookingforpartnerslikeustohelpthemwiththeirlabstrategy.




Apieceofthisishelpingthemruntheirhospitalbusiness,butalsothinkabouthowwecouldpartnerwiththemintheirmoresophisticatedtesting--whatwerefertoasreferencework.SothenwhenweengagewithclientsorcustomerslikeBarnabasweexpectthatwe'regoingtostartworkingwiththem,andwe'regoingtostartto--continuetobuildtheirbookofbusinesswithus.

Asfarasmargins,whatwe'llsayisthis.We'redrivinggrowthinthisCompanyandwe'redrivingbetterROIC.Andincludedinourguidancearoundgrowthandincludedinourguidancearoundearningsgrowth,wedoexpectthatourbuildofourprofessionallabservicesbusinesswillbeaccretivetoourplangoingforward.


I'lljustaddthatIhavesharedinthepast,theseprofessionallaboratoryservicesagreementcomewithacoupleofdifferentcomponents,asStevejustlaidout.Certainlythereferencepiece,thosemarginswouldbesimilartoourotherreferencebusinessrelationships.Andtheninsomeofthesecasesthereispartnershipinvolvingoutreachaswell.

OnthePLSpieceitself,whichisfocusedontakingsomeoftheinpatientsandoutpatientsinthehospitaltestingandpartneringwiththemonthatlabwork--whichpreviouslywasunaddressablerevenue,soit'sanewsourceofgrowthforus--thosemarginsarelowerthanouroverallbookofbusinessbecausewehavetosharethevaluecreationwithourpartner.Obviously,whenwegoinit'sasupplyarrangement,andthereforewehavetosaveenoughforuseachtomakeareturn.

However,asStevealsopointedout,sincethereisreallynosignificantcapitaloutlayatthatpoint,theROICisveryattractive.Ialsowanttoemphasizeit'ssomewhatpreviouslyunaddressablerevenues,soanewsourceofgrowth.


Justtocloseonthis,in2015wefeatheredinanumberofPLSdeals,sothey'reinourresults.Ithelpsuswithgrowth;butalsoasyoucanseewithourresultsweexpandedourmarginsby110basispoints.

SoIfeelgoodaboutourprospectsofthispieceofbusinessalongwithotherbusinessesgrowingtheCompanyandalsomakingsurethatwecontinuetodelivergoodreturnoninvestedcapital.

JasonPlagman (Analyst-Jefferies&Co.):

Great.Thanksfortheinsight.

Operator :

A.J.Rice,UBS.

A.J.Rice (Analyst-UBS):

Hi,thanks.Justinitially,I'mtrying--thisissortofabigger-picturequestion.Sotherevenueguidancelooksfor1.5%to2.5%growth.I'mjusttryingtothinkthroughtheputsandtakesandhowtheyrelatetotheunderlyingassumptions.

Obviously,you'vegottheheadwindofthehalfyear,sotherevenuesthatwerecontributedintheQuintilesJV.Alternatively,you'reanniversaryingatthispointsomelossorexitedcontractsthatimpairedgrowthlastyear,aswellasyou'vegottheSt.Barnabasdealrampingup.

SoI'mtryingtogetto:Whatdoyoureallythinktheunderlyingtrendsareintermsofpricing,volume,andanapples-to-applesrevenuecomparison?Anycommentsonthatwouldbehelpful.





Firstoff,A.J.--andthankyouforthequestion--the1.5%to2.5%isonwhatwecallanequivalentbasis.Sothatdoesnotincludetheheadwindsfromclinicaltrials.Thisisexcludingthat.

Sothebusinessesthatwecontinuetohaveorwillbeadding,suchastheHartfordacquisitionornewpartnershipslikeBarnabas,areincludedinthat.Butthatexcludestheimpactofthe$85millioninthefirsthalf.

Aswelookatit,wetalkedabouttheprice;andweexpectpricein2016tohavesomemodestheadwinds.Andthenmix,obviously,wedidn'tgettothatspecifically,butwewouldn'texpectamateriallydifferenttrendthanwhatyousawthrough2015.

Wecontinuetogrowouresotericbusiness;wementioned5%growthinQ4.Wecontinuetofocusonourmostprofitablebusinessopportunities.Wehavecleanedupourportfolio,whichcertainlyyou'reseeingsomeofthatbenefitintermsofourcustomers;andasweengagewithnewcustomerswe'reveryfocusedonmakingsurethatwegetthevaluethatwedeliverthroughourpricing.

