奎斯特診斷 (DGX) 2014 Q1 法說會逐字稿

Welcome to the Quest Diagnostics first-quarter 2014 conference call.

At the request of the Company, this call is being recorded.

The entire contents of this call including the presentation and question-and-answer session that will follow are the copyrighted property of the Quest Diagnostics with all rights reserved.

Any redistribution, retransmission or rebroadcast of this call in any form without the express written consent of Quest Diagnostics is strictly prohibited.

Now I would like to introduce Dan Haemmerle, Executive Director of Investor Relations for the Quest Diagnostics.

Go ahead, please.

Thank you and good morning.

I am here with Steve Rusckowski, our President and Chief Executive Officer, and Mark Guinan, our Chief Financial Officer.

During this call, we may make forward-looking statements.

Actual results may differ materially from those projected.

Risks and uncertainties that may affect Quest Diagnostics future results include but are not limited to those described in Quest Diagnostics 2013 annual report on Form 10-K and current reports on Form 8-K.

A copy of our earnings press release is available and the text of our prepared remarks will be available later today in the investor relations quarterly update section of our website at www.QuestDiagnostics.com.

A PowerPoint presentation and spreadsheet with our results and supplemental analysis are also available on our website.

Now here is Steve Rusckowski.

Thanks, Dan, and thanks everyone for joining us today.

This morning what I would like to do is to walk you through the industry dynamics, talk about the impact of harsh winter on the quarter and review progress against our five-point strategy.

Then Mark will provide more details on the results and walk you through the guidance.

So let's start with the industry dynamics and the legislative dynamics in particular.

As you know, our industry has been facing unprecedented reimbursement challenges from the government following a long history of reimbursement cuts.

The new provisions of what is called the doc fix legislation that related to the clinical lab fee schedule remove a dark cloud that was hanging over our industry.

This legislation gives us an outcome that is much preferable to earlier government proposals.

What it does is it delays adjustments to the clinical lab fee schedule to 2017.

It provides for a rulemaking process to define new rates based upon a market weighted medium of commercial rates for a broad range of laboratories and importantly, it restricts the authority of CMS to make discretionary cuts.

I look forward working on this with our trade association particularly in my new role as Chairman.

Now there's been questions about the pricing mechanisms in the legislation.

Let me provide some clarity to that.

First, this needs to be defined through the rulemaking process but it is designed to be representative of the entire commercial laboratory market.

The legislation includes hospital outreach laboratories and independent laboratories.

The laboratory industry agrees that everyone benefits from including a broad spectrum of providers in the network.

Now beyond the recent legislation, we continue to believe the Affordable Care Act will be net positive for the industry.

In the near term, we expect it to be neutral to slightly positive for Quest in 2014.

The enrollment process was in line with our expectations, that is a bumpy rollout followed by a late surge near the deadline and we believe that going into the second half we will see some impact but again neutral to slightly positive.

As we all know, this was an unusually harsh winter in many parts of the country and this had a significant impact on many businesses.

During the quarter, we estimate that the harsh winter reduced our revenues by 2% and EPS by $0.11.

Had this winter been more like last year, revenues would have been essentially flat to the prior year and EPS would have been favorable to 2013.

We saw signs of continued stabilization in the underlying trends, sequential year-over-year trends improved for revenue, volume and revenue per requisition.

As we said in January, we want to deliver guidance that is both realistic and achievable.

While the slow start to this year clearly is a challenge we are confident that progress we have made on growth initiatives, particularly as a result of acquisition activities, will enable us to meet our commitments.

Given this environment and actions we are taking, we now expect to show revenue growth beginning in the second quarter.

In a few minutes Mark will share color on our 2014 guidance.

We have been dealing with dynamic market forces and we are in the process of updating our longer-term view.

We do expect to share this with you later in the year at our Investor Day presentation but in the meantime we continue to be bullish on the longer-term growth drivers of this industry.

First, the market will benefit from continued population growth and favorable demographics as baby boomers move into Medicare and live longer.

Also advanced esoteric testings will grow as precision medicine drives demand for advanced diagnostic insights.

And despite the slow uptake for the Affordable Care Act, more insured lives will gradually begin to enter the market each year.

And then finally, medical guideline changes do influence physician behavior and we expect to see increases in some tests such as hepatitis C, noninvasive prenatal testing, Lynch syndrome and lipid testing.

Over the long term, we see significant opportunity in being a high-quality, low-cost provider of diagnostic information services which are essential to healthcare delivery.

We remain committed to executing our five-point strategy and what I would like to do now is to give you an update on progress.

Our top priority for 2014 is to restore growth.

We are making solid progress on our growth priorities.

On the business development front, we have completed seven acquisitions since the beginning of 2013 including three this year.

Prior to our January call, we announced the agreement to acquire Solstas and I'm happy to say the integration is now well underway.

I have been impressed with the professionalism and quality of the Solstas team that I have met.

