奎斯特診斷 (DGX) 2015 Q3 法說會逐字稿

Welcome to the Quest Diagnostics third-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.

I would 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, 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 Diagnostic's future results include, but are not limited to, those described in Quest Diagnostics 2014 annual report on form 10K, quarterly reports on form 10-Q, and current reports on form 8K.

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's Steve Rusckowski.

Thanks Dan, and thanks everyone for joining us today.

This morning I will provide you with the highlights for the quarter, share a few comments on the industry dynamics, and review progress on our five-point strategy.

And then Mark will provide more detail on the results and take you through guidance.

We grew revenues, margins, and revenues in the third quarter.

Revenues grew 1% on an equivalent basis to $1.9 billion.

Adjusted operating income grew approximately 7%, and operating margin expanded by 130 basis points compared to the prior year, once again reflecting approved operational efficiency.

And adjusted diluted EPS increased approximately 7% to $1.28.

Before I get into our strategy update I'd like to talk to you about industry dynamics starting with the recent CMS proposal related to PAMA.

We are currently reviewing the draft and are sharing our perspective with the trade association.

As you are well aware this is an important issue for every lab because it will result in a refresh of CMS's clinical lab fee schedule, which will apply to independent, physician and hospital laboratories for their fee-for-service Medicare payments.

We have said all along that PAMA needs to be built on an accurate representative view of the market.

We were disappointed that the draft provided as many limitations as it did to the definition of applicable lab.

In a recent study the office of Inspector General reported that the two largest independent labs represented only approximately 17% of the total Medicare spending from the clinical lab fee schedule.

While hospitals and physician offices represented nearly half of the total Medicare spend.

PAMA stands for Protecting Access to Medicare Act.

It would be a terrible irony if the data collection process demanded by PAMA had the unintended consequence of reducing access to critical laboratory services.

That could cause some labs to close their doors to Medicare beneficiaries.

Additionally the coding and payment proposals recently released by CMS jeopardize the advancement of personalized medicine.

These proposals failed to take into consideration the value provided from clinically validated information that further advances more targeted and sophisticated approaches to patient care.

That said, we remain optimistic that the proposed rulemaking will result in an outcome that the industry can live with even if it takes a bit more time to finalize.

Now let me shift to the progress we're making on our five-point strategy.

To remind you it's to restore growth, drive operational excellence, simplify the organization, refocus on the core diagnostic information service business, and deliver disciplined capital deployment.

Let's start with growth.

This was the fourth consecutive quarter of organic revenue growth on a consolidated equivalent basis.

Let me share with you some key elements of our strategy.

First, revenues from our [gene-based] and esoteric testing revenues continue to grow.

We also saw a significant growth from infectious disease tested, prescription drug monitoring, and our industry-leading wellness business.

Our Science and Innovation team continues to work with our clinical franchises to bring new solutions to the market.

In October we announced the launch of two companion diagnostic solutions for non-small cell blood cancer based on the recent FDA approved Merck therapy called Keytruda, as well as Bristol-Myers Squibb's therapy called Obtivo.

Both diagnostics tests are from Dako, an Agilent company.

Second, over the past few years we've outlined our strategy to partner more effectively with hospital systems.

We have shared our view that hospitals will look to partner with us in running their in-patient laboratories as well as their outreach service models; and we expect to announce additional agreements by the end of the year.

Finally over the past few quarters we've shared additional proof points on our three information solutions that help customers with population health, data analytics, and decision-support tools.

Specifically, our interactive insights for physicians, our Intellitest Analytics solutions for hospitals and health systems, and finally our Quest Analytics platform.

In late September we announced our partnership with Inovalon to deliver our Data Diagnostic Solutions.

Our Data Diagnostic Solutions will provide a real-time point of service suite of analysis to physicians at the patient level.

This solution will help physicians approve care through a better understanding of the patient's medical history, and review that history against relevant quality metrics through the use of big data and real-time connectivity solutions.

These solutions will help deliver valuable insights precisely when and where clinicians need them most.

We believe this value-added information will help drive the transformation from volume to value-based healthcare.

The second element of our strategy is driving operational excellence.

We continue to make progress with our focus on building e-enabling services, standardizing our processes data and systems, and approving cash collections.

We continue to move closer to achieving our invigorate goal of $1.3 billion in cumulative run-rate savings by the end of 2017.

We continue to simplify and strengthen our organization, which is the third element of our strategy.

We're proud of the professionalism and commitment of our employees, which has enabled us to be included in the Dow Jones sustainability Index for the past 12 years.

Quest Diagnostics was one of only eight healthcare equipment and services companies listed on the Dow Jones sustainability North American index; and one of only 11 companies listed on the Dow Jones sustainability world Index in the same category.