Sothat'sreallytheoverallcommentary.Iwouldsaythe1.5%to2.5%isacombinationoforganicgrowthandwe'vehadfivestraightquartersofrevenue.Wementionedwehadsomevolumeorganicgrowthinthisquarterandanimprovingtrendthroughout2016.


Okay,that'sgreat.ThenmaybejustfollowinguponSteve'scommentaroundtheLDTquestionandtheFDA.Itseemslikethere'stwodynamicsgoingon.Congressisworkingwiththeindustrytotrytocomeupwithsomeparametersaroundwhatmighthappenthere,andthenyouoccasionallyhavethesesalvosoutoftheFDAsuggestingthattheymaymoveaheadwithguidancearoundit.

Canyougiveusanyflavor?Imean,isthereanydialoguewiththeFDA?Doyougetanysenseofwhetherthey'regoingtostanddownandletCongressmoveforward?Orarethey--doyouhaveanysenseofwhatthey'redoing?


Yes.Thanks,A.J.Firstofall,asyouknow,ourpositionasanindustryistheFDAdoesnothavestatutoryauthoritytoregulatelaboratories.We'reinthebusinessofmedicineandapplyingadeviceregulationtoourindustrydoesn'tmakesense,andit'sduplicativewithwhatwealreadyhavewithCLIA.Sothatremainsourposition.

Nowwithallthatsaid,asanindustrywealsobelievethatalegislativeactionorprocessisthebestsolutiontothis.We'reencouragedwithwhat'sbeenproposedfromCongressasagoodstart.Sowe'reengagingwithCongressontheirproposedlegislation;we'redoingthiswithotherstakeholders.

AsfarastheFDAinvolvementinthis,ItrustCongressandtheirteamandalsowiththeworkinourtradeassociation.WehaveengagedwiththeFDAaswelltoseeifwecancomeupwithareasonablesolutionofwhattheyaretryingtoaccomplishwhileatthesametimeaddresstheissueswe'reconcernedabout.

Sowe'reworking.Wethinkthelegislativeactionisthebestactionforus,andthatwouldbemuchbetterthanthecurrentguidancethatwe'veseensofarfromtheFDA.


Okay.Thanksalot.




Operator :

NickJansen,RaymondJames.

NickJansen (Analyst-RaymondJames&AssociatesInc.):

Hi,nicejobonthequarterwiththeorganicvolumes,butacouplequestions.FirstontheSG&Atrend,itdidlooklikeyourSG&Adollarsgrewfasteronmaybeanequivalentbasis.Maybeit'sprobablybecauselastyear'snumberwasn'trestated;butjustwantedtogetabettersenseofwhatyou'reviewingascoreSG&Agrowth,andhowweshouldbethinkingabout2016incontextoftheacceleratingbenefitfromInvigorate2.0.


Yes,thanks,Nick.I'msureasyoucanappreciate,SG&Awillbouncearoundquartertoquarter,dependingonthetimingofcertaininvestmentsandotherthingsthatimpactthatoverallexpense.Thereiscertainlynotatrendtobereadfromthat.

YoucanseefortheyearwedrovenotonlyimprovementingrossmarginbutleverageofourSG&A.Youwouldexpectweneedtocontinuethatinordertodriveleveragethatwe'reimplyingforourguidancein2016,andcertainlytheleveragewewereimplyingthroughtheoutlookthatIprovidedattheInvestorDayin2014.

SomeofInvigorateisonthecostofsalesline.SomeofitisontheSG&Aline.AndyoushouldnotexpectustodeleverageourSG&Agoingforward.

NickJansen (Analyst-RaymondJames&AssociatesInc.):

Okay.Thensecondly,Ithinkyoumentionedabaddebtbenefitinthequarter.Justwantedtoknowifyoucouldpotentiallyquantifythatandthinkaboutwhatdrovetheimprovementfromthatbenefit.Thanks.


Yes.WhatIwouldsayisthebaddebtcontinuestobefairlystable.Mix,aswementioned,mixisgoingagainstusaswegetalargerproportionofourrevenuesfrompatients.Thebaddebtrateonthatissignificantly,onanorderofmagnitude,higherthanitisfromthepayers,whetherit'scommercialpayersorthegovernment.

Sothat'ssomethingwehavetooffset.AndthroughsomeofthegoodInvigorateworkwe'vebeendoingwe'veheldthatatbayandhelditprettystable.Sothat'swhatIwouldsayis--withoutthatone-timebenefit,youshouldhaveexpectedtoseesomestabilityinourbaddebt.

Operator :

BillQuirk,PiperJaffray.

