奎斯特診斷 (DGX) 2018 Q3 法說會逐字稿

Welcome to the Quest Diagnostics Third Quarter 2018 Conference Call.

At the request of the company, the 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 the call in any form without the written consent of Quest Diagnostics is strictly prohibited.

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

Please go ahead.

Thank you, and good morning.

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

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

Actual results may differ materially from those projected.

Risks and uncertainties that may affect Quest Diagnostics' future results include, but are not limited to, those described in our most annual -- 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.

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

As a reminder, adjusted diluted EPS excludes excess tax benefits associated with stock-based compensation.

Additionally, net revenues and selling, general and administrative expenses have been restated for the basis of prior year comparisons to reflect the impact of the new revenue recognition standard that became effective January 1, 2018, and was adopted on a retrospective basis.

Under the new rules, the company now reports uncollectible balances associated with patient responsibility, which we will refer to as patient concessions as a reduction in net revenues, when historically these amounts were classified as bad debt expense within SG&A expenses.

Now here is Steve Rusckowski.

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

Well, this morning, I'll provide you with the highlights of the quarter and review progress on our 2-point strategy, and then Mark will provide more detail on the third quarter performance and give you an update on our outlook for 2018.

We grew revenues and continued to deliver strong earnings growth in the quarter.

Revenues were up nearly 2% despite the effect of industry headwinds we called out last quarter.

Reported EPS was up more than 32% from 2017.

Adjusted EPS grew more than 25%.

As you saw, we have revised our full year revenue guidance to reflect lower-than-expected revenue performance this year, which was affected primarily by 2 factors.

First, as we detailed in the second quarter, we faced headwinds in the areas of prescription drug monitoring, hepatitis C and vitamin D testing.

While we made some progress, these testing areas continue to impact revenue growth in the third quarter.

Second, in the third quarter, we also saw a rise in patient concessions, which Mark will touch on later.

Now before we get into the details of the progress we've made in the quarter, I'd like to provide context of some market trends, starting with an update on PAMA.

Last month, a U.S. District Court judge dismissed on narrow procedural grounds our trade association's lawsuit over the implementation of new Medicare pricing for lab tests under PAMA.

The court's opinion, however, acknowledges that ACLA's arguments on the merits raised important questions about HHS' actions.

This is, of course, disappointing for our industry and it is potentially harmful to Medicare beneficiaries.

Last week, ACLA appealed the District Court's decision, demanding a hearing on the merits.

At the same time, the industry continues to pursue a legislative fix.

Additionally, CMS and our industry continues to work together on addressing the current PAMA issues.

So as we sit here today, PAMA is having an impact on Quest and the rest of the lab market.

Increasingly, smaller independent labs and hospital outreach labs are struggling financially due to lower Medicare reimbursement, not only directly due to PAMA but also under contracts with pricing indexed to Medicare.

So multi contexts of the business, setting PAMA as a factor, and we're continuing to plan and manage our business as if PAMA is here to stay.

At the same time, there has been increasing scrutiny of the wide variation in health care pricing in the popular press.

Consumers and employers, who pay for most of the health care, are becoming more price-sensitive.

Last month, the Wall Street Journal reported that health plans that excluded costly providers can be much less expensive for consumers and employers.

Quest offers a great customer experience.

And coupled with our scale and efficiency, it makes us an exceptional value in the market compared to hospital outreach laboratories, which often charge 2 to 5x more than Quest.

So in short, there are 3 reasons we believe the market would continue to consolidate, and therefore, affords us an opportunity to accelerate growth.

First, reduced reimbursement through the Medicare Clinical Lab Fee Schedule is beginning to have an impact on the laboratory industry.

Second, health plans are embarking on a new strategy, looking to national labs to help with drug efficiency and laboratory spending.

And then finally, consumers and their employers are more attuned to the variation in lab and health care pricing.

Turning to the third quarter.

I'll review our execution against the 5 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.

We announced 3 acquisitions in the third quarter, which strengthens our capability in several key areas.

First, our acquisition of PhenoPath, which is a strong -- which has a strong record of innovation, provides several capabilities that complement and extend our own, particularly in the area of pathology and molecular oncology.

It also expands our presence in the Pacific Northwest.

Our acquisition of the U.S. laboratory services business of Oxford Immunotec will expand our capabilities in infectious disease diagnostics.

It will also bring us greater choice to physicians, who seek innovative blood-based tuberculosis and tick-borne disease testing.

And then finally, our acquisition of ReproSource expands our expertise in reproductive diagnostics.