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

In July we finalized a joint-venture transaction with Quintiles.

The new entity, now known as Q Squared Solutions, is off to a great start with strong culture built on a collaborative strength of both JV partners.

We continue to review our portfolio, look at options for non-core assets and our focus on building value for our shareholders.

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

Year to date we have return approximately $330 million to our shareholders through a combination of dividend and share buybacks.

Additionally we continue to invest in our business and announced two acquisitions.

Looking forward we continue to have a strong M&A pipeline.

Now Mark will provide an overview of our third-quarter financial performance and walk you through the details our 2015 outlook, which is based on our strong operational performance.

Mark.

Thanks Steve.

Starting with revenues, consolidated revenues of $1.88 billion increased by 0.9% versus the prior year on an equivalent revenue basis.

That is excluding the third quarter 2014 clinical trials revenue.

On a GAAP reported basis revenues were lower by 1.3%.

Revenues for diagnostic information services were flat to the prior year.

Volume, measured by the number of requisitions, declined by 0.2% versus the prior year.

Revenue per acquisition was 0.2% better than the prior year, marking the second consecutive quarter that revenue per requisition grew compared to the prior year.

While reimbursement pressure continued to be a moderate headwind, we were able to more than offset that pressure through test and business mix.

This reflects our strategy to grow our esoteric testing business, and drive profitable growth.

Moving to our diagnostics solutions business, which now includes risk assessment, healthcare IT, and our remaining products businesses, revenues grew by approximately 18% on an equivalent basis compared to the prior year.

That is again excluding the third quarter 2014 clinical trials testing revenue.

On a reported basis, diagnostic solutions revenues were lower by approximately 17% from a year ago.

Adjusted operating income for the quarter was $325 million, or 17.3% of revenues, compared to $304 million or 16% of revenues a year ago.

The improvement of 130 basis points can be primarily attributed to efficiencies from our Invigorate program.

In the quarter adjusted net income grew by approximately 7% compared to a year ago.

For the quarter adjusted EPS excluding amortization was $1.28, 6.7% better than a year ago.

In the quarter reported operating income benefited from the $334 million pretax gain on our contributions in the clinical trials testing joint venture.

This benefit was partially offset by net charges related primarily to restructuring and integration costs totaling $28 million.

Overall, net adjustments benefited reported diluted EPS by $1.17.

Last year's third quarter reported operating income was reduced by $48 million, or $0.22 per diluted share, principally due to restructuring and integration costs.

Bad debt expense as a percentage of revenues was 3.9%, 20 basis points better than last quarter and 10 basis points better than a year ago.

Our DSOs were 44 days, 2 days lower than the prior year and flat to last quarter.

As Steve mentioned we continue to improve our cash collections at a time when there is a growing portion for the healthcare bill paid by patients.

Reported cash provided by operations was $212 million in the third quarter of 2015.

Adjusted cash provided by operations was $188 million in the quarter, excluding cash tax benefits realized during the quarter related to the recent debt retirement.

In the third quarter of 2014 reported cash provided by operations was $271 million.

Cash provided by operations was lower than a year ago, largely due to a payment against certain tax reserves in the third quarter of 2015.

Capital expenditures were $52 million in the quarter, compared to $102 million a year ago.

Before turning to guidance, let me share a few comments to help you frame our guidance for the remainder of the year.

First, we delivered strong results for the quarter that are in line with our expectations for the full year.

Second, for the first three quarters of this year we have shown steady growth in operating income and will continue to see improvements in Q4.

However this improvement will be largely offset by a higher effective tax rate in Q4.

As a result, we anticipate a slower earnings growth rate in the fourth quarter than we have seen throughout the first nine months of the year.

Moving to guidance, we now expect full-year 2015 results before special items as follows.

Revenues are now expected to be approximately $7.49 billion.

Adjusted diluted EPS, excluding amortization, to be between $4.75 and $4.80, basically unchanged from previous guidance with a tightening on both ends of the range.

Adjusted cash provided by operations to exceed $850 million, and capital expenditures are now expected to approximate $275 million.

Now let me turn it back to Steve.

Thanks Mark.

While we delivered another solid quarter, as many of you recall at last year's Investor Day we shared our expectation that we would deliver a revenue growth of 2% to 5% and earnings growth of 8% to 10% over the next three years.

Through the first nine months of this year we are meeting that outlook.

Revenues are up by more than 2% on an equivalent basis and earnings are up by 10% from a year ago.

We're pleased with our performance and are on track to meet our expectations for the full year.

I would like to say that 45,000 dedicated employees that work at Quest remain focused on delivering a superior customer experience every day.

This commitment is helping us to execute our strategy and deliver on our commitments.

Now we'd be happy to take your questions.