BillQuirk(Analyst-PiperJaffray&Co.):

Great.Thanksandgoodmorning,everybody.IguessgoingbacktoFDAaswellasPAMA,Steve,whatareyouguysthinkingintermsofthefinaldocumentscomingout?Iguesswe'vebeenhearingprobably1QforPAMAand2QforFDA.I'mjustcuriousifthoseareconsistentwithyourexpectations.


Yes.Firstofall,letmestartwithPAMA.We'vebeenengagedwithCMSonthisalllastyear,oncewereceivedtheirdraftdocument.




Twothings.AsIsaidinmyintroductorycomments,webelievetheydidnotgetitrightasfarastheapplicablelabs.Itneedstoincludehospitals.We'vebeenquiteclearonthatandwe'vegotalotofsupportnowfromAmericanMedicalAssociation,AmericanHospitalAssociation,andCongresstohelpuswiththat.Sowemadethatloudandclear.

Thensecondisthetiming.Wethinktheabilityforustogetthefinalguidanceoutthisyear,forustosubmitthedata,andthenalsoforthemtogothroughthatdatatorefreshtheclinicallabfeescheduleby2017isavery,verytighttimetable,asyoucanimagine.

Sothosearethetwobigissuesthatwe'vehighlighted.We'rehopefulthatwe'llseesomethinginthefirsthalfof2016.Theynevercommittowhatthedateis,butwe'rehopefulthatwe'llseesomethingafterthey'vedigestedeverythingwe'veprovidedtotheminthelastpartoflastyear.Sothat'swherethatstands.

AsfarastheFDA,asIjustmentionedwecontinuetoworkwithCongressonalegislativeaction.Webelievethat'sthebestapproachforthisissue.

Webelieveitisagoodstart.Andagainasthetradeassociationwebelievetheydonothavethestatutoryauthority--theFDAdoesnothavethestatutoryauthoritytoregulatelaboratories.

Sowe'regoingtoworkthisinduecourse.We'rehopefulthatwecancomeupwithsomethingwithCongress,andwe'llseewherethatleadsus.Butthisisgoingtobedonestep-by-stepandmakeprogressandseewherethisevolvesoverthenextseveralmonths.


Gotit.Thenifyouhadtohandicap--IguessstickingonPAMA,ifyouhadtohandicapofthemexpandingbeyondthelabsthey'vealreadyspokento,whereareyouthinkingatthispoint,Steve?


Oh,theapplicablelab?Youcan'thandicapit.AllIknowisthemessagehasbeenloudandclear.

WegotthesupportoftheAmericanHospitalAssociation,whichclearlygetspaidthesamewaywegetpaid.Iftheydonotincludehospitals--asweallknow,thosecommercialratesarehigherthanourrates,sotheyneedtobeinthebasetogetamarketviewofthecodes.

SecondistheSenatehasweighedin.TheHousehasweighedin.Industryhasweighedin.Weclearlyhavedoneagoodjobofmakingsure--wewanttomakesurewegetthisrightbecauseit'simportanttoallofus.

Again,yougobacktothedefinitionofPAMA:it'sProtectAccesstoMedicareAct.It'sveryimportantthatMedicarebeneficiariescontinuetogetthecriticaltesting,andallthoseMedicarebeneficiariesarenotjustinthoselargecitieswhereweprimarilyserve.There'salotofregionalplayersandthere'salotofhospitaloutreachplayersinthismarketplacethathavetogetfairratesfromCMS.


Gotit.thanks,guys.Appreciatethecolor.

Operator :

IsaacRo,GoldmanSachs.




JoelKaufman (Analyst-GoldmanSachs):

Hi,guys.Thanks.It'sactuallyJoelinforIsaac.Youguystouchedalittlebitonthecompaniondiagnosticsmarketinthepreparedremarks.Couldyoumaybehelpusthinkabouthowyouintendtowinshareinthatmarket?Itappearsthatmarket'sincreasinglybecomingamorecommoditizedendmarket.


Yes,sure.It'sapromisingmarket.Ifyougobackandlookatourplatformsforgrowth,companiondiagnosticsissometimesconnectedwithprecisionmedicine.Itisanimportantpartofourgrowthstrategy.

Severalthings.Oneisthatwecontinuetoworkwiththemarket-leadingresearchorganizations.AbouttwoyearsagoweannouncedarelationshipwithMemorialSloan-Kettering;we'reactuallytakingtheirresearchandwearenowmarketingaproductwecallOncoVantage,with34actionablegenes.Actuallywe'regoingtoexpandthatpanelthisyearaswellwiththeirhelp.

