奎斯特診斷 (DGX) 2015 Q1 法說會逐字稿

Welcome to the Quest Diagnostics' first-quarter 2015 conference call.

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

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

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

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

Go ahead, please.

Thank you, and good morning.

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

During this call, we may make forward-looking statements, and also discuss non-GAAP measures.

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' 2014 annual report on Form 10-K, quarterly reports on Form 10-Q, and current reports on Form 8-K.

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 the website.

Now, here is Steve Rusckowski.

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

This morning, I will provide you with highlights of the quarter.

We will share industry trends, and also review progress we're making executing our five-point strategy.

Then Mark will provide more detail on the results, and take you through guidance.

Before we get into our performance, I want to highlight the joint venture we announced last month with Quintiles in clinical trials testing.

Together, our two companies will create a new business that will be one of the leading global providers of central laboratory services to support drug development through clinical trials.

The creation of a joint venture allows Quest and Quintiles to bring together the complementary capabilities and scale of our two organizations in an agile way, with a laser-like focus on serving customers.

The new company will enable biopharmaceutical customers to enhance their drug development process, support precision medicine through companion diagnostics and biomarker discovery, and build value by creating more efficient, effective organization through leveraging the scale, scientific expertise, and operational excellence of the parent organizations.

We expect that, over time, the JV will have an accelerated growth rate, achieve cost synergies, and to be accretive to what our clinical trials testing business would have been on a stand-alone basis.

The JV structure addresses three of our five strategic points.

First, it will help us accelerate growth in the near term for our clinical trials business, and explore opportunities related to our longer-term strategies on precision medicine, companion diagnostics, and creating value from our data.

Second, it enables us to refocus on a core Diagnostic Information Services business without distraction.

And third, with minimal capital, it enables us to participate in expected synergies in a way that lets us deliver disciplined capital deployment.

Mark will provide some more color later on this exciting partnership.

For now, both entities will continue to operate separately until the closing of the transaction, which is anticipated to be no later than the third quarter of 2015.

Turning to our first-quarter results, we continue to make progress on our path forward, delivering solid revenue, EPS and operating income growth.

Revenues grew 5.3%, $1.84 billion.

On an organic basis, consolidated revenues grew almost 1%.

Adjusted cash EPS increased 13% to $1.05, and adjusted operating income increased 14%.

Our performance reflects improved execution in the stable business environment.

And we were able to grow, despite our harsh winter that, while somewhat less severe than a year ago, was particularly difficult in the Northeast portion of the United States where we have a strong presence.

Before I get into our strategy update, I'd like to talk about industry dynamics for utilization, reimbursement and regulation.

Through the first quarter, we continued to see stability in test volumes on a same-provider basis.

We were encouraged by the process of adding more insured lives to the healthcare system as a result of the Affordable Care Act.

More states have been expanding their Medicaid programs, including Pennsylvania during the quarter, and we continue to see growth in our Medicaid volumes.

Medicaid expansion will bring new people into the healthcare system, with the goal of identifying issues earlier to improve outcomes, and reduce overall costs.

We actually saw this ourselves in a recent Quest Diagnostic health trends study.

This peer-reviewed publication in Diabetes Care found a significant double-digit increase in diabetes diagnosis in states that expanded Medicaid coverage, and no increase in states that did not.

On reimbursement, we see less government pressure on the clinical FD schedule in 2015 than we have seen in the previous two years.

I will start with the Doc Fix.

Last week, the President signed historic legislation titled, the Medicare Access and CHIP Reauthorization Act, to permanently reform the Medicare physician payment methodology.

We are pleased that cuts to laboratory payments under Medicare were not included as part of the package.

This legislation also encourages payments based upon quality, and encouraged us to make the healthcare system smarter without denying access.

This legislation was also directionally aligned with the HHS goals announced in January to tie traditional Medicare payments to quality or value through alternative payment models.

Both the legislation and HHS have outlined specific measurable goals and timelines for these value-based reimbursement models.

We believe these emerging payment models will favor providers with scale that are more effective and efficient, like us.

Next I'd like to provide a status update on the Protecting Access to Medicare Act of 2014, or PAMA, which calls for an orderly review of the clinical lab fee schedule.

Our industry continues to work constructively with CMS on effectively implementing PAMA legislation.

Just a few weeks ago, I met with leaders at CMS and a delegation from our industry trade association to discuss the rule-making process that will govern any reimbursement changes.

During that meeting, we reviewed our view of the industry and its participants.

We also discussed our shared goal of delivering an accurate, complete, and efficient data collection process.

We remain hopeful the rule-making process will be defined in 2015, and will establish an approach to building a representative view of the market.

As this industry continues to evolve and mature, we have the right strategy and team, and are well positioned to continue to lead.

We continue to execute the Company's five-point strategy.

As a reminder, our strategy is to restore growth, drive operational excellence, simplify the Organization, refocus on the core Diagnostic Information Services business, and deliver disciplined capital deployment.

Now, what I'd like to do is to share a few comments on each of the elements of the strategy.

Well, this was the second consecutive quarter of organic revenue growth on a consolidated basis.

We continue to focus on our core growth opportunities.

First, we continue to focus on sales effectiveness.

Second, we are getting traction on the professional laboratory services agreements we signed last year.

And third, gene-based esoteric testing revenues grew in the quarter at a faster rate in more than a year.

We continue to grow BRCA revenues, which clearly benefited from Angelina Jolie's ongoing public advocacy.

One way we are differentiating ourselves is by advocating for open access to BRCA data for patients and clinicians.

In collaboration with the French research consortium, Inserm, we led the creation of BRCA Share, an open data-sharing initiative.