Operator.

Thank you.

We will now open it up to questions.

(Operator Instructions)

Isaac Ro, Goldman Sachs.

Good morning Isaac.

Sir, please check your mute button.

Ricky Goldwasser, Morgan Stanley.

Hello.

Good morning.

Good morning Ricky.

Just had a [swab] question on the volume and one on PAMA.

We talked a lot in the first half of the year about the easing comp into second-half around the contract at your anniversary from last year.

We haven't really kind of seen an significant uptick in the third quarter, so can you kind of walk us through what you're seeing in the volume environment and how should we be thinking about volumes for the remaining of the year?

Thanks Ricky.

First of all let me go back and refresh ourselves on where it comes from and the progress that we've made, then we will talk specifically about what we're seeing in Q3, and Mark and I will tag team this.

First of all, if you recall back in 2012, we said in our first Investor Day that this had been a Company that had declining volumes.

We needed to first slow down the rate of decline, flatten that out and start to show improvement.

And continue to show progressive improvement.

And it would take time.

So if you think about the past few years; if you go back to 2013 where organic revenue declined by about 4%.

If you go back to 2014 organic revenues shrank by about 2%.

As you know what we just said was in the last four consecutive quarters we've seen our organic revenue growing by 1%.

So we are making progress.

If you look at it what we're doing to grow our business and also grow our margins is to focus on the larger [req] portion of our business and the richer req portion of our business which is the more sophisticated, esoteric and genetic piece of our business which is growing faster.

And what you have seen for the last two quarters is nice progress in our revenue per requisition, which is helping us both in revenue as well as profit growth for the quarter.

And then also our growth strategy as you know is not just related to organic growth but also growth through acquisitions.

We do plan in our strategy 1% to 2% growth through acquisitions.

With the exception of MemorialCare and what we just announced last night which is a smaller acquisition in our ExamOne business.

We haven't had a material acquisition as soon in the year as we expected.

However, what you did hear in my commentary, we do have a strong M&A pipeline and we do expect to be seeing some of that to come out in the months ahead.

Let me turn now to Mark on what we saw in the third quarter in terms of volumes in the general environment that we're seeing.

Thanks Steve.

Ricky, as Steve mentioned, we are making progress.

We certainly would've liked to have seen even stronger volume in the third quarter.

We did see a couple of things.

A couple of trends I'll mentioned.

And we also talked about in the past we don't have any sort of independent market data.

So our sense is that the market softened a bit in the third quarter based on the utilization basis.

What I would point to is there is some softness broadly across all of our regions, which would suggest it is more market versus Quest performance.

More pronounced in July and August, it rebounded a little bit in September -- it was certainly stronger in September.

We've looked -- shared that we have we call the same account analysis, which is our way of trying to assess utilization.

And versus the trend we saw in the first half of the year we definitely saw a bit of softness in that analysis.

We also have been working closely with a couple of potential M&A targets.

We saw softness in their volumes as well.

Which has also slowed it down some of those deals to make sure that we understood how much of that was market and how much of that was unique to those potential targets.

So just a couple of data points that's definitely make us feel that there was some market softness in Q3.

So yes, we would've liked to make stronger volume progress.

We do think it was largely market based.

Certainly expecting to be somewhat temporary.

But as Steve pointed out, despite that we still are continue to progress and restoring our growth.

Okay.

Thank you.

And then just a one on PAMA.

Steve you obviously highlighted in your prepared comments when we think about the current proposed rate cuts, and when you think about your mix, how should we think about the potential impact if it were to be implemented in 2017 now that you have the data points.

First of all the final guidelines are not out.

And as I said in my commentary, we're not accepting those guidelines and we now are in the comment period.

We'll actually meet with CMS in November.

When I say us, it's myself as chairman of the trade association -- American Clinical Lab Association with some of my colleagues will meet with CMS to talk through the glaring flaws in their collection of the data.

As I said in my commentary, this is supposed to a representative view of the marketplace to exclude a large portion of the marketplace which based upon what we understand there are applicable lab definitions which would exclude a large piece of the physicians offices as well as some portion of the hospital marketplace.

And as I said that is a large piece of who is providing Medicare laboratory services.

So that's a big problem.

Second is if you look through the timing they're going to receive feedback from a number of people.

Not just the trade association but independent concerned parties in the fourth quarter.

They need to then finalize the guidelines and then start collecting the data.

Another inconsistency of what they sent out was a view that we could start providing the data in the first quarter of 2016.

Well, we can't provide the data until we have a final rule.

That's a contradiction in what they sent out so we're going to talk to them about that.

As we all know this has been pushed out.

It's already been late and again this is supposed to be in a place where we're going to collect all of the data in 2016 and refresh the clinical lab schedule by 2017.