Sothisisrightinthemiddleofprecisionmedicine,andclearlywe'reprovidingthecompaniondiagnosticsassociatedwiththat.

Secondis,we'reengagingwithpharma.Weannouncedtheworkthispastquarterthatweweredoing.Italkedaboutinmyintroductoryremarksourrecentannouncementaroundmelanoma.

Wecontinuetobehighlyengagedwithallthepharmacompaniesthathavemanycompaniondiagnosticsassociatedwiththeirdevelopmentfunnels.Sowe'reverywellpositionedinthatregard.

WedoworknowcloselywithQuintilesofgettinganevenbetterviewinthemarketplaceandbetteraccesspointforalotofthesmallerpharmacompanieswiththerelationshipthattheyhave,sincetheyaretheworld'slargestCRO.Sowethinkwe'reverywellpositionedasaninnovationplayer;andnowwe'repositionedevenbetterwithourrelationshipwithQuintilesintermsofaccesstothemarket.


Thanks.Thenmaybejustahigh-levelquestiononwhatyou'reseeingforM&Adynamicsinthemarketrightnow.Aretherepocketsinthemarketwherevaluationsaremoreattractiveonarelativebasis?Justtryingtogetasenseofwhetherweshouldexpecttoseemoredealstowardsesoteric-gearedindependentsormoretraditionalfull-servicelabs.


Yes,wecontinuetoworkthemarket.OurstrategyistofocusonDiagnosticInformationServices.

We'reentirelyfocusedonthat.AllourM&Ahasbeenassociatedaroundthat.

We'vedonesomehospitaloutreachdeals,themostnotableoneisHartford'soutreachactivityinthefourthquarter.Wecontinuetohaveanicefunnel,andthat'sconsistentwithourstrategyof1%to2%growththroughacquisitions.

Throughouroutlookwebelievethere'splentyofprospectstosupportthat.Inthatregard,wealsohavebeenclearthatwe'regoingtoonlyacquirewhenwecanhaveagoodbusinesscasetomakemoneyforourshareholders.Manyofthedealswe'vedonesofarhavejustifiedthemselvesbaseduponcostsynergieswhich,inourexperience,isthebestacquisitionsyoucando.

Sowe'restillencouraged.Westillhaveastrongbeliefthatwecandeliverthisportionofourstrategy,andwe'vedeliveredonthatthroughthepastseveralyears.





Thanks.

Operator :

ElizabethBlake,BankofAmericaMerrillLynch.

ElizabethBlake (Analyst-BofAMerrillLynch):

Hi,goodmorningandthanksfortakingmyquestion.YoutouchedonyourDataDiagnosticspartnershipwithInovalonthatyoulaunchedinthequarter.Couldyouprovidesomecoloraroundyourplansforreimbursementthere?

Imean,haveyoubeenindiscussionswithhealthplans?Iguess,howwouldyoucharacterizetheinterestyou'regettingfromapayerperspective?


Wesaidinourcommentsthatwe'requiteencouraged.We'reofferingalotofvalue.Typicallythepaymentisthroughpayers,whoaretherisk-takingorganizations;soitcouldbeanACO,thosepeoplethataremanagingthepopulationandhavethefinancialincentivetoprovidethisinformationtothephysiciansthataretreatingandmanagingpatients'lives.

Inthatregardwe'vebeenoffandrunningsincethefourthquarter.Momentumisbuilding.We'veworkedthroughtheintegration.

Thenicepartaboutthisiswe'reprovidingthiscapabilityinthenormalworkflowofaphysician.Wehavetremendous,tremendouscapabilitiesatthedesktopofaphysicianwithourorderentryresultsreportingsystem,whichwecallCare360.Sowhenthey'reintheorderentrysystem,ifinfacttheywantthevisibilitytothisinformationthatwe'regettingfromInovalontheycaneasilyaccessthatinformation.

Andthepaymentmodelisbackto,again,typicallytherisk-takingentity,whoeverthatmightbe,thepayerorinthecaseofanentitythat'stakingrisklikeanACO.Sowe'reworkingbothphysicians'awarenessofthiscapabilityalongwithpayerawarenessofthis,andwe'reveryencouragedabouttheprospects.

ElizabethBlake (Analyst-BofAMerrillLynch):

Okay,great.Thankyouverymuch.

Operator :

DonaldHooker,KeyBanc.