Since the third quarter close, we have also announced the acquisition of Hurley Medical Center's outreach operation in Flint, Michigan.

In this case, the seller indicated reimbursement pressure as a factor in deciding to exit the business.

Additionally, we acquired the assets of Provant Health to strengthen our employer wellness business.

So the acquisitions we've announced and will close in 2018 already position us within our 1% to 2% revenue growth target for next year.

And as I indicated, PAMA should further contribute to our strong M&A pipeline.

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

We continue to -- our preparation to take advantage of our opportunity to offer a first-class customer experience for UnitedHealthcare providers and their members when we become the in-network lab provider on January 1. Our commercial team has already been proactively reaching out to educate physician customers about their ability to use Quest for their UnitedHealthcare members.

The revenue opportunity presented by the United contract will ramp over time.

We do expect some portion of this new work to transition quickly.

However, the larger opportunity to help UnitedHealthcare drive lower lab spend is expected to be realized over the next several years.

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

Our announced acquisitions in the quarter mentioned earlier will enhance our capabilities in advanced diagnostics, especially in the areas of Women's Health and infectious disease.

We continue to see strong growth in prescription drug monitoring in QuantiFERON tuberculosis testing.

Additionally, this quarter, we saw solid growth in Cardio IQ as well as testing for sexually transmitted diseases.

On our second quarter call, we highlighted several market headwinds that impacted our growth in prescription drug monitoring, hepatitis C and vitamin D testing.

We saw modest improvement in the third quarter.

For example, PDM denials have steadily improved each quarter this year.

We have also started to lap hep C headwinds we began to experience roughly a year ago.

In aggregate, the issues we have mentioned related to these 3 tests contributed approximately 100- basis points of headwinds this year against our original revenue expectations.

We continue to make progress executing the fourth element of our growth strategy, which is to be the provider of choice for consumers.

Plus Walmart locations continue to see increased traffic and generate great feedback from our customers.

In fact, for locations open more than 6 months, we've seen an uptick in volumes compared to the Patient Service Centers they replaced.

We're currently operating in 21 Walmart stores in Florida, Texas and Illinois.

We -- combined with our partnerships with Safeway, we expect to have well over 200 Patient Service Centers in retail locations by the end of 2018.

Consumers continue to embrace our digital experience.

We now have more than 6 million users on our MyQuest app that lets them view and analyze test results, schedule their appointments, see Patient Service Center wait times and then finally, pay their bills.

The fifth element of our growth strategy is to support population health with data analytics and extended care services.

We're seeing continued interest in Quest Clinical Trials Connect, which we launched in June.

This is a new patient recruitment service to help pharm companies and CROs increase the speed of commercializing new therapies.

We're working with several pharma, biotech and CRO companies with this new solution.

The second element of our 2-point strategy is to drive operational excellence.

At the end of September, we launched a new appointment scheduling system for our patients.

This new system utilizes best-in-class technologies to help patients schedule appointments at a convenient location.

In the second week of deployment alone, we saw appointment-related calls into the national customer service center drop by more than 10%.

Our online specimen pickup option has been a big hit with our physician customers, with nearly 20% of routine pickup requests now handled electronically versus making a call.

Physicians have given us positive feedback on the ease, efficiency and simplicity compared to waiting on the phone and writing down those confirmation numbers.

And then finally, our Invigorate program remains strong, and we're on track to over-deliver on expected savings in 2018.

Overall, we continue to make excellent progress on our operational excellence strategy.

And our leaders will be sharing more insights, successes and plans with those that attend our Investor Day, which will be held on November 29 in New York City.

Now let me turn it over to Mark, who'll take you through the financial performance.

Mark?

Thanks, Steve.

Consolidated revenues of $1.89 billion were up 1.8% versus the prior year.

As a reminder, we now report patient concessions as a reduction of net revenues instead of as bad debt, due to required change in revenue recognition accounting.

Revenues for Diagnostic Information Services, or DIS for short, grew 1.9% compared to the prior year, driven by acquisitions and an easier compare due to the hurricane effect last year.

Volume, measured by the number of requisitions, increased 2% versus the prior year.

Excluding acquisitions, volumes grew approximately 70- basis points in the quarter.

Revenue per requisition in the third quarter declined by 80- basis points versus the prior year.

As a reminder, revenue per req is not a proxy for price.

It also includes a number of variables such as unit price variation, business mix, test mix and tests per req.

