奎斯特診斷 (DGX) 2017 Q2 法說會逐字稿

Welcome to the Quest Diagnostics second-quarter 2017 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 written consent of Quest Diagnostics is strictly prohibited.

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

Go ahead, please.

Thank you and good morning.

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

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

For this call references to reported EPS refers to reported diluted EPS and references to adjusted EPS refer to adjusted diluted EPS excluding amortization.

Actual results may differ materially from those projected.

Risks and uncertainties that may affect Quest Diagnostics' future results include, but are not limited to, those described in our most recent annual report on Form 10-K and subsequently filed quarterly reports on Form 10-Q and current reports on Form 8-K.

The text of our prepared remarks will be available later today in the Investor Relations page of our website.

Now here is Steve Rusckowski.

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

This morning I will provide you with the highlights of the quarter and review progress on our strategy.

Then Mark will provide more detail on the results and take you through updates to our 2017 guidance.

Well, we turned in another strong quarter and are delivering on all five elements of our strategy to accelerate growth.

Here are some highlights.

Revenues grew approximately 2% on a reported basis and 2.3% on an equivalent basis.

Reported EPS of $1.37 was flat from 2016 and adjusted EPS grew approximately 16% to $1.55, which includes an increase of $0.08 over the prior year of excess tax benefit associated with stock-based compensation.

Based upon our progress in the first half, we have raised our outlook for revenues, EPS and cash from operations for the full year 2017.

Before I describe the progress we have made to accelerate growth and drive operational excellence, what I would like to do is to briefly discuss PAMA.

This month a number of ACLA Board members met with the executive branch, as well as key members of the Senate Finance Committee, and both the Ways and Means and energy and commerce health subcommittees, reiterating our belief that the current regulation effectively excludes hospital outreach labs, which are a significant segment of the laboratory marketplace.

Last month our trade association sent a letter to CMS recommending postponing the calculation of publication of a new clinical lab fee schedule, redefining the definition of an applicable laboratory to ensure it includes hospital outreach laboratories.

And upon gathering data from hospital outreach laboratories, publishing new clinical IP schedule rates effective no earlier than July 1, 2018.

While we support reform of the Medicare payment system, we believe any modification should be market-based and appropriately include all applicable independent and hospital outreach laboratories.

At this point we have made a strong case to CMS in Congress.

While we continue to believe that CMS has not carried out the congressional intent of PAMA, we recognize that a new clinical fee schedule could be in place by January of 2018 and we will be prepared.

Now let's review progress we have made executing our 2 point strategy to accelerate growth and drive operational excellence.

In the second quarter we delivered on all five elements of our strategy to accelerate growth.

The first element of our growth strategy is to grow 1% to 2% through strategically aligned accretive acquisitions which we expect to achieve for the fifth consecutive year.

We built on our leadership position in advanced diagnostics with our recently completed acquisition of Med Fusion and ClearPoint.

Under the second element of our growth strategy, we continue to expand relationships with hospital health systems.

On May 1, we completed our acquisition of the outreach operations of PeaceHealth Laboratories and began managing 11 PeaceHealth laboratories serving medical centers in three states in the Pacific Northwest.

We began to recognize revenues from this acquisition and the PLS agreement in the second quarter.

Our existing professional lab services relationships with hospital systems such as RWJBarnabas, HCA, Montefiore also continue to perform well and drive revenue growth.

The third element of our growth strategy is to offer the broadest access to diagnostic innovation.

Our acquisition of Med Fusion and ClearPoint will not only accelerate Quest's growth in advanced diagnostics, but also host the promise of improving cancer care.

Quest will become the preferred provider of advanced oncology diagnostics for the US oncology network consisting of more than 1,400 independent community-based physicians.

In addition, Quest will be a preferred provider of a full range of inpatient and outpatient diagnostic services for 12 hospitals, so Baylor Scott & White Health in North Texas.

Advanced diagnostics, including genetic and molecular-based tests, as well as general diagnostics grew in the quarter.

Drivers of advanced diagnostics growth include QNatal, which is our offering for noninvasive prenatal screening; [core] infectious disease testing and QuantiFERON TB testing were part of the growth.

Within general diagnostics prescription drug monitoring and hepatitis C screening continue strong double-digit growth.

We recently expanded our tumor profile offer through IBM Watson Genomics for Quest Diagnostics to include a 50 gene panel.

With this enhanced insight doctors can take more informed actions for treatment and feel more certain about the best path forward.

Finally, last week we launched QHerit, a new genetic screening service that provides women and men with insight into genetic risks that pass along heritable disorders on to their offspring.

We also made significant progress executing the fourth element of our growth strategy which is to be the provider of choice for consumers.

Our relationship with Safeway continues to expand as we are now operating in over 100 stores.

We still have clear line of sight to be operating in 200 stores and now expect to reach that number by mid-2018.

Patient satisfaction and convenience scores are above 90% for our Safeway locations and feedback from these sites remains overwhelmingly positive.

We can't sum it up any better than two recent feedbacks we've received from our customers on our Safeway locations.

One from an Aetna member from Alexandria, Virginia recently wrote: I really like the location of the Quest center in Safeway.

It saves me time, grocery shopping, pharmacy and Quest blood test all in the same location.