Solstas will help us improve topline performance and strengthen our presence in important region of the country.

We also recently completed the acquisition of Summit Health a few days ago.

Summit solidifies our leadership position in the fast-growing wellness business.

In this business we partner with employers and health plans to provide an overall health assessment including biometric screening as well as a comprehensive laboratory analysis.

Summit is complementary to Quest's own wellness offering whose customers tend to be large employers.

Both businesses have been growing organically in the double digits.

Summit offers wellness services largely through third parties including through large health plans and employers and both Summit and our wellness business also works closely to help retailers and urgent care centers meet their needs as they explore new business models.

Our specimen collection is largely based on venipuncture and Summit relies largely on finger sticks.

This positions us well in the major wellness segments including screening, immunization, coaching and disease management.

At Investor Day in November 2012, we indicated that we are targeting 1% to 2% of revenue growth through strategically aligned acquisitions.

As we have shared, Solstas will add about 5% to revenues on an annualized basis.

In addition, other acquisitions including Summit and Steward will add an additional 1% to 2% to revenues growth in 2014.

Beyond acquiring growth, we have been highlighting the opportunity to partner with hospital systems and integrated delivery networks.

On our Investor Day in November 2012, we spoke about the challenges that integrated delivery networks would begin to have as a result of intensifying reimbursement pressure and falling utilization.

There are many ways that Quest Diagnostics can help from performing reference testing to various forms of laboratory management partnerships, all the way to including purchasing a hospital's outreach business such as our recent agreement with Steward Health System.

What we have seen over the past year is increased interest from the C-suite of integrated delivery networks interested in learning more about our broad experience across the spectrum of service offerings.

During our last call, we announced that we have reached agreement with three community-based hospitals and we indicated that we would have more to share.

I am pleased that during the quarter, the lab professional services team reached agreement with a significant regional integrated delivery network.

This is a multimillion dollar opportunity involving several sites.

We have taken on hundreds of this client's former employees to operate this lab network and we began to generate revenues earlier this month.

These are all exciting opportunities for us.

This last win is further evidence that hospital leaders are open to new ideas to help them manage the emerging challenges of reimbursement pressure and lower utilization.

We have the experience and expertise to help tailor solutions for the needs of hospitals of all shapes and sizes.

Finally, we are seeing results from our focus, specific disease state and conditions.

We talked about the strong growth in our wellness business combining with Summit Health will strengthen this business.

We have also seen solid growth in our toxicology and prescription drug monitoring offerings as well as improvements in hepatitis C, BRCAvantage and noninvasive prenatal testing.

In oncology, in women's health, we launched a test to assess the risk of Lynch syndrome, a genetic disorder associated with a higher incidence of colorectal and other cancers.

While we are making progress, we need to keep our focus on this top priority of restoring growth.

We also continue to make progress driving operational excellence.

Our Invigorate cost reduction initiative is expected to approach $700 million in run rate savings by the end of this year compared to 2011 and we also are committed to our longer-term goal of $1 billion in savings beyond 2014.

As we have said, the operational excellence program which we call Drive, is improving our quality and efficiency and will enable us to improve our overall customer experience.

Now driving operational excellence is really all about creating a superior customer experience and towards that end, we recently launched what we call our MyQuest, which is by Care360 patient portal that allow patients to take ownership of their own results and manage their conditions more effectively.

A new federal rule that took effect earlier this month gives patients in all 50 states the right to view their tests directly without first being authorized by a physician.

We also made great progress on our simplifying the organization's strategy last year.

So in 2014, our attention has been shifted towards building a high-performance culture, focusing on our behaviors, and delivering results.

We have also made some important organizational changes.

First, I am pleased that Lidia Fonseca, an industry veteran, has joined Quest as our new Chief Information Officer.

I worked with Lidia years ago at Philips in my old role.

Lidia is now fully engaged and is part of our plan to strengthen our IT capabilities which includes improving the customer experience and driving efficiencies that will help us reach our $1 billion Invigorate goal.

Also as previously announced, John Haydon, formerly our Senior Vice President of Operations, has moved into a key role to oversee our equity joint ventures.

He is succeeded in the operation role by Jim Davis, who has deep operational experience and had led our employer insurance and products businesses.

Finally, we continue to review our portfolio for opportunities to refocus on diagnostic information services and enable us to continue to deliver disciplined capital deployment.

We remain committed to our plan to return the majority of our free cash flow to our shareholders through a combination of dividends and share repurchases.

The harsh winter made this a particularly tough quarter but we are seeing signs of continued stabilization in the business and closed the quarter strong in March.

We are making progress and recognize that there is much more to be done.

Now I would like to turn it over to Mark for a detailed analysis of the numbers.

Mark?

Thanks, Steve.

Starting with revenues, consolidated revenues of $1.75 billion were 2.3% below the prior year.

Our diagnostic information services revenues which account for over 90% of total revenues, were 2.1% below the prior year.