During the third quarter, unit price headwinds remained consistent with our expectations for the full year, with a headwind of approximately 50- basis points from PAMA and approximately 100- basis points from all other factors.

As we've shared previously, Medicare reimbursement pressure will increase in 2019 due to PAMA.

Other mixed elements remained positive in the quarter and partially offset the impact of reimbursement headwinds as well as growth in our Professional Laboratory Services business.

Reported operating income for the quarter was $304 million or 16.1% of revenues compared to $298 million or 16.1% of revenues last year.

On an adjusted basis, operating income was $311 million or 16.5% of revenues compared to $325 million or 17.5% of revenues last year.

The decline in adjusted operating margin was due to several factors, including: investments related to tax reform savings, which had a 60- basis point adverse impact on operating margin; integration efforts of acquisitions, which take time to deliver full margin contribution; and the impact of PAMA.

Reported EPS was $1.53 in the quarter compared to $1.15 a year ago.

Adjusted EPS was $1.68, up approximately 25% from $1.35 last year.

During the quarter, patient concessions previously recognized as part of bad debt, were up as a percentage of revenue year-over-year.

We continue to see an increase in patient revenues as a percentage of total revenue due to the ongoing trend of rising patient deductibles and an uptick in uninsured patients.

Cash provided by operations year-to-date was $905 million versus $852 million last year.

Capital expenditures year-to-date were $232 million compared to $170 million a year ago, which is in-line with the higher CapEx spend planned for 2018.

Now turning to guidance.

We are updating our outlook for 2018 as follows: Revenue is now expected to be approximately $7.62 billion, an increase of approximately 3% versus the prior year; reported EPS to be between $5.57 and $5.64 and adjusted EPS to be between $6.53 and $6.60; cash provided by operation continues to be approximately $1.3 billion; and capital expenditures continue to be between $350 million and $400 million.

Our updated guidance reflects the industry headwinds we've experienced versus our expectations in 2018.

While we aren't prepared to share 2019 guidance, there are some elements I'd like you to keep in mind.

First, we have a significant opportunity to grow with our new UnitedHealthcare contract.

However, moving in-network comes with lower reimbursement versus the out-of-network services we provide to UHC patients today.

Second, as Steve mentioned earlier, we are already on track to deliver 1% to 2% revenue growth from M&A next year.

Third, as you are already aware, the impact from PAMA is expected to increase from a headwind of approximately 50- basis points this year to more than 100- basis points in 2019.

And finally, we expect approximately 150- basis points of reimbursement pressure beyond PAMA from our third-party payers, which includes the impact of becoming an in-network provider for United and other health plan contract changes as well as hospitals and physicians that we bill directly.

After considering all these headwinds and tailwinds, we are well positioned to grow revenue and earnings in 2019.

We look forward to sharing more detail with you at Investor Day.

I will now turn it back to Steve.

Thanks, Mark.

Well, to summarize, revenues grew and we delivered strong earnings in the third quarter.

We're excited about our M&A activity in the quarter and are-well positioned for a top and bottom line growth in 2019.

Finally, we look forward to seeing many of you at our upcoming Investor Day on November 29.

Now we'd be happy to take any of your questions.

Operator?

(Operator Instructions) Our first question comes from Ross Muken with Evercore ISI.

So it seems like one of the incremental updates Q-on-Q was sort of the concept of patient concessions being an incremental headwind.

Could you just give us a little bit more color just sort of how that's playing out and why that sort of incrementally was sort of a surprise that popped up?

And then as we think about sort of into next year, just a little bit more color.

I know you don't want to give guidance on sort of the headwind you were expecting vis-à-vis sort of some of the network pricing pressures inclusive of sort of the out-of-network United business getting repriced.

Just kind of put the full picture together on what you were trying to get across in maybe those 2 points?

Yes.

Ross, so on patient concessions, we have a larger percentage of our revenue coming from patients.

And as we've shared in the past, the uncollectability -- so it's bad debt for other sources, what we call patient concessions from patients -- proportion is much, much higher from patients than it is from any other source.

So we have almost 0 bad debt from all our other revenue sources.

So really, what was previously bad debt and now is patient concessions is largely a factor of collecting bills from patients.

And again, it's -- a little bit of it's from the uninsured, but most of it really comes from patients who have insurance that were in their deductible and so they're paying a large proportion or not all of their medical costs or it's from their coinsurance.

And so as that mix changes, unfortunately, even though we're improving and continue to improve the bad debt rate or patient concession rate through some of the things we've done such as putting in our Easy Pay in our -- in-office phlebotomist and also in our Patient Service Centers, also giving more transparency to price ahead as we talked about with our transparency tool.