DonaldHooker (Analyst-KeyBankCapitalMarkets):

Great,goodmorning.Myquestionwillbesimplebecauseit'safollow-uponthelastquestion.I'malsointerestedinthisDataDiagnosticsrelationshipyouhavewithInovalonandappreciatethecolor.

Lookingahead,howlongdoyouthink,ifyouweretoguessintermsofhowlongdoyouthinkthisrelationshipwouldtaketoramptoamaturelevel,Iguess,overtoapointwhereIguesstheoreticallyitcouldpotentiallystartimpactingandshowingupinnumbers?Iguessinotherwords,howlongarethesalescycles?





Yes.Wellfirstofall,westartedinthefourthquarter.WeannouncedthisdealinOctober.We'vealreadysignedsomebusiness;Imentionedthatinourremarksthatwesignedsomebusiness.

We'restartingto--we'llstarttoseesomeflowinthefirstquarteranditwillcontinuetobuild,justlikebuildinganybusiness.Soit'simpliedinourguidance;wedoexpectsomegrowthfromthisbusinessin2016,andthatbusinesswillgrowintothefuture.


Whatisyourdedicatedsalesforcetothisproduct?


Well,asyoucanimagine,you'resellingtopayers,sowehaveahospital--excuseme,wehaveahealthsystemteamthatcallsonandmanagesourhealthinsurancerelationships.Sothere'saportionofthesalethathappensthere.

Secondiswehaveahealthsystemssalesorganizationthatcallsonintegrateddeliverysystems.AsImentioned,someofthoseintegrateddeliverysystemsaretakingriskandhaveACOs;sowecallthere.

Thirdiswe'reequippingourphysiciansalesforcethatgoesinandtalkstoprimarycarephysiciansandallphysicians,includingourspecialistphysiciansalesforces.Sowe'retrainingoursalesforcethere,andwehaveover1,200peopleinoursalesorganization.AndthisiscomplementarytowhatInovalonalreadydoesincallingonthehealthinsuranceorganizationsaswell.


Gotyou.Thankyou.

Operator :

BillBonello,Craig-Hallum.

BillBonello (Analyst-Craig-HallumCapitalGroup):

Goodmorning.Ijusthaveacoupleofquestionsabouttheguidance.Mark,youtalkedaboutthatyoufeltafterputsandtakesandadjustmentsyouwereprettymuchinlinewithyourlong-termguidancerangeforwhatyoudeliveredin2015.IfIlookatthe2016EPSguidance,atthemiddleoftherangeit'ssortof7%,whichIthinkisstillbelowyourlong-termEPSguidancerange.

SoI'mjusttryingtoreconcilewhythatwouldbeandwhenyoumightexpecttobeinthat8%to10%range.AndthenIhaveafollow-up.


Yes,thanks,Bill.Iappreciatethequestion.Obviously,we'regoingtoprovideguidancethatwethinkisprudentanddeliverable.

Wehaveprovidedarange.Thatrangecertainlyincludessomenumbersthatwouldputusintothat8%to10%.Iwanttorefreshpeople'smemorythatthe8%to10%wasacompoundannualgrowthrateoverthreeyears,soitwasnotacommitmenttodothateverysingleyear.

AlsoinmypreparedremarksIremindedpeoplethatatthatpointwewereobviouslylookingata2014numberthatwas$0.05lowerthanweactuallydeliveredin2014.AndIcertainlydidnotanticipateareductioninouramortization,whichwasreallydrivenbythefactthatwedidnothaveasmuchsignificantM&Aactivityin2015.




Sowefeelintermsofwhatwecommittedtothatwe'reontrack.We'renotbehind.Certainlydependingonwhereweend2016withinthatguidancewe'lleitherbealittlebitslightlybelowtheCAGRorrightintheCAGR.Really,whatwewanttodoisprovideguidancethatwefeelisprudentanddeliverable;andasweprogressthroughtheyearobviouslywe'llseewherewemightendupwithinthatrange.

Butwecertainlydon'tthinktheguidanceimplies,giventheframingIsharedon2015,thatwe'remateriallyoffofthat8%to10%.


Okay.Thenjustasafollow-uptothat,wouldn'titbelogicaltothinkthatthegrowthcomp--assumingPAMAdoesn'tgetpostponed--thatthegrowthcompwouldactuallybealittlebitmoredifficultin2017thanitisin2016?OraretherethingsabouteitherthisyearornextyearthatwouldoffsetthatMedicarecut?


Yes,soBill,Italkedaboutthreeleversthatwouldenableustogrowearningssignificantlyfasterthanrevenue.Oneofthemwasthesynergiesthatwouldbecontinuedtobedeliveredtotheirsteady-statefromacquisitionswehaddoneearlyin2014.Soyouwouldimaginethatprobablyalotofthathasbeendelivered.