Its goal is to accelerate research on BRCA and gene [mutations], particularly variance of uncertain significance to improve the ability to predict which individuals are at risk of developing inherited breast, ovarian and other cancers.

The Inserm collaboration is an example of how we're using our unmatched data and information assets to deliver insights to our customers that demonstrate the value that Quest provides.

Last quarter, we told you about some new population health data analytics decision support tools we're developing.

We have been piloting our population health tools with several physicians, ACOs, and health plans to evaluate disease states for their patient populations, monitor compliance with specific testing protocols, and identify gaps in care.

In this pilot, our customers are now engaging with patients and healthcare professionals proactively to encourage the appropriate use of screening and monitoring tests to drive better health.

In addition to population health tools, we're making progress to delivering on what we call interactive insights to providers and patients.

Our interactive insights offer providers trending data, interactive features such as customizable reports, and additional content, such as videos and articles specific to conditions and diseases.

IntelliTest Analytics is a web-based secure portal that provides hospitals, integrated delivery networks, and physicians' practices with data-driven insights about test utilization patterns, so they can adhere to clinically appropriate testing norms.

Care360 revenue cycle management helps customers manage denials of billing claims, with a focus on improving patient and payer collections.

In November 2012, we established a new vision that spoke to the impact we have on people's lives.

Our vision is empowering better health with diagnostic insights.

Our vision was an essential part of becoming more external and customer-focused.

Since then, we've made tremendous progress bringing the vision to life.

Well, we're not just a lab, we're more than a lab.

We're a trusted partner, and we provide deep, clinical insights.

Our vision was the first step.

Next, we needed to turn it into a compelling customer-facing brand -- a simple, consistent way to talk about Quest -- who we are, the value we bring, in short, what is the Quest difference?

Our new core brand idea is a powerful one.

It is action from insight.

Our brand strategy is based on three pillars: the idea that we inspire action from the work we do; that we illuminate answers for patients and healthcare providers; and that we advocate better health for patients and communities.

This is a powerful idea -- the notion that from data comes insight, from insight comes action, action that transforms lives.

As you can tell, I'm excited about what our new corporate positioning means for Quest.

It translates our vision into a concise, clear, and actual brand that gives us an opportunity to reshape our place in the industry, allowing us to continue to differentiate ourselves, and not compete solely on price.

Brand is more than a logo or a tag line.

To bring our brand to life, we have to change the way we think and talk, and what we do.

Additionally, we're engaging all of our 45,000 people with their direct impact on delivering this brand promise.

You will start to see the new brand in action in the coming weeks and months.

Next, is our strategy for driving operational excellence.

We are well under way with planning the next phase of Invigorate, which will extend our cost savings to $1.3 billion by the end of 2017.

As in the past, we continue to update you on the progress as we go.

The third element of our strategy is to simplify and strengthen the Organization.

We've been focusing on execution, and building a performance-oriented culture.

We're very pleased to be included recently as one of Fortune magazine's world's most admired companies.

Over the past year, we've introduced a number of new management tools as part of the Quest management system.

We're rolling out a new leadership development initiative this month, and as I visited more than a dozen of our major facilities in conjunction with our new brand rollout, I found employees at all levels to be highly engaged and excited about the challenges ahead.

The fourth element of our strategy is to refocus on our core Diagnostic Information Services business.

We continue to make good progress, and the joint venture with Quintiles is the most recent example of doing this.

After considering a broad range of options for our clinical trials business, we found the joint venture was the best option to enable us to focus on the core, while unlocking the value of this important business.

We will continue to review our portfolio, and look at options for non-core assets, and we always strive to build value for our shareholders.

And then, finally, we remain focused on the fifth element of our strategy: delivering disciplined capital deployment.

During April, we completed the refinancing of more than $1.2 billion of our debt that will lower interest rates for years to come.

We paid our dividend at the increased rate; and as noted earlier, we think the joint venture with Quintiles will enable us to share in our future value creation without requiring significant capital outlays.

Now Mark will provide an overview of the first-quarter financial performance, walk you through the details of 2015 outlook, which is based on our strength in the operational performance, and the improving business environment.

Mark?

Thanks, Steve.

Starting with revenues: Consolidated revenues of $1.84 billion increased by 5.3% versus the prior year, and grew organically by 70 basis points.

Revenues for Diagnostic Information Services, or DIS for short, grew by 4.9% compared to the prior year.

Volume, measured by the number of requisitions, increased 5.6% versus the prior year, while revenue per requisition was lower than the prior year by 0.7%.

For DIS, acquisitions contributed nearly 5% to revenues.

Excluding acquisitions, DIS revenues, volumes, and revenue per requisition were all essentially flat for the quarter.

I would like to share some additional context on these underlying volume and revenue-per-requisition metrics.

First, let me touch on the impact of the harsh winter.

As we have shared in the past, our analysis is based on changes in volume versus trend, for given geographies related to specific weather events.

Additionally, we provide guidance based on historical weather patterns.

For the past two years, we've experienced unusually severe winters.

However, in 2012, we had a mild winter, which resulted in upside to our expectations.

This year, volumes were negatively impacted in the quarter by a harsh winter throughout much of the country, and in particular, the Northeast.

While the impact was not as severe as a year ago, it was worse than we anticipated.

We believe the impact of weather on the quarter was approximately $0.08 of EPS.

As a result, we are pleased with the quarter, but we were planning on better performance.

Turning to underlying revenue per requisition, we saw modest reimbursement pressure in the quarter that was in line with our expectations.

That reimbursement pressure was offset by favorable test and business mix shifts.

Moving to our Diagnostic Solutions business, which includes risk assessment, clinical trials testing, healthcare IT, and our remaining products businesses, revenues grew by 11% compared to the prior year.