Large amount of payers so patients know the costs, know their responsibility ahead, that gives us a chance to collect upfront just because of mix that -- than a headwind.

And as you know, there will be an accounting change.

It's not just a headwind to operating margin, but it's a headwind to revenues as well.

To your question why we couldn't see this coming.

I mean, we really don't know until we start doing collections.

And so given the cycle itself of performing the service, then billing the payer, potentially having some back-and-forth claims on the adjudication and then ultimately billing the patient and receiving our collectability, it takes some time.

And so we obviously don't know of any definition of what's driving this.

But when you look at some of the recent information that's come out from several sources around deductible amounts are actually going up on average, so patients are paying a greater proportion of their health care, especially the patients that use a lot of our services because a large majority is for healthy patients who go to the physician for a regular checkup.

Therefore, we believe that that's a factor.

And then the second one, there has been a small increase in the number of uninsured patients that we're serving.

Obviously, we don't know whether that was driven by some changes in the Affordable Care Act recently or what's driving that, but we definitely have seen that.

So that's on the patient concessions.

On the pricing, that's what I was trying to do was to give you all the moving pieces.

So when you look at it in totality, obviously, we're looking at a very attractive volume opportunity from network access with United.

And it does come with a lower price.

It comes to more of a market price for in-network laboratories.

So it's a good price, but it is lower than we were being paid previously.

We just wanted to make sure people have that understanding in their models.

And then the other price, which we talked about it being 100- basis points or less, will continue.

A fair proportion of that is not from third-party payers.

It is coming from a very competitive hospital market and also from physicians where we client-bill or directly bill that physician and they bill the third party as opposed to us billing the third party.

So we wanted to make sure that people understood all the dynamics that are driving price.

So when you add all those pieces up, you said PAMA is going to be approximately 100- basis points, and we'll have about 150- basis points from other sources in 2019.

However, given the M&A pipeline that we have and the deals that we've already signed and have closed recently along with the access and continued improvements in some of the market headwinds that are hitting competitors as well as we -- as I ended that section, we're very confident in our ability to grow revenue and to grow our earnings in 2019.

And I'll shed some more color on that at the Investor Day.

Yes.

And this is something -- on the patient concession piece is that -- I'm reminding everyone that close to 2 years ago, we teamed up with Optum and UnitedHealthcare around our revenue cycle management or billing operations.

So we're working hand-in-hand with Optum on what we could do to affect bad debt as well as denials.

We have really enjoyed the working relationship.

As a matter of fact, this week, I'll be with that team.

We'll talk about what we're seeing and how they can help us here as well.

So that relationship continues to be strong and that's going to help us as there's more and more pressure on this side of our business.

And maybe just quickly, on the offset side, you had some incremental investments you made this year that offset some of the tax benefit.

And there's also the potential to maybe push back a bit on the supplier side.

I guess, how are you thinking about those are the pushes, the pulls that you have tried to maybe recapture some of that margin you're seeing hit by both PAMA and the other boards.

I'll take the beginning of this, which is related to investments.

We continue to make those investments we think are prudent for the capacity we're going to need, given what we anticipate as volume increases in 2019.

And this is as we'd expect at the real granular level, thinking about where we have presence, where we're going to pick up lives with United, and therefore, where we'll pick up some share.

So that's happening, and it's in our numbers.

Second, as we continue to honor our commitment to our employees, paying out a bonus that'll come up in November.

That is an investment this year in our employees.

We feel good about making sure we have a good workforce that feels good about working at Quest and that continues.

And then finally, the opportunity to continue to grow the business in the 5 growth strategies that I outlined continue to be a promising opportunity for us as we come out of this year and we enter 2019.

So none of that is changing.

We're making excellent progress in all of those elements.

Yes.

So Ross, when you walk through those 3, the bonus was a one-time bonus, so that's not going to repeat in terms of the investments for network access expansion.

Those become cost of sales.

So when you're adding phlebotomists, when you're adding couriers, adding people in the laboratory, adding patient service cross-centers, then all of that is investment ahead, but then it becomes part of cost of sales.

And then finally, on the other investments that Steve referenced, we'll make those decisions along with everything else we decided in terms of long-term, short-term results and also affordability as we get into that year.

And of course, I'll turn it over to Steve on the most important piece.

Yes.

You asked also about the offset of working with our providers -- excuse me, our suppliers.

And yes, this has all been an ongoing approach we've had with our Invigorate program.