And my personal favorite is one from [Long Mile], Colorado, the customer goes on to say: the best blood draw I've ever had; you rock.

This is an exciting era of empowered healthcare -- of the empowered healthcare consumer.

More and more people are taking control of their health and asking to receive their lab results in the palm of their hand.

More than 4 billion patients are receiving their lab results through our My Quest mobile application and we are on track to reach 5 million users by the end of 2017.

And then finally, in late June we announced our collaboration with Walmart to help improve access to care and over time help lower healthcare costs by providing basic healthcare services.

The collaboration will initially launch in approximately 15 Walmart stores in Florida and Texas by the end of 2017.

These cobranded sites will initially provide laboratory testing services and over time offerings are expected to expand to include other basic healthcare services.

In the future these services will help us deliver on the fifth element of our growth strategy which is to support population health with data analytics and extended care services.

Turning to the second part of our two point strategy to drive operational excellence, we remain on track to deliver $1.3 billion in Invigorate run rate savings as we exit 2017.

As we indicated at our Investor Day last fall, we also believe we will be able to generate additional savings beyond 2017.

As we drive operational efficiency we continue to improve the customer experience.

We are e-enabling our processes behind the scenes as well as in our patient service centers.

More than 600 patient services are now live with e-check-in.

We plan to deliver this digital experience to over 1,000 patient service centers by the end of this year.

At these locations patients use a tablet to sign in for their appointment and are provided with an estimated wait time.

They know they are in the system and when they will be seen.

So that's good for patients; it's good for us too.

On the back end, this system data provides us real-time insight into patient flow enabling us to direct phlebotomists to the patient where they are needed most.

Since we introduced the service earlier this year more than 7 million people have utilized the service to date.

Finally, 2017 is our 50th anniversary of empowering better health with diagnostic insight.

We've had numerous events around the Company to mark the occasion.

And our employees have enjoyed engaging with former leaders and learning more about our history.

We are proud of our 50th year and legacy and look forward to promoting a healthier world, building value and creating an inspiring workplace over the next 50 years.

So now I'd like to turn it over to Mark and he will take us through our financial performance in more detail.

Mark?

Thanks, Steve.

Starting with revenues, consolidated revenues of $1.94 billion were up 1.9% versus the prior year on a reported basis while equivalent revenues grew 2.3%.

Revenues for Diagnostic Information Services grew by 2.5% compared to the prior year with approximately 40 basis points attributed to the PeaceHealth outreach acquisition which was completed in May.

Volume, measured by the number of requisitions, increased 1.8% versus the prior year of which 1.4% was organic.

Revenue per requisition in the second quarter grew by 70 basis points versus the prior year.

As a reminder, revenue per rec is not a proxy for (inaudible), it includes a number of variables such as unit price variation, test mix and test per rec.

Unit price headwinds in the second quarter were less than 100 basis points.

While price fluctuations can vary from quarter to quarter, we continue to expect that unit price headwinds will remain moderate in 2017 and consistent with the last few years.

Beyond unit price and the impact of growth in our PLS partnerships, other mix elements, including test mix, contributed between 100 to 200 basis points, which is consistent with the trends we've observed for several quarters.

Reported operating income for the quarter was $319 million, or 16.4% of revenues compared to $422 million or 22.1% of revenues a year ago.

Keep in mind our reported operating income in 2016 included a one-time gain related to the divestiture of our Focus Products business.

On an adjusted basis, operating income was $343 million, or 17.6% of revenues compared to $324 million, or 17% of revenues last year.

Our Focus Diagnostics products business contributed approximately $4 million of adjusted operating income in the second quarter of 2016 which adversely impacted the growth in our operating income year over year by approximately 1 percentage point.

Excluding the impact of Focus Diagnostics, operating income grew approximately 7%.

Reported EPS was $1.37 in the quarter, flat with the prior year period.

As noted previously, our second-quarter 2016 results included a large one-time gain associated with the Focus divestiture.

Adjusted EPS was $1.55, up 16% from $1.34 last year.

The Company reported after-tax net charges totaling $11 million in the second quarter, or $0.08 per diluted share, representing restructuring integration and other one-time costs partially offset by a gain on the sale of an equity interest.

Our effective tax rate in the quarter was approximately 32% compared to approximately 48% in the prior year.

The prior year tax rate was unusually high as a result of the Focus divestiture.

The decrease in the effective tax rate was also driven by $13 million or $0.10 per diluted share in the quarter of excess tax benefit associated with the stock-based compensation compared to a $2 million of $0.02 per share benefit last year.

The benefit was almost entirely related to the exercise of stock options which is impossible to forecast.

Bad debt expense as a percentage of revenues was 4.2%, flat year over year and 20 basis points lower versus the prior quarter.

For the first half of 2017, cash provided by operations was $490 million versus $464 million last year.

Capital expenditures year to date were $107 million compared to $104 million a year ago.

Before turning to guidance I'd like to remind to that we now have annualized all of our portfolio changes as part of our efforts to refocus the business on Diagnostic Information Services.

Therefore the quarterly year-over-year comparison will no longer refer to equivalent growth, but the year-to-date comparisons will refer to equivalent growth for the remainder of 2017.