Volume was 0.7% favorable to the prior year.

Recent acquisitions added approximately 3.5% to volumes.

The unseasonably harsh winter depressed volumes by approximately 2% compared to the prior year.

You have heard us talk about the impact of weather on our business in the past.

Given the severity of this past winter, let me take a minute to give you some color on how we calculate the impact of weather on our business.

Our analysis is based on specific declines in volume versus trend for specific geographies related to very specific weather events.

Adjusting for acquisitions and weather, we are estimating our organic volumes to decline less than 1% compared to Q1 2013.

This year-over-year comparison is essentially in line with our exit run rate from Q4 2013 and is an improvement in the comparison from the earlier periods of 2013.

Revenue per requisition in Q1 was down 2.8% compared to the prior year.

The recent acquisitions and price erosion each accounted for about 100 basis points of the change while changes in business mix accounted for the remainder.

However, we expect this metric to improve as we move through the year as certain items will anniversary including sequestration and certain commercial rates that were renegotiated during 2013.

Consistent with what we shared with you in the fall of 2012, we continue to plan for average reimbursement pressure of 1% to 2% through 2015.

Q1 revenues in our diagnostic solutions businesses which include risk assessment, clinical trials testing, healthcare IT, and our remaining products businesses were down 4.3% compared to the prior year with approximately half of that impact related to the divestiture of Enterix last year.

Adjusted operating income at 13.5% of revenues was about 1.7% below the prior year with the decrease due principally to lower margins associated with reimbursement pressure and limited flexibility in our ability to remove costs in response to short-term weather events.

Despite these challenges, we continued to make progress on our Invigorate program which helped offset wage bill inflation and lower margins on our more recent acquisitions.

As we indicated on our last call, we expect to achieve approximately $200 million in realized savings during 2014 and approach approximately $700 million in run rate savings as we exit 2014 with a longer-term goal of $1 billion over time.

Adjusted EPS of $0.84 was $0.05 below the prior year with an $0.11 headwind resulting from the impact of the unfavorable weather in the quarter.

Special items totaling $28 million, principally restructuring and integration costs, reduced reported operating income as a percentage of revenues by 1.6% and reported EPS by $0.13.

Last year's first quarter included $45 million of costs associated with restructuring and integration charges which reduced reported operating income as a percentage of revenues by 2.5% and reported EPS by $0.17.

Bad debt expense as a percentage of revenues increased 30 basis points from the prior year to 4.3%.

Two issues to keep in mind on our bad debt.

First, as you think about the year, our bad debt expense is typically the highest in the first quarter due to increased patient responsibility associated with the unmet deductible amounts.

Second, from a benefit design perspective as we have shared in our last call, we expected that employers would shift more cost to individuals and we see a continued increase in the prevalence of high deductible plans.

Despite this trend, we believe we are managing the change in the operating environment and continue to see improvement in our collection rates across our various payer categories as a result of our efforts to drive operational excellence.

DSOs were 49 days, a two-day increase from last quarter principally as a result of the Solstas transaction.

That is, our results include all of the Solstas accounts receivable balance but only revenues since the early March close date.

Cash from operations was $84 million in the quarter compared to $47 million in the prior year.

Cash flow for Q1 is seasonally the weakest of the year and as we explained last year, our Q1 2013 cash flow was reduced due to a tax payment that had previously been deferred.

Capital expenditures were $68 million in the quarter compared to $49 million a year ago.

During the quarter, we repurchased $32 million of our common shares at an average price of $52.80.

We plan to meet our capital deployment commitments by returning the majority of our free cash flow to shareholders through a combination of dividends and share repurchases.

We also acquired Solstas and recently went to the capital markets and ran a very successful $600 million bond offering last month at attractive rates while maintaining our investment grade credit ratings.

We remain committed to maintaining our investment grade credit rating and also remain committed to paying down the majority of the debt associated with the Solstas transaction over the next 18 months.

Turning to guidance, our guidance remains unchanged from what we shared last month.

We expect results from continuing operations before special items as follows; revenues to increase 2% to 4% compared to a year ago; earnings per diluted share to be approximately between $3.95 and $4.15; cash provided by operations to approximate $900 million; and capital expenditures to approximate $300 million.

While the first quarter was negatively impacted by the weather, we continue to believe that this guidance is realistic and achievable and will benefit from our recently completed acquisitions in our efforts to restore growth.

Finally, I would like to remind you of some data points to help put our guidance into perspective.

Regarding reimbursement, keep in mind some items will anniversary this year including sequestration and certain commercial contracts.

On acquisitions, you should dial 6% to 7% revenue growth into your models for the remainder of the year, 5% from Solstas and an additional 1% to 2% from other acquisitions in the year.

And we expect acquisitions to benefit EPS gradually through the year as integration plans unfold.

Both Solstas and Summit will be dilutive to second-quarter earnings but accretive for the full-year.