And as I mentioned in our prepared remarks, we exceeded our goals for this year.

Part of that is what we do with our suppliers.

Our suppliers are well aware of what's happening with PAMA.

As a matter of fact, they're working with us on the legislative solution.

This is through the AdvaMed organization, which is the device trade association.

So they're actively working on this with us and are very much aware of the pressure there will be on this industry.

And beyond what we do with our suppliers, we continue to look at efficiencies.

And we hope that many of you will come to our Investor Day because we'll be outlining more of the opportunities we see beyond 2018 into '19, '20 and '21 with more efficiency gains.

Because as we shared over the past several years, even though we did hit that $1.3 billion goal, we see more opportunities in front of us to continue to run a higher quality, more efficient operation going forward.

So we look forward to you joining us to hear more about that.

And just very quickly, 2 of the items that Steve referenced in his prepared remarks about appointment-related calls dropping by more than 10% and specimen pickups being ordered online versus calls.

Those are part of the efficiency.

And obviously, we expect to continue to reduce the amount of phone calls we get and actually drive even more efficiency going forward.

Our next question comes from A.J. Rice with Crédit Suisse.

I figured maybe I'll ask about the retail initiative.

I know Walmart recently had an Investor Day where they talked about the 15 locations that you worked with them on expanding to the Midwest and envisioning over 100 locations ultimately in place.

Any comments you guys have about timing of that?

And then also I know you're working on some pilot stuff with Aetna, CVS, any update on that?

And then how much is retail?

At this point, is it enough to move the needle in terms of its contribution to revenues?

How would you describe where you're at on that?

Yes.

Sure.

First of all, as I mentioned in the script, we continue to add stores.

We're happy with the progress there.

We're at 21 stores now, and it continues to build.

And I'll tell you that, that number will be much higher than that by the end of this year.

And we focused on the big states of Florida and Texas.

And then also, as I said, we moved into Illinois as well.

So there will be other states beyond those throughout the rest of this year.

So that continues to build.

So what you heard from Walmart is aligned with our view.

Second is the experience has been quite good.

It's been good for our patients.

Those patients are also Walmart consumers.

Walmart likes the volume in their stores.

Our phlebotomists like the experience as an employee serving their customers better.

And in fact, when we look at the volumes that we see in those sites that have been open long enough we think it actually does have an effect on our market share within that geography.

So all around, a good presence.

But we're not stopping there.

The opportunity -- we talked about continuing to work with this joint venture with Walmart is how we provide other health care services.

In some of those locations -- and frankly, we're detailing that out with Walmart and you'll hear more about that.

And we hope to provide more color around those services at our Investor Day in November.

And then equally, what CVS and now with the planned merger with Aetna will do with their strategy is a continuation of work we've done with them in the Minute Clinic.

And we're hopeful as well as they continue to work on those integration plans with Aetna, given our great relationship with Aetna, great relationship with CVS, they too see an opportunity with the brick-and-mortar they have and with some of our capabilities of providing other basic health care services.

So when we come to Investor Day, what we'll do with you -- what we will do is walk you through what we call our diagnostic services, which includes how we use our data and how we use the services and capabilities of Quest to help bend the cost curve.

And some of that will be done with our Walmart joint venture and some of it will be done with other partners like CVS.

But we do believe it's a great opportunity for growth in the near-term, but also for the long-term because we're just getting started, frankly.

So more to come on that, and we hope that you show up for the Investor Day in November.

Our next question comes from Patrick Donnelly with Goldman Sachs.

Maybe just on the 3 headwinds: PDM, hep C and vitamin D. Headwinds persisting here throughout the end of the year.

Can you maybe just update us on the trends, the visibility on that turning around?

I'm just trying to figure out how much that could leak into 2019 as we think about numbers kind of going forward for next year?

Sure.

So on the hep C, as we mentioned, that is starting to mitigate because we've lapped year 1 -- the pan-genic drug started to take significant share.

So at some point, most of that business goes away or it stabilizes or maybe even the other drugs make a comeback.

I know there's some pricing competition in that area that might change the competitive landscape.

So that should not continue to be significant into 2019.

On PDM, I want to be clear, as Steve mentioned, it is continuing to be a growth engine for us.

Unfortunately, we're doing more volume than we are revenue.

So revenue is growing, but volume is growing faster and that's because of some of these denials.

I can't put a stake in the ground at this point at how quickly we're going to address that.

I guess, the important thing is that even though that headwind may or may not get addressed in the near-term future, as Steve also referenced, it's stabilized.