ThesecondpiecehasbeenourInvigorate,anditbeinglargeenoughtooffsetpriceandwageinflation,anddeliversomemarginexpansion.Thenthethirdelementistheleveragewegetfromorganicgrowth.

Wecommittedtoimprovingourrelativeperformance.AsStevetalkedabout,minus4%in2013andminus2%in2014,andthensomerevenuegrowththelastfivequarters.Andcertainlysincethere'snotasmuchM&Ainourguidancethisyearastherewasinthe2%wegotlastyear,whichbenefitedfromsomecarryoveronSolstas,we'reimplyingcontinuedstrengtheningofourorganicperformance.

Asyouknow,organicvolumegrowthhasahighdrop-through,andaswegetcloserandclosertomarketrates,whichwehadcommittedwewoulddothroughthethree-yeartimeframe,that'sgoingtoalsoenableustoleverourP&L.Soyoushouldexpectacceleratingorganicgrowthwhichwillbeadriverandthencontinuedtoprogresstogettothe$1.3billionofInvigorate,whichwillalsoaccelerateourearningsleverage.


That'sreallyhelpful.Thenjustonelastthing.IsthereanywayyoucantelluswhatclinicaltrialscontributedtooperatingincomeinQ4oflastyearonanannualizedbasis?Justsowehaveanapples-to-applescompontheoperatingincomeaswellastherevenue.


Weneverbrokeitdownbyquarter,Bill.ThebestI'mwillingtodo,whichI'vesaidinthepast,isthatitwasabout2%ofourrevenueanditsmarginwascomparable.So,youcankindofframewhatthatwould'vecontributedinQ4.


Okay.Thankyousomuch.

Operator :




AmandaMurphy,WilliamBaird.

AmandaMurphy(Analyst-WilliamBlair&Company):

Hi,goodmorning,guys.Ijusthadafollow-upactuallytooneofthepointsyoujustmadeintermsofvolumegrowth.Whatis--wouldyousayisthemarketgrowthatthispoint?

I'mjustcuriouswhatyou'reseeingintermsofthebaseutilization.Obviouslythere'sbeensomediscussionaroundtheACAandwhatimpactthathashad.Sojustcuriousifyoucanprovidemoredetailonutilizationratesthisyearandthengoingintonextyearaswell.


Yes,well,I'llstartandI'msureMarkwilladdsomethingtoit.Firstofall,wecontinuetobuildourownmarketmodel.In2014whenwehadourInvestorDay,weranourmodelwithanumberofassumptions.Wesaythattheindependentlaboratorymarketisgoingtogrowabout2%to3%invalue,andthat2%to3%invaluehas,asyouknow,alotofmovingparts.

WealsomadesomeassumptionsabouttheACAimpact.We'vealwaysassumedthataswehavemoreinsuredlivesintheUnitedStatesthatthatwouldbenetpositiveforthisindustry,netpositiveforus.Butweallknowthathasbeenmuted.There'ssomequestionaboutwhatwillhappenin2016aroundsomeofthoselives.

Andthenalsoweassumeinthatouradvancementoftechnology.We'recontinuingtorolloutnewinnovationtothemarketplace,whichhelpswiththegrowthrateassumptions;andthatwasimpliedinthe2%,3%.

Theagingpopulation,forinstance.HepatitisCisagoodopportunityforus,whichwe'retakingadvantageof,withtheBabyBoomerswhoneedtogettested.Soallthatisthe2%to3%.

Alsowhatwe'reseeing,Amanda,iswhatwerefertoasdensity.We'reseeingacontinuedimprovementintheamountoftestswe'regettingthroughrequisitions.Someofthisalsomightbeenhancedwiththedelaysthatwe'veseensincetheGreatRecessionoverthelast,let'ssayeighttonineyears.Thatpeopleeventuallywhentheyshowuptothephysicianhavemoreneedformoretestingperthatepisode.

Soyouputthatalltogetherandthat'swhywefeelthat2%to3%--andthat'snotinanyspecificyear,butinthelonger-termview--isagoodgaugeofthemarket.Webelievethatutilizationorvolumesonareqbasiswouldbeslightlylessthanthat,butonatestbasiswouldbeslightlygreaterthanthereqsbecauseyou'regettinganincreaseinthenumberoftestsperrequisition.