As a result of these items, we now expect second-quarter EPS to approximate the prior-year level and to show growth in adjusted EPS in the back half of the year.

Now I will turn it back to Steve.

Thanks, Mark.

To summarize, the harsh winter hurt us in the quarter but we are seeing positive signs in underlying trends.

Fortunately, Congress lifted a cloud from our industry with the recent legislation that affects the clinical lab fee schedule and our top priority for 2014 is restoring growth.

We are pleased with progress we are making on our growth priorities and particularly the recent acquisitions.

As we said in January, we believe our 2014 guidance is both realistic and achievable.

Now we would be happy to take your questions.

Operator?

(Operator Instructions).

Glen Santangelo, Credit Suisse.

Thanks and good morning.

I just want to follow up on the pricing question.

Mark, if I heard you correctly, I think you sort of talked about the revenue per requisition being down 2.8%.

You kind of laid out the different components being acquisition, price erosion and business mix.

I am wondering if you can elaborate a little bit more on the price erosion and business mix components of that erosion because I think if I heard you correctly, you are assuming that pricing will be down 1% to 2% this year and next year.

So given that you are down almost 3% in 1Q, so we assume that you are going to start anniversarying some of these acquisitions and ultimately -- and some of these contract renewals and so we should see pricing start to improve sequentially throughout the year?

Is that the right way to think about it?

Appreciate the question, Glen.

So first off, the 1% to 2% guidance is really a three year from 2013 to 2015.

So what I was trying to emphasize is that we are not deviating from what we had communicated starting with our Investor Day in 2012 and I think pretty consistently each time we have a chance to address it.

So when you look at the 2.8% that I referenced on revenue per requisition this quarter, about 100 basis points was true price and that is what we are referring to when we talk about the 1% to 2%.

It is true price independent from business mix and business mix obviously comes in two forms.

One is, should we do acquisitions?

So for instance, we have talked about the toxicology acquisition we did mid last year that tend to have a different structure and have lower revenue per requisition obviously also lower cost per requisition as well and therefore, it has a negative mix impact on us.

The other one is mix within our core organic business as we go forward, and things can shift quarter to quarter depending on test mix and so on and so forth.

So the trend throughout the year, what I am really talking about is the comparisons year-over-year will improve not necessarily forecasting an improvement in overall revenue per requisition although we have talked about the fact that we have seen a positive trend in the number of tests per requisition and that certainly is something that we would expect to continue.

Okay, appreciate that.

Steve, maybe if I can just follow-up on the molecular diagnostics piece of the business, your primary competitor obviously has called out some big challenges getting paid in that area in 2013 and maybe we started to see a little bit of reprieve on that in 2014.

Could you maybe comment in terms of what your collection experiences have been related to the molecular diagnostics?

And ultimately do you think this could be an opportunity as some of the payers start to maybe ease up a little bit on some of the restrictions here and could this be a tailwind for you as we think about the balance of 2014 relative to 2013?

Let me just underscore something that Mark just went through.

We feel that we have good visibility on pricing and there has been a lot of interest on pricing in the past and as we said, our guidance for the last three years is -- for the next three years is 1% to 2%.

We shared in 2013 it was going to be about 3% and we ended up at about 3% and we actually showed in the first quarter that we are making movement down.

We actually believe that we are executing well against our pricing disciplined approach in the marketplace and the 1% real price effect in the first quarter I think underscores that strategy.

So to answer your question around molecular diagnostics, actually we continue to work with payers and what I would share is even though we are having constructive dialogue, I would not say that there is material change in what we are getting paid for by payers so this is a continual process we continue to work at.

We are hopeful -- we are having a good dialogue and good discussion but I can't say in the first quarter there was a material change of what we were paid for versus prior quarters.

Okay.

Thanks for the comments.

Ricky Goldwasser, Morgan Stanley.

Good morning.

Just a couple of questions here.

Obviously we are hearing a lot of commentary around hepatitis C. Just wanted to get your perspective, are you seeing any upside to your hepatitis C testing business as a result of Sovaldi?

Do you expect it to be a meaningful contributor for the remainder of the year?

Thanks for the question, Ricky.

We did actually mention it in Steve's prepared remarks.

It is one of the areas that we have seen growth in.

So yes, absolutely we have seen growth and we expect it to contribute to our overall business success throughout the remainder of the year.

Okay.

Can you quantify it for us?

I'll take that.

It is tough to quantify as you are commenting, there's a lot of visibility right now with the new drug therapies out in the marketplace and now there is effective treatment for hepatitis C. There is a lot more visibility to it so therefore, we should see some tailwinds in the testing we perform but we can't quantify it for you at this time.

Okay.

And then on your ACA comments, I mean obviously it is early on and we got most of the uptick in lives toward the beginning of this quarter, but any early insights on ACA related volumes?

How are patients on exchanges utilizing lab services versus kind of like your [non-NCA] population?