So we're not growing in denials, so we're reaching a point where the denials, while still much higher than it should be and much higher than we find acceptable, it's not going to be continuing to be a year-over-year headwind.

And certainly, if we make some progress there, it could actually be a tailwind moving forward.

And then on vitamin D, I'd say it's still early.

As we mentioned, we still believe that a number of these denials are because of miscoding based on a long history of physician coding practices and not necessarily denials due to patient eligibility.

And so how many of these things will be rectified when the physician community understands, for instance, I have an obese patient who's not eligible for vitamin D and I need to use the appropriate code versus now this was just a screening.

And now with others including as we mentioned CIGNA starting to apply Medicare-type approaches to their coding that this action will be a denied test.

But at some point, again, as you mentioned, you get that behind you.

And it will all continue to be headwind once the market adjusts and patients are appropriately getting prescribed with the right diagnosis code.

And then vitamin D continues to move with the market as it had been doing historically.

So just to reinforce what we said in the script is that we add the 3 together, we looked at our expectations for this year and all it has affected us, it's about 100- basis points.

And that's our business.

And I'll just remind everyone, we talked about this before, we are the market leader in prescription drug monitoring.

So we're very strong in that category, continues to grow.

But we clearly have more exposure than a lot of people in that space.

And so therefore, any effects of those 3 have a bigger impact on us.

So the 100- basis points is our estimate.

And as Mark said, we continue to work this.

We started working this in Q2.

We made some modest progress, as I said, in my remarks.

We will continue that throughout this year.

And then again, as we start to lap it, we'll have less of an impact year-on-year.

But different than what we expected, but still growing in these 3 categories.

And just to add to that, Steve mentioned that those 3 had about 100- basis point negative impact versus our expectations, and then the patient concessions were another 30- basis points.

Okay.

That's helpful.

And maybe just a quick one on the payer shifting with United.

You've talked about a few different buckets of customers just framing that opportunity.

I guess now that we're a few months in and you've done more work on the market on United itself, what fragment of that market do you think you're kind of viewing as early adopters shifting quickly in 2019?

Just trying to frame that opportunity.

Yes.

Well, the business opportunity we have is those customers of ours that have the majority of their laboratory testing coming to us already, but a lot of times at another laboratory because we're not in-network with United.

And so those are the accounts we've already knocked on their doors.

We've shared with them the great news that we're going to be in-network starting January 1. We've worked on what we need to do, if anything, in terms of IT inspiration to get those orders in-house.

And those will come to us early in 2019, those types of customers.

The second group of customers that I'll broadly put in this category are those that might have multiple laboratories and our job is to make sure we gain share.

And given the access that we have starting in 2019, which is really remarkably better, we believe there's also an equal opportunity for us to gain share beyond those great customers we have but for all customers to pick up share, particularly in some of the large states.

We talked about this.

When you look at Florida, Texas, California and New York, our access is going to be north of 95%.

So great access in the marketplace, great value proposition, quality of service and also pricing.

We believe we have an opportunity to pick up share in those accounts.

Next question comes from Derik De Bruin with Bank of America Merrill Lynch.

A couple of questions.

One, first one, housekeeping.

Did -- if I missed it, my apologies, but what's the all-in organic revenue growth number for the quarter and the specific contribution from M&A?

So the revenue growth was pretty much all on M&A in the quarter.

Got it.

Okay.

And if you -- just 2 follow-up questions.

I guess, did your volumes get affected this quarter by some seasonality in consumer genomics testing?

I know that's been a tailwind for the business.

I know there's some -- this is a weak quarter for that one.

And then follow-up on that one going to be just on deal valuations.

Are things coming in?

Yes.

So we didn't experience any meaningful change due to seasonality in the quarter around genetic testing.

And then -- sorry, your second question, Derik?

Basically, just valuations on deals and the fact that people -- people, are they going to get a little bit more attractive?

Yes.

No, I think the valuations really haven't changed materially.

Obviously, you've got to price in the PAMA headwinds, although we are hopeful that we can positively impact that at this point.

We're pricing things as if those PAMA cuts will happen.

That's the way we're valuing things.

So therefore, if anything, valuations have come down and the seller or potential seller recognizes that as well.

Yes.

And just to -- one of your question around consumers genetics.

Sorry.

And just to remind everyone, we do have a relationship with Ancestry, and we provide genotyping for their ethnicity offering.

It's a modest portion of our business and continue to get growth, but it is modest for us.