What I'm sharing with you is already late and my sense is that we're going to have more delays in 2016 with finalizing the rules and then collecting the data and understanding how that does affect the clinical fee schedule.

As far as the potential reductions of our clinical lab fee schedule, until we collect the data, and I've said this all along, we don't know what the results are going to be.

Frankly when we look at the data we've gathered and we shared the Avalere study from the trade association there weren't notable differences when you do a fair representative view of the marketplace.

So we need to gather data to see what the results are.

In their guidance that they sent out they did speak to a couple estimates of what they think the range to be.

We shared before that it's about 12% to our revenues for Quest Diagnostics.

We're not going to speculate of what any reductions there could be because we're not certain about those but it's 12% of our revenues.

So whatever reduction there may be will have an effect on that 12%.

So hopefully that is clear.

Bill Quirk, Piper Jaffray.

Great.

Thanks.

Morning everyone.

So I guess a follow-up on the utilization comment.

I was hoping you could just add a little color to the comment on some of the market softness that you are seeing.

Was that I guess overall utilization or should we think about that being specific to any particular sub segment, like drug testing for example.

Mark, you want to --

It was overall.

It was not segment specific.

Generally when we are commenting it's the largest portion of our business that we are commenting on and not any of the unique sub segments.

Actually we saw some pockets of strength so it seems as if some hiring may have picked up in the economy, so actually that business is doing better than the broader business, but it's kind of the base overall routine and esoteric testing volumes compared to the trend we had seen earlier seem to slow a bit, in July and August especially.

We did see, as we said, we did see some pickup at the end of the quarter and we did see good growth once again in our genetic and esoteric business.

We said that last quarter as well and we're encouraged by that in our results on revenue per req is reflecting that, and we think it's an important aspect of our strategy for growth, and an important aspect of our strategy for growth earnings.

You are seeing reflected in our numbers and we feel good.

Prescription drug monitoring continues to be a nice growth opportunity for us and we continue to drive our wellness business, which is something that we feel strongly about going forward as a good growth driver for us.

So it's really related to the overall base of business.

We do the same-store analysis, we have talked about before.

We take our existing accounts, that we know their our accounts.

We do an analytic on that to compare volumes this year versus last year.

And there was some softness in Q3 versus what we saw in the last few quarters.

So it was notable particularly at the start of the quarter and strengthened as the quarter continued.

Very good.

And just one more on PAMA.

Certainly can outlined a number of the limitations perspective proposed data collection document.

Any way to ballpark kind of what the odds of that getting expanded to including more hospitals.

Steve, you spoke pretty confidently about some of the problems with the documents and mentioned, obviously, that you're going to be sitting down with these guys -- or CMS rather, in November.

But where would you put the odds of potentially seeing that expanded to reflect a more broad representation of the industry.

I can't place odds on what happens in Washington.

I don't think anyone can.

You know, we're working this.

We want to make sure that we get this right.

There was a bill passed by Congress.

It was called Protect Access to Medicare Act.

It was intended to refresh our clinical lab fee schedule it hasn't been updated since the 1980s.

It was very strongly felt by Congress that the right way to do it is to take a market-based approach.

Look at the market, understand what people are paying on the commercial side and then reflect that in the clinical lab fee schedule.

To exclude 50% of who is providing Medicare laboratory testing is a glaring flaw in the definition of the relevant market.

So we're going to be all over this.

We have been all over this and we will continue to work it.

And again it has been delayed.

It is hard for us to understand how they're going to be able to collect the data in the early part of 2016 to be able to adjust the fee schedule in 2017.

But that remains to be their goal.

And we will see how this evolves.

But I'm sharing with you exactly where stand right now and we have a huge issue as a trade association but also in reflecting the access comments I made.

When you look at the large part of the marketplace being provided for by small independent laboratories, and you think about those rates not be included in the market.

We know that could create an issue for many of them and therefore Medicare beneficiaries are not going to get their lab test and that is going to be a huge issue for Congress.

So we're going to work our way through this but we're going to do this in the due course of the process that we have within CMS.

Jack Meehan of Barclays.

Thank you and good morning.

I just want to ask another question on PAMA and certainly understand we don't have perfect data today without the survey.

But just as you look at the framework that CMS used to lay out what an applicable lab is, it appears -- at least based on the definition today that Quest and [LabCorp] are going to be a good portion of the survey, I think it's around a third.

What you think, as you look at some of your rates on the routine side of the business versus what Medicare is today.

Do you think the 6.5% cut that they laid out is a reasonable assumption to use?

Again I will repeat what I said earlier until we gather the data it's hard for us to speculate what the results will be.

We don't have -- [along with they] visibility on the rates, that's why they want to gather the data.