The best way that we will answer at this point, we are still digesting what we will see.

Our comments is that for this year it would be neutral to slightly positive for us in our numbers.

We along with the rest of this industry are trying to understand the true impact of the exchange.

We do believe there was an increase in Medicaid lives and we are also trying to digest what happened the employer side.

The other part of this, Ricky, is as you know, we do have a larger percentage of our business with high deductibles, we are believing a fair percentage of the new lives will have high deductibles and that has interesting dynamic for our business both in what eventually these people will have to pay for out-of-pocket.

And second is what that does to the pressure on bad debt.

So we are digesting it all.

We don't have a better feel for it yet but again, we believe it will be neutral to slightly positive in 2014.

Mark, would you like to add anything to it?

Yes, the one comment I will add is one of the very positive aspects amongst many of the Affordable Care Act is that there is a number of diagnostic and preventative treatments that are actually not subject to any patient responsibility.

It is not clear that that is broadly understood so until that is broadly understood, certainly the reaction will be somewhat muted to taking advantage of tests and not having to worry about your deductible in these high deductible plans.

So I think it is very early I think is the answer and we are believe me, very interested, we will be monitoring it.

I'm sure you will be asking us about it regularly but it is just too early to make the call at this point.

One last comment on the Affordable Care Act.

Again, we believe the Affordable Care Act continues to be net positive for this industry and net positive for us.

We have said in the past and we will continue to say that as more people have insurance in this country, they are going to need what we do and that is good for us.

And that is also included in your 1% to 2% assumptions for pricing trends going forward?

Yes, it is.

Okay, thank you.

Michael Cherny, ISI Group.

So obviously a few weeks ago everyone noticed the push out you mentioned of the clinical lab fee schedule reimbursement changes.

In terms of your negotiations there, I guess obviously it seems like clinical labs have been a bit of the crosshairs of CMS for a while now.

This is clearly a sign of positive for you guys.

What do you think was the key tipping point in convincing CMS to delay some of these cuts?

Particularly, I am also -- one thing you didn't mention also as much was the downside limits on those cuts, the 10% at least rail guards for 2017?

Michael, I would describe it this way.

We did a good job actually as an industry.

As you know, I'm active with the American Clinical Lab Association and so are a number of people in this industry.

We spent a fair amount of time walking the halls of Congress, getting Congress involved and what this industry has paid in the past and what is at risk if in fact we didn't have any what we will describe as guard rails on the process going forward.

Fortunately we got them to listen.

We were fortunately there when they were also thinking about how they would do this year's doc fix.

We took advantage of that opportunity and fortunately with the bill that was passed it allowed us some time now to get into a good dialogue about the rulemaking process and also that will allow us to have a comprehensive market view by code that will eventually set the prices that will take effect in 2017.

So we are encouraged by that.

We have work in front of us to make sure the rules are done correctly and eventually when we do the market analysis and again, what I said in my remarks, it is a full market view including all segments of the marketplace and we feel good about that.

We think it serves all segments well to be participants in that survey.

And when we go through the data in 2015 and 2016, we will eventually have new prices in 2017.

We did have caps at the code level.

They are at 10% but until you get the market data, you are not sure really what the effect will be per code but that is 2017.

So we feel good about the process.

We feel good that we have some time to digest it and it creates some stability with us for this unknown in the marketplace and as I said from my earlier remarks, it actually lifts a cloud that was over this industry in the past.

So we feel good about what has happened.

Great.

Thanks.

And then just quickly, relative to maintaining the 1% to 2% compounded reimbursement cost through 2015, are there any other really unknowns or swing factors one way or the other that could impact 2015 that you are currently debating to either positive or negative?

Mark will take that, Mike.

I think the answer to that is no, I don't think there is any other wildcards at this point certainly not any on the radar.

So I think as we mentioned in the past, we've got a good handle on the cycle of commercial renegotiations.

I think we have had a pretty good track record of being able to guard rail those as Steve mentioned.

We called the 3% going into 2013, that included some negotiations that had yet to be completed at that point and we hit that pretty much the nail right on the head.

And then we talked about obviously are seeing those lower rates in 2014 and 2015 and certainly as we shared this quarter, it seems like we are delivering on that.

So at this point, we feel very confident in those guard rails, the 1% to 2% that we mentioned over that period of time.

Perfect, thanks.

Darren Lehrich, Deutsche Bank.

Good morning, everybody.

So I just wanted to key into one of your comments, Steve, just around what you said you are in the process of updating your longer-term view.

Can you just remind us what is your current long-term view of the market?

I recall at the initial Investor Day that you guys hosted that you tho0ught it was around 4% market growth.

And maybe just give us a sense for how you are thinking any differently about the longer-term view?

Sure.

I will reiterate what we said in 2012, and again we haven't updated it so it is an old estimate, but let me tell you what we said.