We're optimistic about the opportunities with the Ancestry because we still believe there's an opportunity for us to work together with them around building awareness overall, around the importance of everyone knowing their family health history, and that's an opportunity for the future.

But just with the context of in terms of consumer genetic testing, it's a small portion of our business with modest growth this quarter.

Our next question comes from Jack Meehan with Barclays.

I wanted to dig in a little bit more on the volume commentary.

So I think you mentioned that it was around 70- basis points when you excluded M&A.

How much did weather contribute to the year-over-year growth?

And I guess, just my math would suggest that the underlying utilization was down year-over-year.

I know you've talked about some of the issues.

But what's your level of conviction that, that can improve in the fourth quarter, into 2019?

So most of the fourth quarter "improvement" is really coming from the M&A we did, so that's giving us some lift.

We don't expect a step-change improvement in utilization, what we call same account volumes.

And then in terms of weather, we had some impact but it wasn't material enough to call out.

Certainly, it was a slight headwind to us in the quarter.

Weather -- sorry, weather was a headwind?

Yes.

Sorry, I thought you meant the hurricanes this year.

So we talked about the fact that versus last year we had a favorable compare.

I thought you were asking us whether the hurricanes that took place in the Carolinas in the third quarter were significant factors.

So we did call out that we had a favorable compare, and it was about 150- basis points in the quarter.

But there was a slight negative impact this year from hurricanes in 2018.

Great.

And then just as my follow-up, I wanted to see if you can elaborate a little bit more on your pricing comments at the end of the script, Mark?

Just to understand the PAMA stepping up, but the 150- basis points beyond PAMA.

I know in the past you've talked about 100 bps of normal unit price.

Is that 50 bps kind of incremental related to United?

And then as you size it all up, just do you think mid- to high- single-digit earnings growth is doable for 2019?

Yes.

So the 50- basis points isn't tied directly to United.

But certainly, directionally, United is one of the major drivers there.

I'm sure you're familiar with the way pricing works.

So we had significantly higher reimbursement from United as an out-of-network provider than with typical in-network based on what we negotiated with United.

So yes, that's a big driver that's not entirely United.

And at this point, I'm not going to give any guidance for 2019.

So what I will reconfirm is that the Investor Day outlook that we provided, having a 3% to 5% top-line CAGR and a mid- to high single-digits EPS CAGR from 2017 through 2020, we still stand by that.

Obviously, we've got 1 full year and 3 quarters of a year behind us, and when you look at our guidance, it still puts us within that range.

And so what we're saying is that we look to the next 2 years, we're certainly still confident that we can deliver with the net CAGR range without giving any specific guidance for a given year.

Yes.

Just to reiterate, we will grow top-line and bottom-line in 2019.

We've said that.

What we also said is that the M&A that we have already shared will get us comfortably in that 1% to 2% growth in 2019.

You couple that with the United opportunity that we've been speaking about gives us confidence in our ability to say, yes, we'll grow top and bottom line next year.

Your next question comes from Bill Quirk with Piper Jaffray.

First question, Mark.

Just to -- not to beat a dead horse here on the 150- basis points that you signaled for 2019, but is any of that related to additional plans kind of following or trying to follow some of the PAMA rates down?

I know historically you've indicated that you don't have a lot of contracts that are tied to Medicare, but just trying to tease any nuances out here.

No, it isn't.

There are some small changes in some Medicaid rates that states have made, specifically Ohio.

I mean, you can argue whether that was in any way related to PAMA.

I think they actually had a budget issue.

They wanted to fund some women's health initiatives and they slammed the laboratory reimbursement rates.

There certainly was some dialogue around where Medicare was going in some of the states.

Not many of them look at Medicare as a signal for where the Medicaid rates should be.

But in terms of commercial plans, no.

There isn't any incremental headwinds because the commercial plans are trying to take advantage of PAMA.

In fact, as we've shared, the dialogue we've been having with the commercial plans is they see that as an issue for them because the more pressure we get from other sources, the more we need to get from them.

And therefore, it's in their own best interest not to feed that because they know in the next collection period that the potential recalculation could be even more severe if we give lower commercial rates.

And so they're very sensitized to that, and I can assure you that we are holding very firm in those discussions and make sure that they understand the world where you have a significant difference between commercial rates and governments, and certainly Medicare rates is going to go away.

The whole intent of PAMA is to move the rates to a market-type rate, which says that we need to talk about other ways to create value beyond price and that's what we're doing.