We enjoyed strong growth during the quarter from our clinical trials, products, and risk assessment businesses.

Adjusted operating income for the quarter was $269 million or 14.6% of revenues, compared to $236 million or 13.5% of revenues a year ago.

With comparable volumes essentially flat, the improvement can be primarily attributed to the benefits of our business mix, Invigorate program, and M&A-related impacts, including synergies.

These factors enabled us to improve gross margins and further leverage SG&A.

As a result, our adjusted operating income and earnings grew faster than revenues.

For the quarter, adjusted EPS, excluding amortization, was $1.05, 13% better than a year ago.

Amortization was $0.09 in both 2014 and 2015.

The Company reported after-tax charges totaling $80 million in the quarter, primarily associated with the debt refinance in the first quarter.

The charges also included restructuring and integration costs associated with our Invigorate program and recent acquisitions, and combined to reduced reported EPS by $0.54.

Last year's first quarter included after-tax charges of $18 million, primarily associated with restructuring and integration charges, which reduced reported EPS by $0.13.

Let me share a few comments on special items.

As you think about special items, because of their nature, they do fluctuate from period to period.

This quarter, we incurred a charge related to the first tranche of debt retired.

A second tranche of debt was redeemed in April, which will result in a similar charge in the second quarter.

We expect to incur total pre-tax charges of nearly $150 million related to our debt refinancing.

In addition to charges, our special items also include benefits.

For example, we anticipate recognizing a gain related to the joint venture with Quintiles at the time of closing.

This gain will occur when we contribute our clinical trials business into the joint venture, which is expected to take place no later than the third quarter.

This gain is expected to be of a similar magnitude to the total charges associated with the debt retirement.

We will adjust this one-time gain out of our earnings.

To put this in perspective, since the beginning of 2012, the benefits adjusted out of earnings have been approximately the same amount as the charges adjusted out of earnings.

Bad debt expense as a percentage of revenues was 4.3%, flat to a year ago.

As a reminder, bad debt expense is typically highest in the first quarter due to increased patient responsibility associated with co-insurance and deductible requirements.

Our DSOs were 45 days; three days lower than last quarter, and four days lower than a year ago.

This is a testament to our operational excellence continuously demonstrated by our billing, operations and patient service centers' teams that continue to effectively engage with patients and payers to ensure that we get paid for the work we do.

Reported cash provided by operations was $52 million in the quarter.

However, excluding the $78 million of cash charges associated with the retirement of debt, cash provided by operations would have been $130 million in the quarter versus $84 million a year ago.

Capital expenditures were $56 million in the quarter compared to $68 million a year ago.

Moving to guidance, we expect full-year 2015 results from continuing operations, before special items, as follows: revenues to increase between 2% to 3% compared to 2014; adjusted diluted EPS, excluding amortization expense, to be between $4.70 and $4.85; adjusted cash provided by operations to an approximate $850 million; and capital expenditures to approximate $300 million.

We have not included in our guidance the impact of contributing our clinical trials business to the JV with Quintiles, largely because the impact will depend on the timing of the deal's closing.

To help frame it, our clinical trials testing revenue was in the range of approximately 2% of our consolidated revenues in 2014.

With respect to the impact on adjusted EPS, we believe the JV will be essentially neutral in 2015.

We will provide more details when the deal closes later this year.

And, as we noted on the investor call to announce the transaction, once it closes we will no longer report the revenues and operating income from the clinical trials business in our income statement.

We will, however, reflect our share of the joint venture's earnings on the equity earnings line on our income statement.

This is where we report our current share of earnings in our other three unconsolidated Diagnostic Information Services joint ventures, which are with leading regional integrated delivery networks.

Now, let me turn it back to Steve.

Thanks, Mark.

Well, to summarize, we delivered solid top- and bottom-line growth, and improved profitability in the first quarter.

This is our second consecutive quarter of reported organic consolidated revenue growth.

We continue to make good progress executing our strategy, and we're excited to share more details on the joint venture with Quintiles when we close.

Thanks for your support.

Now we would be happy to take any of your questions.

Operator?

Thank you.

(Operator Instructions)

Our first question is from Mr. Michael Cherny from Evercore ISI.

Your line is open.

Hi.

Can you hear me?

Yes.

Good morning.

We're here.

I apologize for that.

So a question about volume growth.

It seems to be you talked about an improvement from a market outlook perspective, obviously weather across the board is pretty nasty this year.

If I recall correctly, I think you're still rolling off the comp related to some of the lower-margin business that you guys decided to walk away from last year.

Is there any way you could provide us with a number in terms of what you think that took away from organic volume growth so we can try to get to a true number, particularly one that correlates with the positive market commentary you've had?

Well, first of all, you're right.

We are rolling off some of these businesses.

In the past, we haven't given you specifics on that.

Mark, would you like to shed some light on sequentially our continued improvement?

Yes, Mike, thanks for the question.

We had referenced at one point 150 basis points of volume differential.

Obviously we don't want to get into the habit of every single quarter, reconciling that, but directionally, it's order of magnitude, what you might think of in terms of the impact on our volume.

We did also reference that we would annualize that at some point in the second quarter, but also to be clear, we took those actions in the second quarter.

So you shouldn't be expecting the year-over-year comp to be fully positive until the end of that quarter.

So, it's similar level of volume as we also said, although we continue to regularly look over our portfolio and ensure that all the volume is value-creating volume.

That discreet set of actions we took during the second quarter of last year was a one-time event, and you shouldn't expect those things to happen again with any regularity.

So, Mike, let me just add to Mark's comments.

What we're doing is continue to focus our energy on parts of the market that are growing and defocus on those parts that aren't, and that's related to earlier remarks about what we're doing with our resources and accounts.