We said that we believe that the marketplace was a good market and this market would be growing at about 4%.

Now in that market assumption, we assumed The Affordable Care Act would be taking full force in 2014.

And as you know that hasn't happened, so that was a big assumption in that.

Clearly this has been pushed out.

It is going to be more of a gradual build, and when we eventually come back to you with our current assessment of the market this fall, we will dial in what our current forecast is as far as The Affordable Care Act.

The other drivers, and I said it in my introductory comments really are changed.

The population is growing, we are all living longer, baby boomers are moving into the Medicare system.

Also, advanced diagnostics are critical to precision medicine.

These all have very positive effects on the amount of diagnostic information services that are needed in the marketplace.

So we will update this when we have our Investor Day in the fall.

Some of the assumptions that we had in 2012 clearly have changed, but we still are optimistic and bullish on the prospects for this industry.

Okay, so that is helpful.

It is clear that you are suggesting here that the ACA benefits may just come in more gradually and that seems like a key assumption that has changed.

I guess I would be curious, are there any other things that may be changing for the better in your view because we have heard a lot from you just about the activity in the hospital domain and I am just wondering if you think you are getting more traction there such that you have a different view the other way in that part of the market?

What I will say is as I said in our comments, we are encouraged by the traction we are getting with our dialogues in hospitals.

We announced the relationships over the last quarter or two.

We feel good about those and, Darren, what you see in those is a broad range of different relationships that we have formed.

We talked about Steward up in Boston, and it's a delivery system, we feel good that they have decided to continue to work with us on broadening our relationship.

We have also announced a small community hospital in Northwestern Connecticut this week, name of Charlotte Hungerford, again it is a community in Northwestern Connecticut but frankly that hospital is all that we have been Northwestern Connecticut and to save money in their cost structure, they decided to work with us and feel good about that.

We also announced -- we can't share the name --is that there is a large integrated delivery system that has multiple sites and it will be multimillion dollars in volume for us and we were encouraged by that and we started to see some revenues.

Then we shared this with you because the funnel continues to build.

Our discussions continue to build so we are optimistic that but not so optimistic that at this point we are going to change our guidance because they are still building and we need to bring them in this year and show progress.

And we feel good about our guidance for this year.

Okay, that is helpful.

And then just one follow-up.

Really with regard to your Q2 commentary, I guess the implied flat year-over-year guidance for Q2 is roughly 6% to 7% below consensus on the EPS line.

Are you saying that most of that is the dilutive nature from deals?

Can you just help us think about why you are giving us this Q2 flavor at this point?

I appreciate the question.

First off, generally we don't really address consensus but what I can tell you is that as we look at the year, obviously we are guiding to something that is just a little bit better than flat year-over-year so really the question is how do the quarters get laid out?

The first quarter we are a nickel behind and I mentioned that we do have a little bit of dilution in the second quarter from Solstas and Summit which really implies that we are going to pick up that nickel or so in order to grow depending on where we end up in the guidance in the back half of the year as these acquisitions really become accretive through the integration synergies that we are driving that take a little time to accomplish.

So I am not quite tying to your 6% to 7% below consensus.

The prior year was $1.06 and while we are not speaking precisely, giving you a precise number Q2, it is just trying to signal it is generally flat a little bit of growth on the underlying business offset by a little bit of dilution on the two recent acquisitions.

Okay, that is helpful.

Thanks very much.

Bill Bonello, Craig-Hallum.

I also just wanted to say hi to Lidia.

I worked with Lidia too and I think that is a great hire.

I wanted to ask a couple of questions too about the hospital deals because it seems to me like those are really starting to take off.

Just the first thing is and you probably talked about this before but can you just remind us what you are targeting in terms of return on capital with these deals, how we should think about what the metrics that they really need to achieve for you to want to get involved with them?

I assume margin is probably less of a concern than return but maybe just elaborate on that and then I have a follow-up.

I would characterize it that every hospital has its own lab strategy and the way we are approaching the C-suite is we are walking in and we are having a discussion about their lab strategy and just like so much out there you see one strategy, you've seen one strategy, the same is true for the lab.

And what we tried to give you is a portfolio of all the different opportunities which we find exciting.

People are engaged in dialogues with us.

It all starts, we have a strong hospital business as you know.

We do reference testing for hospitals and we build on that relationship and some of these deals will take the form of laboratory management and the deal we talked about that is a multisite deal has -- a portion of that is laboratory management.

We also have as you know, formed some joint ventures in the past.

We have a number of successful joint ventures with integrated delivery systems.

And then finally in some cases, hospitals want to get out of the outreach business and already between UMass and Dignity and this week we have announced Steward selling the remainder of their hospital outreach and that they acquired some hospitals coming our way is an encouraging sign that many systems are now thinking or rethinking what they should do in the lab space and deciding that it is best for them to focus on what they do well and relying on a leader like Quest to do what we do well for them.

So we think that is encouraging.