We don't know what other analysis commercial contract rates are by code.

There's an enormous amount of data here.

We have over 3,000 tests.

We have multiple contracts if you read what they propose it has to be done by TIN number which adds more complexity.

If you look at what we have to do is a lot of reporting, and we're just one of hundreds of labs that are required to report.

We have to go through the data.

As far as what was in that report -- or in the guidance around an estimate, we're not sure where those estimates come from other than interesting data point with cherry picked results that they've seen.

We'll see what the data supports and we'll make sure that this is a thorough process to get our fair rates in the marketplace for the value we deliver.

Jack, as I'm sure you are aware when we looked at the Avalere study, even without hospitals we didn't expect significant reductions in a clinical lab fee schedule.

We share that with -- the hospitals were included in fact in many cases, Medicare was paying less.

So you then have the CBO scoring, which is another data point, which would suggest more reductions than Avalere but certainly nothing overly draconian.

And then you have what's come out from CMS based on their proposal being even higher.

So there's estimates all over the board, as Steve said, until we get some actual data it is actually hard to answer that question.

That is fair.

And just one around the commentary around the M&A pipeline.

Do you think that some of the discussion around PAMA has either delayed some of the transactions taking place, or does that change the way you evaluate targets in the market?

Thanks.

First of all, many hospital outreach labs that we look at and we have purchased have a larger percentage of the business with Medicare.

So we do take into consideration what the Medicare rates will be in our evaluation of the business.

Second, if that is true then we believe this could be a further catalyst of more outreach businesses interested in looking at their options.

What we've said, we have a nice M&A pipeline many of those assets that we're considering are hospital outreach assets -- and we are encouraged by it.

And we still believe with the projections of what we have for rates that the cost synergies will be realized by bringing their volumes into our infrastructure, we can build a nice business case related to the cost synergies associated with those acquisitions.

It's been a deliberate part of our strategy.

It's key to what we believe will happen at the marketplace that is more hospitals relying on us for their laboratory services.

In the second part of our working with hospitals.

Our hospital outreach opportunities where we help them with their inpatient laboratory.

We're working on a number of very large opportunities there and we hope to share some of that with you in the next few months and going into 2016.

So stay posted, but we are encouraged by the progress and I think all the change that we see happening in healthcare in general is going to be a further catalyst for more interest in what we have been talking about for several years.

Amanda Murphy, William Blair.

Hello, good morning.

Mark, instead of a follow-up I don't thing that we specifically addressed why you guys expect to be at the low end of revenue guidance for the year.

And I apologize if I missed that.

Are we to assume it's because of some of the volume commentary that you made, or is there something else in there that you should be thinking about?

That's a large driver certainly, Amanda, but the other one is if you recall after the first quarter when we had a little more impact from weather than we had anticipated, at that point I shared that for us to get towards the upper end of the range we would've had to execute some meaningful M&A.

So while we went in to the year thinking that we could do the 2% to 3% without any M&A, after the first quarter headwinds we had based on weather, especially in the Northeast and in Boston specifically record snowfalls, where we have a very important share in a large portion of our business was going to take some M&A.

So as you've seen we've announced two deals this year.

One of them just last night, Superior and then MemorialCare.

Those are not large enough at this point and were not done early enough to contribute significantly in 2015.

So therefore a combination of a little bit of the unexpected volume softness in Q3 and not getting a deal done-- large enough deal in a timely fashion is really the two drivers.

Got it.

And I had a question on Q Squared.

I know it's a bit early there but I'm curious if you can talk about how the two companies are sort of going to market?

Is there any evidence yet of any competitive advantages from the combination at this point?

Recognizing it is still pretty early there.

Yes, it is still early but we're encouraged.

We closed in July.

We've consolidated our business into one Q Squared Solutions.

We are now working through the integration that we put in place.

We still believe there's a nice business case of a creation opportunity for the joint venture now that we'll realize 40% of in subsequent years, so we're still encouraged by that.

And then second to your point, the days are still early but this market has consolidated and we're now in a smaller subset of companies that are addressing the marketplace.

And we believe that now with Quintiles and us working together we have a stronger presence with pharma and we're optimistic about the prospects.

So as that develops and we have some opportunities to talk about as far as wins within the joint venture we will -- and I'm sure Quintiles will as well but it is still early with that.

We are encouraged.

Okay.

Thank you very much.

Thank you.

Bill Bonello, Craig-Hallum.

Good morning, couple of questions.

For the last several quarters and especially this quarter you're starting to show some really impressive growth from an operating income standpoint, which is something that we haven't seen for years frankly.

And I'm trying to understand as you look forward whether you think that kind of leverage, either through cost savings or other factors, is sustainable into 2016 and beyond?