But the things we wanted to see grow are growing in the quarter.

We did mention that we saw the highest growth rate in our gene-esoteric testing business this quarter.

We're happy about that.

We continue to see good growth in our wellness business, our prescription drug monitoring business, hepatitis C.

All the areas we focused on for growth are progressing nicely, and as you know, I mentioned in my commentary BRCA as well.

The focus is good, sequentially we are seeing improvement and our momentum continues to build.

We feel good about that.

Thanks, guys.

That's really helpful in understanding the underlying dynamics.

Just quickly on BRCA specifically, I think you called out both esoteric which was quite strong in the quarter and BRCA as a particular driver.

Is it possible at this point given that it's been a number of quarters since you first launched that test to give a sense of the sizing of that business roughly to at least the esoteric base and over next -- the course of this year, how important you think the growth specifically there could potentially be?

We're not going to spell out the business, and obviously as you look at it, it's magnitude relative to the overall size of Quest.

We don't get into that detail on business of that size.

Certainly it's growing.

It's one of the areas we called out previously, and it continues to be a growth area along with prescription drug monitoring, certainly HCV, our professional laboratory services area.

So BRCA continues to provide growth, but we're not going to give granularity at this point of sharing the actual revenues.

That's fine.

I figured I'd try anyway.

Thanks, guys.

Thank you.

Thank you, sir.

Our next question is from Isaac Ro from Goldman Sachs.

Hey, guys, thank you.

Pleasure.

First question was on the weather commentary you had.

I wonder if you could try and ballpark the weather impact?

I think I missed that.

Second question had to do a little bit with the financials.

That's great.

Mark, you want to give some more color.

We gave you an EPS impact of relationship to last year.

Yes, so, from a volume perspective and revenue, it was probably in the area of around 150 basis points.

So last year we talked about 2% head wind due to weather.

This year it's not quite as severe, but fairly large differential from what we would expect to be an average weather based on looking at historical patterns.

Sure.

That's helpful.

Thanks.

And then just in terms of market share, if we square up your commentary on volume and then some of the benefits you're seeing from your growth initiatives, how do you feel about your market share?

And then last one was on tax rate.

Obviously a bit low this quarter, you had some one timers, but how should we think about tax rate for the rest of the year?

Isaac, we continue to feel good about where we're focused in the market and where we're focusing, we are picking up share.

We feel good about that.

As we mentioned in the past, we're deciding in some portions of our portfolio to not participate.

So in those areas, obviously we would be losing some share.

But overall we're trying to manage our business and the portfolio of resources we have to get the best earnings growth.

What you see in the quarter, and we're happy to show it, is that we actually reported nice operating income growth.

And I think it's a good indication of our business mix and our focus in those areas of growth and how it's driving some portion of our margin expansion, which we called out in the script.

You want to mention, Mark, what's going on with tax?

Yes.

So, obviously you periodically can get some discreet items in your tax line, and you can't always anticipate those.

So we did have a couple of small items, actually, they weren't that large in Q1.

But, the direction we gave going into the year was that our tax rate would be higher than it was in 2014, that it would be more along the historical levels.

So I think that's what your expectation should be for the balance of the year.

Got it.

Thanks a bunch, guys.

Thanks, Isaac.

Thank you, sir.

Next question is from Mr. Ricky Goldwasser from Morgan Stanley.

Hey, Ricky.

Hi, good morning.

I have two questions here.

So first of all, now that you refinanced the debt, any thoughts about buybacks and acquisitions for the remainder of the year?

I think it wasn't included in the original guidance.

Do you see it at this point representing upside to numbers?

Yes.

So I'd say the -- obviously there was cash required, Ricky, I'm sure that's why you're tying it to what are the implications for buybacks.

And I think at this point, the guidance we gave is consistent, which is you shouldn't assume any significant reduction in shares outstanding based on repurchases.

We committed to targeting to ensure there's no dilution from share count, but not any significant buy backs to reduce shares.

Now with that said, we have a strategy of deploying some of our cash every year to target 1% to 2% of growth through M&A, and we've also said that if there is not value-accretive M&A that we can identify, that we will do more share repurchases.

So I don't want to completely rule out share repurchases, but at this point, as part of our strategy, we're continuing to look and we'd like to believe that we can add some businesses, tuck-in, fold-in type of businesses we've done in the past, and that would probably be our priority for cash for the balance of the year.

But should we find that there's nothing that's executable, certainly we would use that cash for more share repurchases.

Okay.

And then one follow-up question on ACA.

Obviously we're seeing this like more and more lives joining the exchanges.

And I think we're still not quite seeing that pull through on the volume side.

Can you share your thoughts?

What do you think is causing it?

Is it that this population is consuming health care through hospital systems rather than the ambulatory space, is it that you think that they are not -- don't still know how to utilize health care, and are we going to see the uptick of later in the year?

Any insight would be very helpful there.

Yes.

Like you and everyone else in this market was trying to digest, the resorting, if you will, for the system.

And as we mentioned in our commentary, we are seeing an increase in Medicaid volumes, so that's for sure.

We see that.

As far as the rest, it's hard to understand where people have come from, went to and how they're entering the healthcare system.

So we have seen, like you, some of the volume reports coming out of some hospitals, not all.

It's mixed views on that.

So we're still trying to understand how this will all sort out with you.

But again, we're starting to see the impact of more lives in the system.

We're hopeful -- from the beginning of ACA, we said we believed that the Affordable Care Act should be net positive for the industry and for us.

We believe more people with insurance is a good thing.

The diabetes studies that we showed shows that by having people with insurance, it can have a positive impact on population health.

And we think that's a good example of how more people in the system will serve the industry well, but also us as we go forward.

So we're hopeful.