This supports what drives value, Bill.

We believe the two largest drivers of value are growth and the return in invested capital.

We think that this business, our lab professional services business will allow us to restore growth and at the same time be accretive to our return on invested capital targets as we go forward.

I will turn it to Mark to add some color to that as well.

As Steve mentioned, Bill, as I am sure you are familiar, these deals come in different shapes and forms so when we buy a business, and outreach like we did with Steward, of course there is some greater invested capital but you also get higher margins because you own the business whereas on some of the other deals where we are really just partnering, obviously we don't have as much investment and the margins therefore are acceptably lower to still get an attractive return on invested capital.

So we are really focused on growing our return on invested capital.

Certainly we try to do as well as we can with the margins in every given deal.

It is just that the structure of the partnership deals are going to be lower margin with lower invested capital than the acquisitions.

I also want to make sure we are clear because we mentioned that some of the acquisitions are lower margin.

That is really the initial margin so until we drive those synergies, but as we mentioned and I think I specifically addressed on the January call, once we get Solstas for instance up and running, we expect those margins to be comparable to our base overall business.

That is helpful.

Do you have an actual return hurdle that an acquisition has to hit or a deal has to hit that you can share?

Not that we can share.

What we have said is we are really targeting to grow our return on invested capital so on the acquisitions, we do mentioned that we wanted to be accretive on an ROIC basis by the third year but have not shared specific overall ROIC targets or hurdle rates.

As you know, Bill, there is some subjectivity in this because everything has different levels of risk.

So we certainly would not accept anything below our cost of capital and we are targeting to grow our ROIC which suggests they all have to be above our current level of ROIC but we haven't shared specific hurdle rates.

Okay, great.

And then just one final question I guess for both of you.

There seems to be an ever-growing mass of CLIA-waived specialty labs and for the most part you haven't done a lot in that area.

You have done a couple I guess in the past.

But can you just kind of tell us your view on that?

Could those be attractive opportunities?

They seem to be growing really fast but I know that there can be other concerns maybe about integrating them with a business like yours.

But I would just be curious if you think that is an opportunity for growth or not?

So first of all, one of our five points of our five point strategy is to deliver disciplined capital deployment and as part of that, we have a goal to grow 1% to 2% through acquisition.

And what we have said is we want to use our money wisely.

We are going to look for strategically aligned accretive acquisitions.

And as you can hear from our comments this morning, we feel good about the progress we are making.

We are on the high end of that range we provided in our five point strategy.

We are tracking well against it.

So, Bill, in terms of specialty labs, we will consider specialty labs.

They are strategically aligned and they need to be accretive.

Every deal is a deal by itself and we need to look at it based upon how we can make money for our shareholders but we will consider it.

But in the end, it has to be aligned.

We also would consider make versus buy considerations and whether we could do it ourselves and whether it is wise for us to invest in buying something when we can do it ourselves.

But at the end, we need to deliver on our goals of making money for our shareholders and we will continue to put it through that filter.

Okay.

Thanks.

Amanda Murphy, William Blair.

So I just had a follow-up on some of the questions around volumes.

I know there is a lot going on in the numbers and I am curious what you guys are seeing in terms of underlying dynamics relative to HSA plans just excluding reform and whatnot.

Are you seeing that impact Q1 volumes or benefit Q4 volumes at this point?

I think looking at that level of granularity is a little bit tough and especially looking at the first quarter, Amanda, with the amount of weather we saw it is tough to read too much into some of these trends at the moment.

Got it.

And then just curious about the pathology side of the business.

I guess two questions there.

One, any change to in-sourcing dynamics just given all the reimbursement issues in this space?

Secondly, is that an area that you think maybe -- or I guess are you seeing more assets in that area come to market?

Is that something that you would consider being more active in in terms of M&A?

Let me give you some color around pathology.

Clearly with the [ADA305] cuts last year, there is more pressure on everyone to make money in pathology services and also on the technical side.

You would have expected given the pressure that there be increased interest in outsourcing if you will.

What we shared before and it really hasn't changed, we haven't seen a material change on people's perspective on this.

When we do have discussions with hospital systems, we go department if you will by department talking about what their strategy is and pathology is a consideration but no notable change at this point.

Got it.

Thank you very much.

David Clair, Piper Jaffray.

Good morning, everybody.

First question for me I was just hoping we can get an update on BRCAvantage and your NIPT businesses.

How are these performing compared to your original expectations and any color on reimbursement?

Sure.

Let me take that.

BRCAvantage as you know, we entered the marketplace in the fall.

We did this very, very quickly after the Supreme Court decision in June.

We feel good about that.

We are gaining traction in the marketplace.

As you introduce products, you first have to introduce it to your customers.

There is a variety of segments in this marketplace from surgery to radiology to women's health specialists and we are doing that as we speak.

We are actually tracking to our internal plan which obviously would have a ramp built into it and we feel good that we are making the progress we would expect.