With that said, we are providing the following updated outlook for 2017.

Revenue is now expected to be between $7.69 billion and $7.74 billion, an increase of 2.3% to 3.1% versus the prior year on a reported basis and an increase of 2.6% to 3.4% on an equivalent basis.

Reported diluted EPS to be between $4.90 and $5 and adjusted EPS to be between $5.62 and $5.72.

Cash provided by operations is now expected to be approximately $1.2 billion.

And finally, capital expenditures remain between $250 million and $300 million.

Our increased revenue, EPS and cash from operations outlook is based on first-half performance and reflects the completion of two previously announced acquisitions including the PeaceHealth outreach deal in May, as well as the Med Fusion and ClearPoint Labs which closed last week.

In addition to our first-half performance, our raised EPS outlook reflects the higher-than-expected level of excess tax benefit associated with stock-based compensation.

Now let me turn it back to Steve.

Thanks, Mark.

Well, we turned in another strong quarter and are delivering on all five elements of our strategy to accelerate growth.

Based on our progress in the first half, we have raised our outlook and are well positioned to meet our expectations.

So with that we'd be happy to take your questions.

(Operator Instructions).

Amanda Murphy, William Blair.

Hi, good morning.

I just had three questions on the volume side if I may.

So I know that you have said in the past in terms of organic volume growth that you are not going to parse out those specific drivers.

But I was just curious, [there seems to be some] weakness in pharma scripts and whatnot.

So what are you guys in just in terms of basic utilization patterns at this point if you think about per capita usage, if you will, at this point?

Yes, sure, thanks, Amanda.

Well, first of all, as we said in the past, we look at a lot of different external measures, then we do an internal measure where we look at our same account measurement where we do a measurement where we know we have a good account and we look at year-on-year comparison of volumes.

And what we've said in the past remains this quarter; we think the underlying volume in the market is stable is the best way to summarize it.

And then to your second point about volume in the quarter -- as you know, we don't guide on volumes.

We do guide on revenues and it's important that we continue to drive revenue growth which is what we are entirely focused on.

So I will turn it over to Mark to provide a little bit of color around what's in the mix.

Mark?

Yes, sure.

So Amanda, as Steve said, I think we assess in our imperfect fashion through the tools we have that the market is pretty stable.

We haven't seen significant utilization declines and we certainly have not seen anything significant in terms of growth.

So we are pleased with our volume, our advanced diagnostics performance, as Steve mentioned in his prepared remarks.

Certainly volumes and, importantly, revenues were up strong.

Our general diagnostics was solid and then certainly PLS is giving us some [lift].

And then I just had a quick follow-up actually on the PLS side.

So it may be a bit early to ask this, but you talked about the opportunity potentially to leverage some of the PLS agreements to expand relationships beyond that into maybe some reference work and things like that.

So I was wondering if you have any insights there, again recognizing it may be a bit early.

I appreciate that.

As we've talked about and raised the case, when we engage with a healthcare system integrated delivery network we talk about three things.

First of all what we can do to help them with their inpatient laboratory and that's what we refer to as a professional laboratory services engagement.

The second part of this is their advanced diagnostics and the reference testing and we believe we can be a very effective provider of more and also help them with what they do.

So that's another part of the discussion.

And the third case is the fact we're in that discussion to decide what their strategy is around hospital outreach.

And PeaceHealth is a good example of that where we bought their outreach at the same time, so we are helping them with 11 of their hospital inpatient laboratories.

And to your question -- specific question, in that relationship we are also helping them with their reference work as well.

So in all these engagements we typically become a stronger presence in that account for reference work.

Kevin Ellich, Craig-Hallum.

Good morning.

Thanks for taking the question.

Just wanted to follow-up on the hospital outreach comments.

You guys have announced a number of good deals.

The one that is most interesting to me is the Baylor Scott & White; I think you are in 12 hospitals now with -- partially due to the US oncology announcement.

What's the potential to expand that since Baylor is so big down in Texas?

And do you see additional growth in any of those markets?

Yes, Kevin, thanks for asking.

We are quite excited about it as well for a lot of different reasons.

Matter of fact I was down there last week.

We had our day one, if you will, with a town hall meeting and spent some time with the management team.

So this acquisition actually fits four elements of our accelerated growth strategy.

First of all, obviously it's part of our growth through acquisitions, that's good news.

Second is in terms of innovation it brings to us a nice broadening of our portfolio around what we can do around oncology and precision medicine, so we are encouraged about that.

Third is to your point it broadens our presence in the second largest state in the country, Texas, where we already have a strong presence.

And then with this it's all about providing better healthcare at better cost levels.

And we think with some of the work they've done and the engagement, for instance with US oncology, we can help with the data and understanding what we can do to inform better cancer care.

So four elements of our strategy so we are encouraged by that.

And the relationship in Texas is strong and so we are deeply engaged how we continue on what they've built with that engagement and continue to grow from that given our broader presence now with us at Quest Diagnostics.

So we're excited about it and we think it's a great acquisition as well.

So thanks for the question.

Great.

And then just to follow up on Walmart, I might have missed some of the commentary, Steve, but what measures or metrics will you be looking at to judge how quickly you want to expand and what (inaudible) lines do you guys plan to add as I think it's going to be more -- will it be more than just patient service centers and blood draws in the Walmart stores?