Do you think if you don't see an uptick in sort of volume or pricing that it would be -- you would have to revert back to sort of lower operating income growth or is there enough on the cost savings side that you can drive growth even if the macro environment sort of doesn't improve?

And I do have a follow-up after that.

Thanks for the question, Bill.

I'm sure you recall that at the Investor Day in November I talked about -- and Steve talked about, the fact that we foresaw 2% to 5% revenue growth through 2017.

1% to 2% coming from M&A so an organic level of growth of 1% to 3%.

And earnings growth, not earnings per share, but earnings growth of 8% to 10%.

And that was going to be fueled by three drivers.

One was going to be some of the continued synergies and leverage we would get out of the transactions we executed into 2014 carrying into 2015.

The second driver was our Invigorate program, which moving our goal from $700 million in run-rate savings to $1.3 billion.

And we didn't lay out how that would drop through by year.

But given the size of that growth in savings and efficiencies, we talked about the fact that contrary to the past several years it would be large enough to not just offset the headwinds that Invigorate had paid for in the earlier years.

You know, the annual wage inflation and some sort of price erosion but actually would contribute to the bottom line and that would be significant.

And then yes the third lever was as we return to organic growth that there's a fairly high drop through and that would help us to leverage our earnings growth faster than revenue as well.

Those are the three levers.

And while were a little bit disappointed in the softness of Q3, we have grown.

As Steve pointed out, revenue was minus 400 basis points in 2013, minus 200 last year and plus 100 this year.

So we are growing and we are getting some leverage.

And we expect to continue that's progress.

Long winded answer but while we haven't given any guidance for 2016 yet, the outlook I laid out would suggest yes we are confident that we will continue to grow our earnings faster than our top line.

Bill just a follow up with that.

I said in my introductory comments we continue to believe that we can deliver on that goal we set out which is the additional savings opportunity.

We exited 2014 with $700 million run rate savings.

We said there's another $600 million.

The goal is now $1.3 billion.

We are nicely on our way.

We see that reflected in the results.

But I would like to also underscore another thing which you have seen in the last couple of quarters.

And that is, the emphasis we have in our strategy is to continue to focus our energy and our investors on a higher growth portion of our portfolio.

The richer portion of our portfolio which is more the advance esoteric genetic fee services.

We have said that is growing nicely.

We see that reflected in our revenue per req.

So that headwinds that we've seen before in the last two quarters we haven't seen.

So we feel good about the progress that we're making on it as well, to make sure that we get a better yield in our portfolio than what we've seen in the past.

So you put all of that together, coupled with the M&A just to underscore what Mark said.

We believe that the 2% to 5% growth for this business over a three-year period is solid.

And we believe the 8% to 10% growth in earnings -- real earnings in operating income is achievable.

We're confident we can continue to do that as we go forward.

Great.

Then if I can, just one slightly unrelated follow-up.

But you talked about potentially we could see some exciting steps with big deals to manage hospital, even in-house labs, et cetera.

Can you talk about as you think about what you are doing on the hospital side, whether it's managing hospital lab business directly, or purchasing outpatient -- outreach business budget, particularly in the former, what impact that might have in terms of sort of metrics that we're looking at?

In particular thinking about capital intensity return on invested capital, et cetera.

Is that a higher return proposition for you and how does it fit from sort of just a margin standpoint.

I will begin with this and alternate to Mark on the returns and how that affects our goals we have laid out.

First of all it is both.

It's both managing hospitals in-patients laboratories in some form.

In some cases it might not be entirely but some portion of it.

And then finally it is helping them with their outreach business.

And in some cases we would it acquire their outreach business, which we have done for the last three years.

And there so much in healthcare goes you see one strategy, you've seen one strategy.

So we've engaged with the C suite around their lab strategy.

When this goes well we are their lab partner going forward.

We've demonstrated this already with a number of our joint ventures we have, and a number of the outreach businesses we've acquired.

We're clearly their lab partner going forward, and I think this is a direction that we'll see more of in the future as the healthcare system in this country continues to evolve.

Now with these potential deals around what we call laboratory professional services, and also outreach, they do effect our earnings and growth rate differently and I think you are referring or asking the question about return on invested capital.

So Mark, could you give us some perspective on both sides of the growth with hospitals.

Certainly.

Thanks for the question, Bill.

Let's start with the professional laboratory services.

What we've talked about in the past is this is really organic.

There is not a significant capital outlay.

It might be a little bit of capital upfront as we transition some of the volumes into our labs and out of their labs.

But it's not anything of significance.

It is lower margin versus buying someone's outreach business where we're capturing all of the margin on a go-forward basis.