So then just last one, because you mentioned the population health.

You highlighted the pilot that you're doing with some physician offices on your population health tool.

Should we think about -- how do we think about that business model?

Should we think about it as potential longer-term revenue opportunity or is it just needed add value to create stickiness with the physician and potentially connect also with the hospital provider space?

Yes.

We're thinking about both, actually.

And we haven't totally sorted out how this might work in terms of a business model.

Clearly where we can show more value with accounts, we believe that does offer value in terms of our business.

But secondly is we are more and more value to integrated delivery systems and those organizations that are managing population.

Se do have valuable assets here or information assets.

And this application we think is actually very valuable in terms of managing that population.

And we're thinking our way through may there be an opportunity for us, actually, to have a revenue business model for this?

But we haven't concluded on that yet.

Thank you.

Thank you.

Thank you, ma'am.

Next question is from Miss Lisa Gill from JPMorgan.

Thanks very much.

Good morning, Lisa.

Good morning.

Can you just -- maybe two things around the new JV?

First off, I think that, Steve, I heard you say that clinical trial testing was about 2% in 2014.

So should we think about that as being a 50 basis points head wind for the back half of this year as it sounds like -- that the volume actually won't go through your volume, but will come from a below the line item for the JV?

Mark, why don't you walk through how this will get sorted out on a go-forward basis?

That's correct.

Depending on the timing, if you want to call it a head wind, it will be an adjustment.

While obviously we won't be the controlling interest as the minority owner, we have a fair amount of involvement in the JV.

We have a number of our senior leaders who are involved in the clinical trials moving into that business.

We've got an executive that we've talked about in the past John Haydon who is actually going to be sitting on the board and involved in this JV.

So while, for accounting purposes, we're no longer going to be reporting the revenue and no longer going to be reporting the income on the operating margin line, it's not as if we're completely distancing ourselves from the clinical trials business.

In fact, through the partnership, we're looking to drive even more in this relationship as we referenced and potentially using our data for clinical trial enrollment as well.

So, yes, in terms of P&L engineering, it will be a head wind on revenue.

But from an earnings standpoint, we're really just in 2015 moving it from one line to the other.

And then most importantly, we believe it's going to be significantly accretive to what we would have done otherwise with clinical trials in 2016 and beyond.

So, Mark, the way that I'm trying to think about it just from a modeling perspective and your guidance today of reiteration of your revenue expectations for 2015.

And just, given your comments around the weather in the first quarter, I'm just trying to square that up with how to think about the next three quarters and your expectations around both volumes as well as revenue growth.

And did you see something that you feel confident to maintain that number?

Because if I remember correctly, you gave that guidance before you announced the Quintiles JV.

Right.

So, Lisa, my apologies.

Let me make sure I'm clear.

So despite whether we still believe the 2% to 3% top line guidance is attainable.

However, as I said in my prepared remarks, I will be adjusting that for the JV once I know the timing.

So we will be reducing that 2% to 3% revenue growth guidance impact by the JV.

Nothing related to weather.

Okay.

Great.

And then just, Mark, my second follow-up question is also for you, is just around SG&A and the quarter and where you are on the cost-saving initiatives.

SG&A came in a little bit higher than we anticipated, but your gross profits were a little bit higher.

I'm just wondering around timing aspect, again, how do we think about the cost savings initiatives coming in over the next year or so?

Sure.

So again, I don't look at any one specific model, so not sure why we may have been different than what you were expecting.

But I can talk to about SG&A, obviously Invigorate contributes to both our cost of sales as well as SG&A.

We continue to make progress on Invigorate.

If you look quarter to quarter, SG&A, was fairly flat in dollar terms.

We do have that head wind every year at the beginning of the year from bad debt.

So, we did get, about 30 basis points of increase from bad debt.

That is the typical cycle, bad debt at the beginning of the year tends to be higher than at the end of the year.

So we're very comfortable with managing of SG&A.

You can see we've leveraged it significantly versus last year, and as part of the Invigorate program, we expect to continue to leverage that.

Okay.

Very helpful.

Thank you.

Thank you, ma'am.

Next question is from Mr. A.J. Rice from UBS.

Sir, your line is open.

Morning, A.J., are you there?

Mr. Rice, your line is open.

Okay.

A.J., are you on mute?

It looks like we lost Mr. A.J. Rice.

The next question comes from Mr. Bryan Brokmeier from Maxim Group.

Sir, your line is open, you may proceed.

Hi, good morning.

Did you say the organic volume was flat, and is that excluding any business that you're walking away from?

Or is that just the M&A?

Mark, you want to take it?

Yes.

So I didn't make any adjustment for, as we've talked about the business we've walked away from.

That is an actual number.

So we're just taking our results and adjusting for M&A to get to that figure.

So, the walk aways as we talked about in the past are not adjusted out of that, so that would be based on earlier comments of a lift if you want to look at it this way.

We would have shown growth had I adjusted for that.

Okay.

And NIPT is another large market that you're currently participating in through a partnership.

Can you provide any color on when you're planning to launch your own test?

Well, first of all, it's going well.

So, as I mentioned earlier, we're quite pleased with our growth rate in advanced and esoteric testing, and our non-invasive testing is -- prenatal testing is going quite well.

So we're hopeful about that.

We continue to work through our own -- our own tests, as you say.

We haven't announced a specific date on that, but we're making very good progress.

Okay.

Thanks a lot.

Thank you.

Thank you, sir.

Next question is from Mr. Darren Lehrich from Deutsche Bank.

Sure, your line is open.

Hi, good morning.

It's Dana Nentin in for Darren.

Hey, Dana.

Going back to your DSOs being down three or four days from last year, I'm wondering if you can provide any color there as it relates to the [MOPAS] payment recoveries?