Yes, absolutely.

So first of all we are starting with two of the largest (technical difficulty) in Florida.

We also have a strong presence in Florida, so two nice states, the second and third largest state now in the country, so it's important for us to make progress in those large states.

Yes, we will look at some of their centers for our patient service centers.

But as importantly, what I said in my introductory remarks is we are actually going to use this joint venture to provide some of the basic healthcare services to help with what we can do with population health to bend the cost curve.

So what are some of those things?

Can we help with people dealing with hypertension and do blood pressure checks.

Can we make sure that people are staying on their meds?

So if you are on a diuretic and you are suffering congestive heart failure can we help you with that by periodically taking your weight, making sure you stay in your diuretic -- stay in range.

We can also help with diabetes management.

We are also working with some of the healthcare insurance companies where we can close gaps in care to help them with their quality scores so they get reimbursed for providing the healthcare that we all know is the best healthcare.

So those are the basic healthcare services.

And fortunately at Quest -- and we are the world's largest laboratory -- but (inaudible) that said for the last five years, we are in the field of Diagnostic Information Services.

We have over 20,000 healthcare workers, 10,000 phlebotomists with 10,000 other healthcare workers that provide services already for wellness services for employers and health insurance companies.

We are also providing health checks for health -- life insurance prequalification physicals and checks.

So we are leveraging those resources in this relationship as well.

So we are excited about it.

We think it's a great opportunity for us to expand our already unsurpassed access to the marketplace, but also engage with the ecosystem in healthcare with some of these basic healthcare services that can, in our mind, really help bend the cost curve for healthcare in populations that are difficult to get access to.

Lisa Gill, JPMC.

Great, (multiple speakers).

Good morning, Steve.

I just had a follow-up question on your comments on PAMA.

As far as timing goes, when would we learn that they've decided to postpone this and add that incremental data on the hospital outreach?

Yes, so the curb schedule, as you know, we submitted the data already.

That was delayed by two months because their portal was not available, and so we recommended they listen to us, postpone it.

We put it in our data.

Those people that are submitting the data have done that by the end of May.

The current schedule there on is to publish tentative rates in September.

So that's the schedule that they currently have published.

However, we have shared with them that we believe that several things are going on with the data they've collected.

One is they haven't included all the data from those laboratories that they are buying from, particularly hospital outreach.

We believe their approach still limits the size of the sample.

And we shared that.

And also this has been reinforced by the Office of the Inspector General that in the fall said that only 5% of the laboratories are being asked to submit data.

Will submit data, for instance about 69% of what they actually buy from.

The second is what we have heard from some of the smaller laboratory associations, that in fact some of the data input [isn't good].

So we've shared this with them because some of the small laboratories did not have good access to retrospective data.

And our concern is that if they use that data for the basis of publishing a tentative clinical IP schedule in the fall it won't be right.

So our strong recommendation to them, and we have got support from Congress broadly, of many different leaders of Congress as well as the Senate are behind us on this.

We believe the best thing for us all is to take some time to get it right.

So our recommendation is postpone it.

We have made a recommendation of how we believe they could collect the data.

That will take some time.

We think if they work on that aggressively they possibly could publish a new clinical IP schedule no earlier than July of 2018.

So that's the path we are on, but the current schedule we have is that the tentative schedule to get out some rates in the fall with a refreshed clinical IP schedule in the first of next year.

And as we said in our introductory remarks, we are prepared for that, but working hard because we believe that it does not reflect the Congressional intent to get a full sampling of the marketplace and get that data in a good form and get good quality data to establish new rates for us all.

So we are pushing on this in a big way across the trade associations.

I think the key is there still remains a lot of uncertainty around PAMA.

I'm sure you drew that from Steve's comments and unfortunately we don't have the data to determine what the projected outcome will be, whether it's the timing or the impact.

I do think it's good to go back to the final rule periodically and just remind everybody that the methodology is to take CPT code by CPT code calculation.

It's a weighted median based on the data that they've collected compared to the rates that they are currently paying.

And that any CPT code can be cut as much as 10% per year for the first three years and then beyond that for 2021 to 2023 a final rule dictate that any CPT code could be changed by as much as 15%.

So, that is the final rule in terms of the application of the rule and the outcome.

I'm sure as you drew, there is still a lot to be answered.

Donald Hooker, KeyBanc.

Hey, great.

Just kind of a broader question on the PLS deals, which seem to have had great momentum over the past year or so.

I understand they are all structured differently.

I guess on the one end you have the full-service outsourcing where you take over all the employees and supervisors.

And then on the other end your -- I guess it's just maybe one or two people on-site and they are buying off your contracts.

How does that -- how do your relations -- how do the deals break across that continuum?

And maybe can you talk about the different revenue that generates across that continuum for these deals?

And is there evidence that maybe over time as you add more and more of these that people start on the low-end and move up towards the higher end if you will?

Yes, thanks, Don, for the question.

We continue to be excited about the prospect here and, again, it starts at the highest level of hospital systems.

And I've shared in the past their lab strategy is on a short list of strategic things they are talking about.

And so, they welcome meetings with us to help them think through this.