The way these deals work is given our economy scale in our efficiencies we can save them significantly enough money to get them to sign a multi year contract with us to perform that service for them and we basically split that savings with them as part of the negotiation, but we don't have a large capital outlay.

So from a ROIC perspective these deals, while lower margin than our current business, are very attractive on a ROIC basis.

Again, as I said, it's a source of organic growth that largely was unaddressable previously.

So it is getting into a market and area and inpatient and outpatient that is a new source of growth for us on the top line.

On the outreach, we certainly expect to continue to pursue such deals.

We talked about how the economics work very well.

They are basically paid out through cost synergies.

We've demonstrated the ability to do that successfully.

We know how to do that.

And we think is excellent for our shareholders.

It is part of the 2% to 5%.

So when we talked 1% to 2% of M&A, it is really those outreach businesses -- small tuck in, fold in outreach or small labs for that matter, but a portion of that is going to be outreach.

We can fund that within our operating cash flow and still maintain our commitment to deliver the majority of our free cash flow to our shareholders.

So, I wouldn't anticipate a significant shift in capital intensity to drive that strategy.

Certainly the professional laboratory service business is not going to require a ton of capital.

Finally on the outreach and any other M&A we talked about the three metrics used.

One of them is that these need to be accretive to our ROIC plan of record by year three, so we're very focused and make sure that even the acquisition that they are growing our ROIC.

Excellent.

Thank you so much.

Thanks.

Dave Francis, RBC Capital Markets.

Good morning guys.

I'm wondering bigger picture.

Do you guys have a perspective, or I was wondering if we could get your perspective, what do you see over all volume-wise given your results and your perspective here -- just kind of what the puts and takes are from a broader perspective relative to kind of what's likely to resolve some of the softness that you saw in the last quarter.

Is there something going on with the mix of high deductible health plans with the newly insured, or again your bigger picture take on what is going on volume-wise.

Sure Dave I will take this to start and I'm sure that Mark will add to it.

First of all, if you look at the market there is a bunch of puts and takes as you describe it.

First of all we believe the Affordable Care Act and the number of uninsured decreasing will add more lives to the system.

We have said consistently that when people have insurance we believe in what we do in that way there for that would be good for us.

Albeit what we have seen so far for lives in the system from the Affordable Care Act are much less than what we anticipated back three years ago, as we all know.

But we said in the past two quarters that we are starting to see some of those Medicaid lives enter the system so that is providing some volumes and most people would agree that they will be increasingly less uninsured in this country in the years ahead.

That is what we modeled in our expectations going forward.

So that's number one.

Number two is, there is -- there continues to be a push for higher deductible insurance programs offered to employer-based healthcare offerings in this country.

We believe it's about 40% of employer sponsored healthcare is high deductible and that clearly has pushed pressure on utilization.

I've said before that those of us blessed with being reasonably healthy are paying for the majority of our healthcare out of our own pockets.

So people have thought twice about using the system, and most people would agree over the past seven years or so that some portion of the utilization softness has been caused by this effect.

We believe actually that, that will continue.

There will be more and more pressure on employers.

They'll be pushing more responsibility to employees.

Employees will consider when and where they use the healthcare system.

And that will have an effect on utilization.

With all that said, we think that's actually a good thing for our business because we offer such a strong value proposition.

And we believe price transparency and the visibility of the wide variation on pricing in the system is actually a good fact for us given our value in our prices in this industry are so attractive.

So that's the second effect.

The third effect is we do have an aging population; us baby boomers.

We already see that in our results.

We talked about infectious disease growing.

All seeing some nice growth in hepatitis C, as an example.

We're all baby boomers are encouraged to get tested given the new drugs of the marketplace to cure that.

The age of the baby boomers [slug up] our market place will continue to grow; the population grows.

So you put all that math together and we continue to believe that in the mid-to long-term this industry that we're in should be growing in value 2% to 3%.

We believe there will be more value per test going forward given the advancements in the introduction of the new genetic base services we have demonstrated in our results as well.

We believe that there are some sub markets that are growing faster than that, but some of that 2% to 3% is the dynamics of what is happening overall in healthcare as well.

Based upon more people with insurance, higher deductibles for those of us to get our healthcare from our employers, the aging population, and the growth in the population.

So hopefully that provides the perspective you're looking for what we see in the macro market overall.

That's helpful color and I appreciate that.

A quick follow-up on the Inovalon announcement that you had recently.

Can you talk just very briefly about what your go-to-market strategy is there?

Is that a product that your sales guys are capable of selling themselves given the footprint that they have the difference in what they're typically selling or do you have to rely on the Inovalon guys?

How are you going to go to market on that?

Great question.

First of all, we're very encouraged about the prospect -- the opportunity with Inovalon.

The reason why that we think this is so encouraging and why Inovalon thinks it's so encouraging is our presence in healthcare.