Also noninvasive prenatal testing is a growth market for us.

We are focused on that as well.

We feel good with the progress we are making there.

We think it is a fast growth marketplace.

This is a great example where medical guidelines are actually stimulating demand for us and we are taking advantage of those new guidelines in the marketplace.

So in summary, they are both tracking, they are both opportunities for growth for us.

We feel good about their prospects.

And then any color you can give us on reimbursement for either one of those?

Yes, we have successfully negotiated reimbursement rates with the typical health plans that we contract with.

We feel good about the prices again similar to what Steve said on expectations, it is not just volume but the reimbursement rates that we thought we could achieve we are feeling good about those.

So the reimbursement environment is reasonable.

Certainly like any other test that starts to get a lot more attention, the payers start to put some things in place like pre-authorizations, etc.

that can slow down the process, make things a little cumbersome and you've got to work through some of those issues initially to smooth out the process but no major hurdles on reimbursement in those two categories right now.

Okay, thank you.

And then as you look at the portfolio right now, are there any businesses that you are kind of looking at potentially divesting or what is your thoughts there?

I know you have pointed out in the past that the Celera products business is something that could potentially be divested?

So again going back to our five point strategy, what we have worked on in the course of 2013 is refocusing on diagnostic information services.

Back in 2014, we actually sold four assets, two small, two larger.

We continue to evaluate some other portions of our portfolio.

When we had our Investor Day in the fall of 2012, we did talk about looking at our strategic options for Celara products.

We are currently still evaluating that.

I mean, we've got a few others that we will evaluate but we will keep you informed as necessary.

We continue to stay focused on our core business which is diagnostic information services and there is a few things we might consider changing in our portfolio but we have made excellent progress, making sure that we are focused on bringing more diagnostic information services companies into our portfolio with our acquisitions.

Okay.

And then just one quick one on guidance.

I am assuming the update that you gave in mid-March did not include Steward or the IDM that you are talking about right now.

So should we assume that these deals just get you more comfortable with guidance or should we assume that there is potential upside here?

Within the guidance, we earmark the 1% to 2% for strategically aligned acquisitions.

So while we may not know exactly which acquisitions they might be, we typically have a pipeline so while the Solstas acquisition kind of stands outside that given its size, you should really look at Summit and the other two as kind of being within the envelope of that 1% to 2%.

So while they weren't explicitly in the guidance, I think you should assume they were implicitly in that guidance.

Okay, thank you.

Bryan Brokmeier, Maxim Group.

How large is your clinical trials business and despite the recent slowdown, are you seeing any impact to that business from the recently high level of biotech financings?

We have not shared the specific size.

I mean it is one of the smaller businesses within our diagnostic solutions.

But certainly the slowdown in R&D spend has had some impact on the overall market within the clinical trials laboratory area and has made growth a little more challenging.

But we also feel good about our service offering and some of the relationships that we have which really enable us to maintain work with some of our -- as a preferred provider for a couple of the drug development companies.

So it has been tough headwinds but not anything of major significance in terms of the slowdown and we feel good about that business both today and about its future prospects.

Thanks.

Was the doc fix legislation a factor in your acquisition of the remainder of the Steward outreach business and more broadly, how does it impact the M&A environment?

I will say that the doc fix legislation had no bearing on our view on our acquisitions that we have done in the past and also this year.

As far as the environment going forward, it provides the lift if you will of the cloud that was over the industry.

We are happy about that.

It provides us some time now to work on the rulemaking and we feel good about that.

So what it did do, the doc fix, is it will at least provide us with more clarity around pricing in 2015 and 2016 some reasonable confidence around the clinical lab fee schedule pricing that we should be considering when we are looking at acquisitions.

So it is a part of the conversation but I can't say it has had an overwhelming consideration for what we did with Steward.

Does it also make -- does the legislation also make scale that much more important in the industry?

Well, I think there is a lot of dynamics in general around scale in this industry.

It is true for this industry, it is true for the broader healthcare industry.

Frankly what you see us driving is a continuation of what we believe is necessary in healthcare and more and more consolidation.

What we did with Solstas, what we did with the other acquisitions are consolidating this industry, we think that is strategically helpful to us and also we can make money for our shareholders and we are going to continue to track down that road because we believe it is the right strategy for Quest Diagnostics and I think it is consistent with what you see in other parts of healthcare overall.

Okay, thanks a lot.

Thank you for your participation -- participating in the Quest Diagnostics first-quarter 2014 conference call.

A transcript of prepared remarks on this call will be posted later today on Quest Diagnostics website at www.QuestDiagnostics.com.

A replay of the call may be accessed online at www.QuestDiagnostics.com/investor or by phone at 800-937-2485 for domestic callers or 203-369-3858 for international callers.

Telephone replays will be available from 10:30 AM Eastern time on April 24 until midnight Eastern time on May 23, 2014.

Goodbye.