Sothat'swhatwehaverightnow.AsIsaidin2016wesawutilizationbeingsomewhatstable.Likeyou,welookatallthedifferentindicationsinthemarketplacetogetengagedwithwhat'shappeningon--goingonwithinthemarketplace.Butsofarit'sfeelingaswecomeoutofthisyearsomewhatstableexpectationsforutilizationin2016.


Gotit;veryhelpful.Thenjustonemoreonesotericgrowth.Youmentionedafewteststhatyou'verolledoutinperiod.Ifyoucanprovidealittlemoredetailintermsofwhat'sdrivingthatgrowth.Likeforexample,areyouseeingincreasedhospitalsend-outsfromalltheconsolidationacoupleyearsago?Justhelpingusunderstandthepartsofthatgrowthishelpful.


Sure.Whatwementionedinourpreparedremarksiswehaveabigbusiness--it's$1.8billion;Ireferred




toitinmyclosingremarksasbeingadvanceddiagnostics,whichincludegeneandesoterictesting,anditgrewby5%.5%,sowefeelgoodaboutthat.

Iwouldsayit'sanumberofprogramsthatwehavelaunchedinthepastfewyears.Itistakingadvantageofourinvestmentthatwemadeinourclinicalfranchiseorganization.

Wehaveinvestedinastrongerteam.We'relaunchingproductsinabetterway.And,Dan,whydon'tyougiveusthetophandfulofopportunitiesthatwesawinthatnumber?


Yes,sure.Amanda,we'veseengrowthinanumberofdifferentcategories,butcertainlysawduringthecourseoftheyeargrowthinourBRCAtesting,inournoninvasiveprenataltestingsolution,withininfectiousdiseasewithHCVandHIV.Soseeinggrowthinanumberofdifferentareas.


Sowefeelgoodaboutthat$1.8billionbusinessgrowing5%.Wethinktheprospectscontinuetobegoodgoingforward.


Gotit.Thanksverymuch.

Operator :

MichaelCherny,EvercoreISI.

MichaelCherny(Analyst-EvercoreISI):

Goodmorning,guys.IactuallywanttodigalittlebitmoreintoAmanda'squestion.Yougaveusanicebreakdowninafollow-uprelatedtothewayyoulookatthemarkethere,lowsingledigitsgrowthintermsofthemarket.

Obviously,it'sbeenawhileforanumberoffactorssinceyougotto--beenabletodeliverthatgrowthonanunderlyingbasis.Aswethinkaboutboththisyearaswellasthenextfew--andIknowtherearemovingpieces,sothisisabitofaloadedquestion.Butisthinkingaboutsub-1%organicvolumegrowthor1%-ish,orsomewhereinthatrange,thenewnormalthatweshouldthinkaboutrelativetoyourbusiness?Andifitisorwhateverthatnumberis,whatdoesthatmeanintermsoftheincrementaldrop-downthatyouwouldexpectrelativetohistoricallevelsonthevolumeside?


Yes,soobviouslywe'renotgoingtoprojectourvolumebeyondthisyear,Michael.I'msureyoucanappreciatethat.

Whatwedidcommittowasgettingbacktomarketlevelsofrevenuegrowthandalsothengainingshareatsomepoint.Butinthethree-yeartimeframethrough2017,wefeltitwasincumbentuponustogetbacktomarket-levelgrowth,andthat'sreallywhatwe'recertainlystrivingtodo.

Ithink,aseveryonerecognizes,wetalkaboututilizationinamarketthat'sreallyabunchofsubmarkets.Sooneofthedriverscertainly,besidesthefactthatwehaveoutstandingofferings,ofthe5%growthinesotericisthatsomeofthosemarketsaregrowing.CertainlyBRCAisagrowingmarket;noninvasiveprenataltestingisagrowingmarket;hepatitisCisagrowingmarket.

Andthenyou'vegotthingsthatwementionedandit'snotquitebehindus,suchaspaps,whichisa




decliningmarket.Certainlytheimpactofsomeofthesafetyscaresontestosteronehasimpactedthatmarketintermsofutilizationoverthelastcoupleyears.

Sothere'sreallyabunchofmarketsmovingsomewhatdifferentdirections.AnddependingoneachlabandcertainlyQuest'sshareinthosemarkets,it'sgoingtoimpactusalldifferently.

Soitwouldbereallydifficult,evenifwewerewilling,togiveyouavolumenumber.That'swhywhatwereallyfeelbetteraboutisgivingrevenuenumbers.