And in that context a big part of this is how we can help them become more efficient with their hospital inpatient laboratory.

And it is that spectrum, the broadest capability is we help them manage it, the leverage of our procurement.

They also learn from our best practices at running the world's largest laboratory.

And to answer your question about across that spectrum, [where is it said], I would say it's equally distributed across the lowest level [of involvement], the most -- no predominant necessarily at one end of that spectrum.

But to your last question, once we get in the account and we begin to develop the relationship we do see increased levels of engagement by the customer with us.

And we do broaden our services broadly and we do spend more time on what we can do to help them with their reference work.

And then also in that context we do continue to have a conversation about their outreach strategy if they are in the outreach business.

So the way we see it is we start with an engagement, but that is just the beginning of engagement.

And then we also use this as the discussion broadly of what we can do for them in terms of what their mission is and their strategy, which gets us into a discussion about population health and what we can do with our data analytics.

We've got a lot of capabilities there.

We've talked about that in the past as being a nice value added (inaudible).

These new extended care services are of great interest, particularly those integrated delivery systems that are taking some (inaudible) risk and might have formed an ACO.

They are quite interested in how they can leverage these access points we are putting in place with our joint venture with Walmart as one example.

So, this is strategy is really a strategy of how we serve hospital systems in a bigger way.

And one aspect of what we can do with them is around the professional lab services engagement in their inpatient laboratory.

But it's much broader than that.

And I would just add, Don, you asked about the revenues and, as you implied, directionally the deeper the relationship, the higher the revenues.

If we are actually on-site running their in hospital laboratory and having those employees work [with us], then we have to [fill] that out for them.

So that would be a higher revenue type arrangement.

But I'm sure as you can imagine there's not a lot of margin in that [stock].

So the greater part of the margin is really driven around rationalizing some test menu, moving a subset of that off-site where we can drive not only better cost but shorter cycle time because we are running those tests every day.

That's one of the big advantages when we have a PLS type arrangement.

It's not just about cost and that's where a preponderance of the revenue and the margin comes.

And it's really just driven by I'd say hospital preferences.

You have heard Steve say in the past you've seen one hospital lab strategy you've seen one.

It's really nothing endemic to the particular hospital structure that dictates the PLS arrangement, it's really just their comfort level.

Okay, thanks so much.

Thanks.

Brian Tanquilut, Jefferies.

Hey, good morning, guys, congratulations.

Steve, when you first came on board you guys first started the hospital strategy and that was sort of new for the industry.

And now you are doing the retail strategy with Safeway and Walmart.

So do you think this is the wave of the future in terms of where the lab will be?

And what do you think, as you look down your pipeline, in terms of other retailers or other opportunities to get closer to the end user or the consumer?

I mean how should we be thinking about the future strategy as you pull from your traditional PSDs into more retail or consumer-oriented settings?

Yes, exactly.

So Brian, thank you.

Well, what we talked about five years ago, yes, we are the world's largest laboratory, but the business that we want to focus on is Diagnostic Information Services.

And so, the information and the services portion of our portfolio is a big portion of what we've really put our shoulder into over the last several years.

And you are seeing some of the contributions in the way of business in the last few years.

So let me just walk through what that means and where do we see this going.

So in that strategy we believe that hospital systems were becoming stronger.

We knew that hospitals were acquiring physician practices and therefore it was quite important for us, rather than thinking about the hospital as primarily a competitor, how we could team up and partner with them with their lab strategy and that has worked well.

They are all over trying to become more efficient.

They are trying to understand how they could provide better patient care.

And then finally is they're realizing that being in the outreach business is not necessarily something that they all want to focus on and therefore they can team up with us and we are a good provider of that.

So it's a nice services element.

And then as we get in, and similar to what I said to Donald on the last question, it's all about their strategy.

And their strategy is to be a broader provider of integrated health services within a geography and we can help them with that.

So we have a broad line of information products.

We have launched this a couple years ago with the (inaudible), we call it Quantum.

And in that portfolio of products we offer capabilities to take a look at your utilization for diagnostics.

It allows the data to be put on the table.

To ask questions about are we doing a proper work up to make sure we have an informed decision that happens -- that informs what happens next in healthcare which is an important part of the delivery of good healthcare, lower cost.

Second is we've also served up with our nice access to the workflow -- within the physician's workflow, the ability to look at all past data from our relationship with Inovalon.

And that data we think is valuable to get a full view of what happens to that patient and so those data analytic services we think are helpful.

So that's a conversation we also get into.

And as we work on this discussion they are all interested in how they retain their current patients and grow their patient population as well as their membership.

And we all see that there is a sea change happening where the consumer is much more engaged.

And that's why we think it's very important for us, and we put a lot of energy on broadening and expanding our brand and what we believe our brand stands for.

Matter of fact we have talked about our brand and our tagline being action with insight.

Our vision is to empower better health with diagnostic insight, not just to be the world's largest lab.

So in that consumer -- in that consumer strategy which is part of our growth strategy there is multiple aspects to that.

One is to provide great access so we believe our retail strategy helps us with that.

We started with Safeway.

We said we are going to do more.

We recently announced our relationship with Walmart so we think that's expanding our access.

Second is to provide products that are consumer-oriented.