And I guess, if not, can you update us on the status of those non-payments?

It's not related in any way to that.

Largely it's related -- I'd point to UMass, the acquisition of that business.

Last year as we were transitioning the billing system from them to us, there was some complexity in that.

It slowed some collections down a bit and inflated our receivables I'd say relative to what they would have been otherwise, last year.

So now that we've gotten that behind us, I'd say, that's probably the biggest driver in the current year.

It's really nothing at all related to molecular.

Okay.

Can you update us on the status of those non-payments?

Yes.

We're making progress.

We're tenaciously going after our payments for what we do.

We're working with all the health plans to do that.

And I can share with you we feel good that we're progressing through -- doggedly working through test by test, payer by payer to make sure we get paid for the good work we provide.

So we feel like we're making progress.

I do want to clarify because I think we've taken this question a number of times in the past and consistently in our response, we're not expecting any significant wind fall.

While certainly this is a head wind and I think you've heard from maybe other people in the laboratory area about significant reductions in payments based on some of the changes, whether it's CPT2013 or CPT2015 or other changes in reimbursement requirements.

So while it's certainly been a head wind, it's not material to our performance this year.

And it should not be something that you expect at some point, we're going to come back and say -- hey, we've solved a bunch of issues and here's a big goodie bag.

Okay.

That's helpful.

Thanks.

Thank you.

Next question is from Mr. Robert Willoughby from Bank of America Merrill Lynch.

Hi, Steve or Mark.

You're approaching a year of ownership now of Solstas.

Can you speak to retention rates of the business there, what synergies have been captured, what's left on the table there?

Yes.

So we're making excellent progress with the integration of Solstas.

What we did in that geography is to really combine both of our businesses together.

And so we're integrating operations, we're integrating our G&A functions.

Some portion of the improvement you see in our SG&A this quarter is related to that good work we're doing there.

We also have integrated the sales force.

And as you know when you buy any organization, we had planned on some attrition related to clients that we know that would not move over to us and we had planned that in our model, and we're tracking to make sure that we hit that plan.

So we feel good about the progress we've made, and we feel good about what we're delivering in terms of creating value for our shareholders.

Okay.

Thank you.

Thank you.

Thank you, sir.

Next question is from Miss Amanda Murphy from William Blair.

Ma'am, your line is open.

Good morning.

I guess a couple of follow-ups on the reimbursement side.

So you mentioned the growth on the esoteric front and BRCA specifically, but just curious if you think forward, obviously there's a lot of opportunity particularly in sequencing-based diagnostics.

What's your view on the reimbursement environment there specifically?

I know there's been some work to establish some coding there, so curious just thinking about that this year and longer term?

Well, we deliver a lot of value.

As you know, the average market price has come down over the last year and a half, two years.

We believe where we are right now is supporting the plan we have going forward.

We feel good about that, and we will continue to, as we've done with everything in our business, continue to have the data that justifies that we're creating a lot of value here and we need to make sure we get back in our reimbursement the value it delivers.

So we're going to be careful before we do anything.

In terms of pricing changes, we believe that defending and continuing to differentiate ourselves in the marketplace is important for us.

We think it's important for the industry to continue to defend and get our value back from the marketplace, the great value we deliver, and that's the position we continue to take going forward.

So, Mark, anything you'd like to add?

Amanda, I'm sure as you fully appreciate, especially in the gene-based area, reimbursement is related also to your offering.

It's not an independent, decision.

So look at our OncoVantage product and the fact that we have a panel of actionable genes, 34 actionable genes.

And as we engage with the payers I think, the response as they dialogue with our medical professionals and so on is fairly positive because of the fact that we are moving forward with a limited panel that is actually all around action.

So as Steve talked about earlier, data brings insights, insights drive action, and I think the payers are much more willing to pay for things where clearly there is a path towards action.

Again, not commenting on anybody else's offerings.

It's not the same for all of us.

Certainly the choices we make around our product offerings and the size of the panels and the actionability of those panels also influences our ability to get paid.

If I could just have one follow-up to that.

Is there any way that you could give us an idea of how big that business is for you now?

Obviously esoteric encompasses quite a lot, but if you think about just sequencing, I guess, as a bucket, how big that is and how much of your growth on esoteric is coming from that side of the world?

I know you mentioned BRCA again, but --

Mark -- I mean, Mark and Dan, why don't you talk a little bit about how we break out things in our 10-K?

Amanda, we break our gene-based and esoteric in the 10-K we shared on the supplemental analysis on the website.

So overall gene-based, esoteric and anatomic pathology is about a $2.5 billion business, but in terms of specific sub segments and different cuts of the data at the level of granularity you're looking for, we haven't shared that at this point.

Okay.

Thanks, guys.

Thanks.

Thank you.

Our next question is from Mr. Nicholas Jansen from Raymond James.

Sir, your line is open.

Mark, this one is for you on free cash flow.

I think the guidance this year is $550 million, but that certainly excludes some things like the debt restructuring charges and some of the project Invigorate 2.0 charges.

So I'm just trying to get a sense of actually how much true, free cash flow is available this year?

I know you have a dividend payment.

I know your guidance includes 1% to 2% revenue growth from M&A.

So maybe just walk me through the cash flow dynamics.

The only thing I'm excluding is the debt refinancing.

So I'm not adjusting for any of the Invigorate expenses.

So as we talked about, it was $78 million in the quarter.

We talked about the fact that we had a somewhat similar charge in the second quarter, so that should guide you.

At the end of the day, we're expecting somewhere a little less than $100 million of expense from the refinancing.

So the $550 million less that will be I guess the free cash flow number that you're looking for, and that takes into account the cash expenditures for other adjustments.