Certainlyifyoujustlookatvolume,youmisssomeofthepositivemixaspectsthatyou'veseencomethroughinourresultsoverthelastyear-plusintermsofmix,highermixoftheseesotericofferings;highermixofbettercustomerpricing,beingmoredisciplinedinthoseways.Sothat'swhatourfocusisonasopposedtofiguringoutvolume.

Wethinkthedemographicswe'vetalkedaboutarepositive.Certainlyagingpopulation,growingpopulation.Wecertainly,despitesomeoftherecentnegativenews--suchas40%fewerenrolleesintheexchanges;someoftheslowergrowththatwe'vetalkedaboutoverthelast18monthsintermsofenrollment;you'veseenamajorpayerwhohastalkedaboutsomeofthestruggleswiththeexchanges--anddespiteallthatwestillthinktheAffordableCareActisaddingpatientswithinsurance,andthat'sagoodthingforus.

Sowedofeelpositiveaboutvolumesandtrendsandcertainlyexpecttogetourfairshareofthat.Butitwouldbeverydifficulttogiveyousomesortofasteady-statevolumeorganicgrowthprojectiongoingforward.


Michael,justtofollow-uponthatalittlebit,keepinmind,wetalkaboutrevenuealotbecausewhatshowsupasvolumeversusgrowthinouresotericbusinesssometimesfallsintothemixcategory.Sorevenueperrequisition,thisyearwefeltsomepressurebutwewereabletooffsetthatforthelastseveralquarters,morethanoffsetthatwithfavorabletestmixthat'scomingthroughthegene-basedandesoteric.

IthinkStevealsomentionedthatwe'reseeingmoretestsonrequisitionsaswell.Sotherequisitionvolumecountsdon'tnecessarilygetthecredit,butyouseethecreditoverallintherevenuelineforsomeofthatbenefitandsomeofthatstrategy.


No,Iappreciatethat,guys.IfIcouldsqueezeinonemorequickone,anyupdatedthoughtsrelatedtosomeofthetechnologicaldevelopments,ormaybelackthereof,relatedtosomeofthepoint-of-caretestingandparticularlysomeofthemicrofluidics-linkedpoint-of-caretesting?Obviouslythere'sbeenalotofnewsaroundacertainupstartthatseemstohavehitabitofawall.

Soanythingrelatedtohowthatmarketisevolving,ifyouseeanyothertechnologiesthatatsomepointmakesensetobesuppliersparticularlyintothepatientservicecenters.


Yes.Thanks,Mike,foryourquestion.Firstofall,point-of-carediagnosticshasbeenaroundfordecades.I'vebeenaroundfordecades,investedinit,andknowthemarketwell.

Whereithasbeensuccessfuliswheretherehasbeenagoodvaluepropositionthathasdeliveredsomethingtothemarketplace.Sochronicdiseasemanagement,diabetes,it'sdonewell.




Ifyoulookatcriticalcareinhospitals,ifyouweretogointoacriticalcareunitwithbloodgastesting,that'sbeenanexampleofgoodpoint-of-caretestingvalueproposition.Andthenfinallyemergencymedicine,ifyoulookatcardiacenzymesandthevalueofhavingthosecardiacenzymessooner,whenthepatientisbeingtransferredtotheemergencyroom,hasagoodvalueproposition.

Butinotherareaswhereit'snotquiteclear,whereit'snotcompelling,thosepromiseshavenotreallybeendelivered.Withallthatsaid,we'retheworld'slargestDiagnosticInformationServicesCompany.We'realwayslookingatwayswecanimproveourcoststructure.Webuyfromallthein-vitrodiagnosticcompanies.

Ifinfactthereisabetterplatformtodosomeportionofourroutinetestingonamuchmoreefficient,effectiveplatformthanthecurrentonesthatweusefromallthesuppliers,we'reallears.Sowenevernotlookatinnovationthatcouldbehelpfulinusdeliveringonourpromiseofgreatqualityatsomeofthebestpricesintheindustry.Andourvaluepropositioncontinuestobevery,verystrong.

Sopointofcareisapartofthat,butyouneedtomakesurethatyoureallyunderstandwhatit'sgoingtodoandwherethevaluepropositionisstrongenoughtogetsometraction.Andagainwecouldbeautilizerofsomeofthatifinfactthefactsarecompelling.


Thanks,guys.

Operator :

Thankyou.Atthistimewehavenofurtherquestions.


Great.Wellthanks,everyone,forallthequestionsandthanksforjoiningusonthecalltoday.Justtoconcludewehadanothersolidquarterandfinishedtheyearstrong.Weappreciateyoursupport,andhaveagreatday.Takecare.

Operator :

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