We've talked in the past earnings call about what we are doing to be a provider of testing directly to consumers.

We've launched a pilot; we are doing some of that in Arizona.

We are now expanding that pilot of selling testing where states allow it to be done to Missouri into Colorado.

We have a great business that is growing around wellness.

We have a product called Blueprint for Wellness, we've expanded that into the field of sports where we have a sports diagnostic product.

We have done the work with Ancestry, so there's a whole portfolio of more consumer-oriented products that we've rolled out as well.

And then we've also improved on the access and consumers remarkably want to have all their health information and frankly we are quite surprised about the input -- excuse me, the pickup of our MyQuest application.

I mentioned in my introductory remarks over 4 million people have registered with us.

We believe we are tracking to be on track to get about 5 million users.

So if you look at all those elements, we believe that this positions us nicely as that Diagnostic Information Services Company that's thought of when the consumer will have choice around the diagnostic testing.

And over time we believe with better transparency, because we do offer we believe one of the strongest value propositions in our marketplace, the physician will ask the consumer which laboratory do you want your testing to go to.

And they will remember this great experience that they've had at Quest Diagnostics.

They'll have the information that's provided to them.

They'll have access to products and they will be able to easily access our capabilities.

And so the choice will be given to us.

And that's our strategy.

We think that's a powerful element of our strategy and it's where healthcare is headed.

Consumers will have more choice and consumers will direct more healthcare.

So we are making a lot of progress.

We are excited about it and we think that's going to help us with our core business today.

But over time will become a larger piece of our portfolio over time that we really do direct healthcare in a better way where it's needed, which is not necessarily only in hospitals but throughout the healthcare system in communities that are touched not by traditional healthcare, but other places like our retail strategy.

So that's where we are going with it.

I really appreciate that.

Mark, just a quick follow-up.

What are your assumptions and guidance for the back half in terms of tax rate and buybacks or capital deployment?

So we -- in terms of capital deployment, it's really dependent on whether we have strategically appropriate deals that create value for our shareholders.

So really that will depend on our deal pipeline and what might come to closure in terms of your expectations for share buybacks.

We talked about keeping our [way so] pretty flat.

To the extent that we wouldn't execute more M&A you would see more share buybacks.

But I think you should consider pretty much flat share count.

And then certainly from a tax rate, as we mentioned, it's impossible for me to predict option exercises.

So outside of the stock-based companies you should expect an effective tax rate that's pretty much on the historical level that we have seen in the upper 30s as opposed to the rate we saw this quarter, the low 30s, really driven by stock-based comp.

Now if we were to have significant exercises in the quarter that obviously (technical difficulty).

But that's why we've been very intentional in calling out what that impact is year over year so that you can understand that because it's really not operational.

Got it.

Thanks, guys.

Isaac Ro, Goldman Sachs.

Good morning, guys.

Thank you.

I wanted to come back to PAMA for a minute.

I appreciate your comments around the data collection process.

I'm interested in the commercial side of it and in particular how you think the competitive landscape is going to evolve as we approach implementation whether it's delayed or not.

And specifically about the overall battle between the in-source labs within hospitals and the commercial labs.

Is there a material tug-of-war starting to brew here between where a lot of that volume gets done?

I'm interested in what's happening out there in the commercial landscape amidst the data collection.

Thanks, Isaac.

Well, part of our discussion with these hospital systems around their lab strategy is they see pressure on rates broadly.

They are feeling pressure from their commercial insurance relationships, but they also are looking forward and realizing that the clinical IP schedule we've refreshed.

And as we've talked about in the past, they have more exposure than we do to that.

It's roughly 12% of our revenues.

It's a much more meaningful percentage of their laboratory revenues.

So, when we engage in these conversations one aspect of their consideration of what they do around outreach is they are going to be under pressure both on the commercial side as well as from Medicare.

But the other aspect, as you know, is related to what your strategy is, do you want to put more capital in an increasingly more complicated area and in some cases they decide not to.

Second is they realize that our scale is significant.

As we move away from a fee-for-service model to a much more value-based reimbursement model, it's no longer going to be activity, it's going to be making sure that you have the best cost per service unit.

And our cost structure is far superior than any other cost structure.

So in many of the cases we are engaged around this and in some cases when we bought their outreach business it's because they are seeing reimbursement changing and they believe that they have to move to team up with someone like Quest that has a very efficient model of delivering the necessary diagnostic services.

So as part of that overall strategy for the integrated delivery system, part of this is looking at the pressure on rates.

But it's more comprehensive than that as well, Isaac.

That's helpful.

And then maybe as a follow-up to that, if we look at the rest of the commercial market, clearly the majority of your competitors are very, very small.

How do you think they are going to react to PAMA over the next let's say 12 months?

Is there a meaningful opportunity there to consolidate more share from commercial labs?

Yes, so we shared this at our Investor Day.

Look at the market we compete in; ourselves and our nearest competitor have less than 25% share.

We have a very compelling value proposition where we offer some of the best pricing and we believe best service and quality on the planet and we believe we should have more share.

We are working hard at gaining that organically, but we are also believing that we can consolidate more of this marketplace and that's why we have a strategy of 1% to 2% [good] growth through those strategically aligned acquisitions.