You think about our presence, particularly in the [worked for] healthcare, we have over 200,000 placements of our order entry results reporting system, Care360.

We interface with all the EMRs you can think of the planet.

The large EMR companies like Epic, Cerner, and McKesson, and also the small homegrown activities.

We sell to 50% of physicians in this country, we sell to 50% of hospitals.

So we're right in the center of the ecosystem of healthcare.

So that's why we have a large presence.

And the nice thing about that is what we will do with Inovalon is attach their capability into the workflow of the physician.

So it is not something that they have to disrupt their workflow to get access to.

So we're working on the actual integration of their applications into our applications.

So the physician or administrative when they are working through the work up on the patient and the completion of gathering all of the information of the patient will be able to access all of that information.

As far as go-to-market, like so much in healthcare it is obviously complicated.

We have people that call on physicians, both primary-care physicians and all specialists.

That portion of our sales force will be informed and be talking to the customers about this prospect.

We also have an information sales force.

These are highly specialized people to get into more of the content associated with us and Inovalon, as well, is providing some capabilities on the ground level as well as broadly support the sale as well from a real specialists perspective.

So it is a hybrid sales approach but we are encouraged about the prospects for us and Inovalon going forward, and we have launched this in the fall to get off to a good running starts going into 2016.

Great.

Thank you.

Robert Willoughby, Bank of America Merrill Lynch.

Hello Bob.

Steve, on that Inovalon deal I guess my question would be how did you arrive at a 50/50 revenue share for it?

It seems to me with the connectivity that you have that you cited the data that you have, aren't you bringing a lot more to the table?

Can you maybe flesh that out?

I appreciate you saying that Bob.

We believe we bring a lot of value to the table.

On the same side they bring all of the content to the table and there's a lot of content.

They built a nice capability with the quality metrics application.

The collection of all claims data is real time.

So there's some very sophisticated approaches to gathering the information and serving that up to physicians.

So we think the 50/50 split fairly recognizes the value we deliver and the value they deliver and it's a good partnership.

We think that's a fair split but we are happy about the value you think that we bring to the table because we think it is a good opportunity for us.

Bob, real quickly the analog might be some small independent lab came up with a new esoteric test.

So they created the whole test.

They didn't have the ability to sell it to the health plans as well as we could.

And to do the pull through with Steve's said, our coverage because it is going to be ordered basically like a CPT, like a test.

So I think you would say okay 50/50 is pretty fair.

They did the innovation, obviously they did the IP, et cetera, and we are really the commercial arm to help sell that and educate people on the value and the opportunity.

And just maybe a question on the cost associate with setting this up and then the deliverable itself.

It is a one-page or report or a two-page and maybe just can you give an anecdotal example of what the report might look like, and just lastly how do you get the doc to pay for it is the payer going to pay for it?

How are you going to get over that hurdle?

First of all, the reports vary based upon what you're asking for.

Some of the patient history are nice, well presented summary of patient history.

The quality metrics are somewhat of a simple -- this is what you need to do to close the gaps in care, related to quality metrics, to qualify for stronger HEDIS scores, your star ratings -- so that is another report.

As far as the pay for here in many cases it will be the risk taking organization, the insurance company.

It would be the person that has the motivation to do this.

But in other portions of this, particularly related to HEDIS scores it could be the provider organization that's clearly incented to do a better job of closing the gaps of care and see the value, and therefore will pay us for this.

In terms of the investment required is a little more complicated than adding a couple of test codes to our compendium.

It's not significant investment required to get this capability in our Care360.

Michael Cherny, Evercore.

Great thanks guys and thanks for squeezing me in.

I will make it one simple question; it's a clarification question.

Just Mark, on the reported volume for the quarter is there any way to break out the M&A contribution?

If I'm reading correctly I believe the only deal that should have contributed is MemorialCare.

So any sense of what is organic versus what was came from M&A?

Pretty much all organic Michael.

In the quarter M&A was [rounding].

Less than 10 basis points.

That is perfect.

As we said earlier we expected some M&A sooner.

We have gotten a nice funnel for M&A.

And you will see that in subsequent months.

But the third quarter was pretty clean.

But it was the fourth consecutive quarter of organic revenue growth.

Okay.

Perfect.

Thanks guys.

Okay.

Thanks everyone for joining.

As we have shared, we had another solid quarter.

We are making good progress executing our strategy.

We do appreciate all your support and interest in our Company and have a great day.

Thank you for participating in the Quest Diagnostics third-quarter 2015 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 800-839-2347 for domestic callers, or 402-998-0556 for international callers.

Telephone replays will be available from 10.30 a.m.

Eastern time today until midnight Eastern time on the November 21, 2015.

Goodbye.