Again, we have some positive guys that we adjust out periodically that are cash positive as well.

So when you net all those out, normally we don't make any adjustments.

Just given the size and the -- I guess the unusual nature of the debt refinancing, I decided to adjust that just to make the year-over-year comparison what I thought was a little more meaningful and comparable.

Okay.

That's helpful.

And then regarding the $0.08 weather head wind, I'm just trying to reconcile that relative to what you reported.

So I guess on the previous conference call, you talked about having 1Q earnings only slightly better than 2Q to 4Q.

If we added $0.08 back to the $1.05, that would be meaningfully better than slightly.

So I'm just trying to reconcile the quarter relative to your internal expectations that you gave back in January and how that proceeds to the guidance that was reiterated today.

Thank you for the question.

Obviously when we spoke to you in January, we hadn't incurred the February weather, but we had incurred some January weather.

So we were trying, at that point with the knowledge that we had at that point, we just wanted to make sure that people didn't get overly exuberant about the potential of the first quarter given the easy compare with the weather in 2014.

So yes, a couple of things.

One is, we probably performed a little more strongly than we expected in the first quarter adjusting for the weather.

So had the weather not been there, it would have been a really, really strong quarter.

There's various reasons for that.

However, I will go back and say the guidance that I gave today is something that, we're very confident in.

And, whatever the performance of the first quarter, you just should assume that that guidance is reasonable and that's where we're going to land.

Thanks for the clarification.

Thanks.

Thank you.

Next question is from Mr. Brian Tanquilut from Jefferies.

Your line is open.

You may proceed.

Good morning.

Good morning,

Hey good morning guys.

A quick question for you on the hospital side.

So I know we've talked about in the past how the opportunity is for these hospitals to look to outsource their labs.

We're hearing more and more about payer pressure on commercial pricing for the hospital-based labs and also narrow network strategies, specifically Anthem in Indiana, Kentucky and Ohio.

So are we seeing more of that, or is the pressure accelerating in the hospitals that you're starting to see more conversations with hospital CEOs?

So I mentioned in the past, Brian, the discussions we're having and the opportunities that we're having that we're working is larger than we ever anticipated.

Most CEOs and CFOs have lab strategies as part of their short list.

We're encouraged by all of that.

The dynamic you mentioned we think is a very positive dynamic.

As we've talked about, we offer great value, we have some of the best pricing for the quality we deliver in this marketplace.

And, therefore, in terms of value, we're one of the strongest of the choices people have.

And yes, payers are now starting to look at even tightening their network even further.

The wide variation in prices from what we have here versus hospital outreach are notable.

And, yes, it's from the payers, but I also mention two other dimensions to that.

Employers are spending a lot more time on their healthcare costs and they're seeing wide variations, so they're starting to ask questions.

And most importantly, consumers with a higher copay and deductibles have now started to ask questions why would their bills go up just because physicians are now working for integrated delivery systems versus when those physicians used to send the work to independent laboratories like ourselves.

So all this is coming together in a good way.

Those hospitals we talk to realize with payment models moving away from fee for service to population health and bundle payment models that no longer is an incentive -- there's no longer an incentive to drive volume in activity.

But look at how they deliver the best quality health care at the lowest possible cost.

That's what we saw at the University of Massachusetts.

Second, some do see and realize that they do have a melting ice cream cone with some of the differential commercial rates that they enjoy today on their hospital outreach.

And, therefore, they're talking to us and thinking about what their options should be.

So it's coming together nicely.

We actually applaud what's happening with Anthem.

We think it's a positive change for the industry and a positive indication that there's a catalyst out there in the system to start to get the discussion started and move this at an accelerated pace.

Got it.

Thanks, Steve.

Thank you.

Our next question is from Mr. David Clair from Piper Jaffray.

Sir, your line is open, you may proceed.

Good morning, everybody.

Hey, David.

So I'm just curious, given the timing of the PAMA final rule, it sounds like they're going to miss the initial June proposed rule deadline.

So how would you handicap the odds of the clinical lab fee schedule repricing happening by 2017?

Well, David, I will leave the odds giving to Las Vegas.

Hard to handicap CMS, hard to handicap anything that happens in Washington.

As I mentioned, we were down there last month, we being myself and some members of our industry.

We had a very good conversation.

It's complex and they're working through all that complexity with all the different entities that would have to give them their data, all the different codes they have to look through, all the different tax IDs.

And so they're digesting all of that.

So with all that said, it is still their goal, and that's how they say it, still their goal to have the rule making out in 2015 for collection in 2016 for 2017, refresh of the clinical lab fee schedule.

So that's the goal they're still working on.

Okay.

Thank you.

And then I was wondering was the debt refinance included in your original EPS guidance?

And if it wasn't, what's the offset to the interest savings that we're going to see in the year?

So with -- I'm sure as you appreciate, when we put guidance together, you've got a number of items to consider and various ranges.

I know for modeling purposes you always need a discreet entry, but we're considering ranges of potential outcomes and inputs.

So certainly we had a reasonable expectation we might do the debt refinancing.

We didn't know exactly the timing, we didn't know exactly what the new interest rate might be and hence the interest savings.

So at this point, since I've reaffirmed guidance on EPS, assume that the interest savings is in there.

And I can't really call out an offset because, we still have $0.15 of range within the guidance.

So, it's within the parameters of all the different contributors to how the EPS is driven.

And so, I couldn't tell you exactly what the offset was because there isn't necessarily because we're still within a range that's quite broad.

Okay.

Thank you.

Thank you, sir.

Last -- next question is from Mr. Jack Meehan from Barclays.

Sir, your line is open, you may proceed.

Hi.

Good morning, guys.

Good morning.