We have announced a number this year with PeaceHealth.

We are moving forward now with Med Fusion.

And also we also announced recently Cape Cod in Massachusetts.

So our march continues, continue to drive that strategy.

So we think the commercial rate pressure on the rest of the marketplace will help accelerate the strategy we're on and we should over time pick up more share both organically and through acquisitions.

Got it.

Thanks a bunch.

Bill Quirk, Piper Jaffray.

Great, thanks.

Good morning, everybody.

So I hate to keep coming back to PAMA, but obviously it remains a pretty hot topic.

I guess, Steve, I certainly understand (inaudible) position here.

Help us think about as we get closer to the initial implementation date or, excuse me, the initial preliminary rate date, how do you handicap the likelihood of a delay at this point given all your conversations with folks on the Hill?

Yes, I can't handicap it, but I will share that we are actively working the communication with CMS.

And when I say we, it's the Board of Directors and all members of ACLA are actively talking to our Congress members both on the House side as well as the Senate side.

We have also met a couple times with leadership at CMS.

The leadership at CMS understands this well, understands that the current approach has issues associated with it.

And our simple messaging on this is take the time to get it right.

We continue to support the idea of paying or having CMS pay market-based pricing, but to get the right data, take the right approach to agreeing on those rates is important for all of us.

And what we remind him of is the reason why we have PAMA is reflected in the words, it's protecting -- Protect Access to Medicare Act.

And it was important for Congress and part of their congressional intent not to just pay at the lowest rates, but to make sure that they pay for what they use.

And the reason for this is there is many parts of this country that are not served by the large national laboratories.

And the concern that they are now aware of is if in fact -- if this is not done in the right way rates could be cut and smaller labs that are very necessary in small rural areas in some segment of the marketplace the majority of what the testing is as provided to the Medicare marketplace could be substantially cut.

An example of that is what's happening in nursing homes, where the majority of nursing home testing is basically the most routine tests that are done for many small laboratories all over this country.

So we remind Congress and we remind CMS of where we started and why we believe paying market-based price is quite important.

So what I will share is we think they are very, very responsive to listening to our concerns.

We realize there is a new administration.

They realize that what was put in place was put in place over the last couple years.

They realize there is an opportunity to work with us to get it right.

So we remain hopeful but I can't handicap it.

Got it.

And then just as a follow-up, the pace of deals has increased, and obviously you talked quite a bit about that here in the Q&A today.

Can you talk to us a little bit about how much capacity both your deal and integration teams have?

Well, we haven't hit a point where we don't have the capacity to do deals that make sense.

And we spend a lot of time looking at deals.

We say no to more deals than we say yes to.

It's important.

We continue to go back to our philosophy on doing acquisitions.

They have to be strategically aligned and also we have to make money on those deals.

And a key part of making money on those deals is making sure we have the right integration plan.

And so as we integrate this we have a small structural team that helps us with the integration, but also a large part of the integration happens in our regions as well.

And so, if you look at the distribution of some of these deals, they have been distributed throughout the United States.

We have done a number up in the north, UMass being one example of that, Harvard Healthcare being another example.

But most recently we are doing this deal out in our Western region with PeaceHealth and we are working on that with enough capacity to pull that off.

So, our capacity has not been a rate limiting factor at all.

It's -- more the rate limiting factor is making sure we have deals that we believe are strategically aligned and we can make money at.

Got it.

Thank you.

Ricky Goldwasser, Morgan Stanley.

Hi, good morning.

Two follow-up questions here.

The first one, if you can elaborate a little bit more on your relationship with Walmart.

I know you talked about 50 stores by the end of the year.

So, how should we think about revenue contribution and your earnings contribution between volume and price?

And then does the relationship with Walmart preclude you from entering additional partnerships with others?

And do you think that over time we'll see market split into verticals -- you have the relationship with Safeway and Walmart and potential others where your competitor has a relationship with Walgreens?

Yes, I appreciate that.

Well, first of all, the relationship is getting going here.

We said we are going to focus on two of the largest states, Florida and Texas, and we are going to pick 15 sites will be our initial pilot sites.

What we will provide at those sites are some of our patient service center capabilities like we've done with Safeway, but we believe there is more we can do on those sites with basic healthcare services.

And what will specifically get done is -- really depends upon where we forge relationships with healthcare insurance companies (inaudible) delivery systems for HCOs within those geographies where we think there could be some value of providing these basic healthcare services in those great access points that Walmart has.

This will be a joint venture.

We are the majority holder of ownership in that joint venture.

We have not provided visibility or guidance of how large this will be.

But we are hopeful that this year will be off to a good start and we will share more in due course as we get into it.

The second part of your question, as we said when we announced Safeway, Safeway was an excellent relationship.

We are proud of what we have done.

We are halfway into what we believe we can realize, the 100 stores, we've got another 100 to go to get to 200.

What we are doing with Walmart we think is complementary.

And every one of the retail strategies that are -- retail companies that are in our space have a different strategy.

So we continue to enjoy a nice good working relationship with CVS as a way of example.

We believe Walgreens has a different strategy as well.

And what we will do with Walmart and what we will do with Safeway, we believe there are other ways we can work with other retailers that could be complementary to what we've agreed to do with these two that we've announced so far.