I wanted to ask about the new BRCA data share initiative share you announced earlier this week and background, how it came together and timing wise, just curious why now?

Obviously you've been on the market 18 months, and I think there's a lot of differing thoughts on the merits of the US.

So in terms of it being a metric, what are you seeing on the market?

First of all, we responded quickly to the opportunity to enter the BRCA market after the Supreme Court ruling.

We entered the market about four months afterwards.

So we entered into the market, and we -- as we approach all businesses, Jack, we continue to look at ways that we can get better at what we do.

So we've been improving our offering in terms of our capabilities of our sales force, capabilities of our genetic counselors, capabilities of the quality of our reporting and the look and feel of our interactive insights, as I talked about in my remarks.

But also we're looking at how do we get the actual results to be of higher quality, and we only have so much data.

We believe it would be the right thing to do to take our data, combine it with other people's data, and Inserm being the French Institute for Health has 16 labs they report their data in.

We're also happy to have LabCorp participating in this.

So we're going to put both of our data sets into Inserm, and we believe that this is just the beginning, there will be others to follow.

In the outcome of this, we believe will be an outcome of the curation and also the analytics around that data to produce better sensitivity and specificity around the testing for BRCA, and we think that's a good thing for the industry and a good thing for us.

So we think this is the next step of improving and delivering a great -- a great solution to the marketplace in a better way.

We will continue to differentiate ourselves in everything I just described, how we sell it, how we support it, how we present it and how we explain it in our solution to the marketplace, which we think will allow us to continue to differentiate ourselves versus the other options that our customers have.

So we think it's progress in the right direction.

Got it.

And then, just maybe off that, is there a way to gauge a sense for just collectively the contribution in terms of volumes is and just where you think it needs to be in order to have similar VUS rates and if that's a good metric to consider?

Yes, Mark.

Yes, so I mean you're not going to see any detail on the volumes that are contributing.

The French institute has been collecting data for 10 years, so there's a fair amount of data.

Obviously you've got us and LabCorp who have said it's in the best interest of patients to contribute, come out with better data information.

We're going to compete on other aspects of our product offerings and anything around the science.

And again, back to the VUS, this is not about VUS,.

This is really about ensuring we have the best ability to provide information to patients.

And, therefore we won't get into numerical comparisons or anything like that.

That's not why we're doing this.

We're not doing this from a competitive reason; we're doing this because it's in the best interest of the patients.

Got it.

And if I can squeeze in one more maybe for Mark.

Curious if you're seeing anything on the deductible side and any changes to start the year in terms of the prevalence of high deductible health plans?

It's still early for us to know whether there's been a large -- obviously we built into our assumptions a continued trend towards more high deductible plans for employer-based provided insurance.

We did have the usual first quarter lift in bad debts like all of our efforts, so nothing I can share of detail at this point.

Okay.

Thanks, guys.

Thank you.

And our last question is from Mr. A.J. Rice.

Sir, your line is open.

You may proceed.

Thanks.

Hi, everybody.

Sorry about earlier.

Thanks, A.J.

Just two quick areas of questions.

First on the upcoming JV with Quintiles, is it generally in the ballpark to think of the operating margin -- thank you that you gave us the revenues -- the operating margins on the clinical trial business you're contributing are somewhere close to the corporate average?

And then as you think about the JV on an ongoing basis, will there be either cash commitments on your part going forward after the JV is set up, or will you be taking -- have opportunities to take cash out?

What are the cash flow implications of the JV?

Right.

So A.J., I won't get into the specifics, but the clinical trials business is not materially different -- order of magnitude, its margin is similar to the overall enterprise.

Obviously you will get a lot more granularity on that when you start seeing the changes in our equity earnings line going forward.

Sure.

In terms of cash, there's just some initial cash from a working capital standpoint that's not of significance because we're going to continue to wean down the receivables of our business and keep that as opposed to contributing that to the venture.

So at the end of the day, that's going to be about a wash.

We have an annual -- as part of the contract, we have an annual ability to take out a cash dividend, as will Quintiles as well.

So we are expecting to get cash contributions out of the JV going forward.

And in terms of any future cash needs as part of this agreement, we have the ability both to contribute cash if we want to do more M&A through the partnership.

Or if there's some other investment opportunity that the joint board agrees makes sense, there is an ability to move cash into the entity.

So we feel it's pretty flexible in terms of cash, but we certainly are expecting to get our fair share of cash out of this entity going forward as well.

Okay.

And then maybe just one other follow-up.

On -- I think you had said this before and I think it's my sense of the industry overall, that when you think about the larger contracts with payers and others, that this is a relatively benign year that doesn't have a lot of recontracting activity.

But just wanted to put that out there and confirm that that is indeed the case, if it's true.

Yes.

So independent of whether we had a lot of recontracting, what we have said is that the price and pressure, the price erosion in 2015 should be more similar to 2014.

And in 2014, it was less than 100 basis points, and I'm not going to get into the specifics of how close is it going to be to 2014, but more like 2014.

And I also said that, as part of the investor day, that I would expect 2016 and 2017 to also be more like 2014.

Okay.

All right.

Thanks a lot.

Sure.

Okay.

No further questions.

Thanks again for joining the call today.

As you can see, we're making good progress executing our strategy.

We're excited about the clinical trials opportunity.

We appreciate your support, and you have a great day.

Thank you very much.

Thank you for participating in the Quest Diagnostics first-quarter 2015 conference call.

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

A replay of the call may be accessed online at www.questdiagnostics.com/investor or by phone at 866-430-5847 for domestic callers or 203-369-0933 for international callers.

Telephone replays will be available from 10:30 AM Eastern time today until midnight Eastern time on May 23, 2015.

Good-bye.