And just to add to that, Ricky, the impact this year is immaterial.

I mean as you can imagine, it's 15 stores where we're really just going to be ramping up over the balance of the year.

The value creation is well in front of us and it goes beyond just having a blood draw center.

It really is those additional services that Steve talked about.

So, Walmart certainly has the foot traffic really into people every day.

We have not only got the ability to do the laboratory testing but, as Steve mentioned earlier, we've got the on-call specialists that actually do a lot of in-home assessments, biometrics and things well beyond laboratory testing that can supplement our ability to provide additional services.

So, more to come on Walmart, it's not exclusive.

We mentioned that the arrangement with Safeway was not exclusive.

There are many, many retail centers available; even though we have over 2,000 patient service centers, approximately a little over half would kind of be candidates for a retail [outlook].

So it wouldn't be all of our patient service centers.

And so, if you look at 1,000 plus potential patient service center opportunities certainly between Safeway and Walmart and potentially somebody else, we are going to barely cover a small portion of their footprint.

So this is not looking at locking up and excluding other people.

It's really just partnering and finding a way to get more efficient on our capital deployment and where we locate our phlebotomists and other services.

Thank you.

And one follow-up just on your second half guidance.

So when we look at the contribution from acquisition, is it fair to say that second half acquisitions will contribute around 100 basis points?

And if so, it seems that you are looking for an acceleration in organic growth rate in the second half of the year.

Based on our back of the envelope second half it's around -- over 3% top-line growth.

So are we in the ballpark?

And how do you think about -- where is the acceleration on the organic side is coming from?

Right, so yes, Ricky you are correct.

The increase in guidance on the revenue side is almost exclusively from M&A.

While we are very pleased with our organic revenue performance for the first half, it's certainly not out of our original guidance range.

So the increase in revenue guidance is really driven by the deals.

As I mentioned on the earnings side, we actually feel strongly enough in the first half that there is some organic impetus in the increased guidance.

And then the other piece is really around the stock-based comp reducing our effective tax rate in the first half.

M&A or new deals is not expected to contribute anything meaningful on the EPS side in the back half of the year.

So it's really driven by organic health and by this tax benefit.

And then back to the question I was asked earlier about assumptions for the back half.

Right now that guidance assumes a tax rate that is more in the going in rate in the high 30s.

We shared that there was $0.06 of excess tax benefit last year.

That was in our original assumptions and guidance for this year.

Obviously we've exceeded that greatly in the first half, but I am not counting on any extraordinary excess tax benefit from stock-based comp in the back half.

So should that happen and it's not really forecast -- something we can forecast, then that could lower the tax rate [even further].

Steven Valiquette, Bank of America.

Thanks.

Hey, good morning, Steve and Mark.

So most of my good questions have been asked already.

But just curious just on that retail strategy.

What is the right number of partners over time just from a retail or co-branding perspective and is that critical?

Is this a situation where you might be comfortable having 5, 10, retail partners over time or do you want to keep the number smaller to maximize the co-branding awareness?

Well, we are working our way through that.

The Safeway relationship is different than what we are going to do with Walmart and, as I said, we already have working relationships with some other retailers and I mentioned CVS and Walgreens.

Different strategies, all these have different strategies.

And frankly I think we'd like to have a handful of strong national brands that we'd work with.

We'd like to make some progress with those before we expand too broadly.

So we have two now and working relationships with others.

So we are entirely focused on executing against what we said we would do with Safeway.

We feel good about that.

We just launched this new relationship with Walmart.

We want to make sure we make progress in 2017.

And as far as others in due course we will talk about that as we work with them on their own strategies and how we could be helpful.

But a good way of thinking about this, we started with one, we have now moved to two.

And a handful would be a good number that we can then manage over time to provide what we do and help them with their health strategy.

By the way, were you ever in deep discussions with Walgreens?

You just mentioned Walgreens and CVS, but was that one kind of a tossup at the end on who would be the partner?

Or is there still a possibility you could still also partner with Walgreens in addition to the lab provider based in North Carolina?

Yes, so we are open to working with others.

We want to make sure that what we do it doesn't in any way contradict what we are doing with some other partners.

But as you know, Walgreens continues to broaden their health preference.

They have a working relationship, as you know, with MedExpress.

MedExpress will provide healthcare services and that strategy will change over time.

As you know, most of these retailers work with all different brands no matter what category and laboratory services are no different.

So they are selling all different brands in their stores so therefore they are open to different brands.

And we believe that the strategy, it's good for us to think about how we could team up with different people in the ecosystem in healthcare and every one of these players has different strategies.

So we think there is an opportunity there as well.

Thanks, operator.

Okay, so that concludes our day.

We had a strong first half in 2017.

We look forward to continuing to meet our commitments by executing our 2 point strategy, which is to accelerate growth and drive operational excellence.

We appreciate your time on this call and we hope you have a great day.

Take care.

Thank you for participating in the Quest Diagnostics second-quarter 2017 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 866-380-8120 for domestic callers or 203-369-0352 for international callers.

Telephone replays will be available from approximately 10:30 a.m.

Eastern Time on July 25, 2017 until midnight Eastern Time on August 8, 2017.

Goodbye.