Increasingly, we're walking in and talking about all the other ways we differentiate ourselves positively that they may not fully appreciate and some of the things that Steve highlighted in his remarks around the patient experience, the technology we're putting in our Patient Service Centers, the ability to build a relationship through the MyQuest app, schedule appointments, make things easier.

Because at the end of the day, the payers want their patients to get the appropriate and necessary testing done, and so therefore, that's definitely a good thing.

It's also our data, the way we feed data and the more critical mass we have, the easier it is on them to do the analytics in a world where data is increasingly important for population management.

So there's a lot of ways that we talk about our value proposition.

And then finally, it is, as Steve mentioned, a world where they recognize that they have a cost curve.

They need to start working with best value providers, and certainly, we're one of those, and starting to move volume out of a high cost, less attractive value providers into the better laboratories.

And that's the way they're really going to save money and drive better value for their members versus continuing to look to extract price out of those who already have the best prices in the market.

Question comes from Ricky Goldwasser with Morgan Stanley.

So one question that I have.

If we go back, Steve, to your comments about the UnitedHealthcare converting from out-of-network high price to in-network lower price, I think something that would be very, very helpful for us as we think about the opportunity next year and longer term is if you can give us some sense of your share as an out-of-network provider with United.

And I understand that you might not be able to give us the United data.

Maybe some sort of a framework for us to think about.

What type of share do lab typically have in an out-of-network relationship?

Yes.

So let me do this.

I'll remind many of you on this call of what we talked about of the opportunity we see with United, which if you go back and you recall what we've talked about the opportunities that many of the health plans see is by working with one of the nationals.

As ourselves, we can do a better job of helping them reduce their laboratory costs.

And what we talked about with United, to frame the opportunity in front of us is we've talked about United -- estimates that they spend anywhere from $7 billion to $8 billion in laboratory spend a year, and most people have estimated that the nationals may be providing about $1 billion of that.

So therefore, there's a big opportunity as they think about how they do a different job and a better job of serving their membership with working now with Quest and at least one other national provider to reduce that spend.

So when you look at that $1 billion versus the $7 million or $8 billion, you see the opportunity in front of us.

And the biggest opportunity in the short run is, as I said earlier, is to go after those great Quest accounts.

We'll do that early.

But this is why we believe that this affords us a nice growth opportunity not just for '19 but for '20 and '21 because it's going to take some time to gain that share and move that work away from more expensive labs.

And this is true for United but I'll also argue we'll be doing this for other health plans as well.

So it's an opportunity to continue to pick up share.

So we will, again, be coming back together in November.

We'll help provide more visibility to what we believe the opportunity would be within reason.

But hopefully, at least those remarks will help kind of size the opportunity in front of us given where we sit today.

Ricky, it's a little more complicated being with United and Quest because we had some in-network volumes.

As we shared, historically, in our pathology business, we had a couple of states that have been in-network.

And then obviously, what you're trying to look at a model where out-of-network labs share within large national payers.

In fact, we had such a strong business with United a decade ago.

We never lost all of that because of the loyalty of some of the providers.

And the fact that they could look even out-of-network, our prices were still better than hospitals and many others.

So it's a little bit different than if you want to look at other payers and say, hey, how much volume is there out-of-network?

I think Quest had a disproportionate share of volume relative to what other labs might have out-of-network, but it's still not huge because you are an out-of-network provider.

Certainty, when they have fully insured patients, we don't get paid at all.

So it's only the administered plans for that when out-of-network benefits where it made sense for us to keep that volume and continue to try to compete.

Understood.

So just as a follow-up, and I understand that you had more share than a typical out-of-network.

But it would be really helpful for us if you can give us a data point of what a typical out-of-network is?

At least it will help us establish a floor from which you can build on.

That's one.

And then the second question that I had is regarding the acquisitions.

Can you remind us how long does it take for an acquisition to reach company margin?

And if you can quantify, what was the negative impact on margin from acquisition integration?

Yes.

Let me answer that, the acquisition question.

We've shared in the past 12 to 18 months.

I'd say on the outreach purchases, they tend to happen a lot more quickly.

They're more simple and straightforward.

It's really just integrating them into our local laboratory, and then the cost of serving those patients is basically the cost of serving all the other patients we currently do in those markets.

So those might even happen a little quicker, in the 6- to 12-month window.

And some of these other, I'll call them, technology acquisitions -- and that could involve site shutdown.

It could be -- involve moving the test menu to multiple locations.

Obviously, it's working through the sales force issues, reimbursement issues and so on and so forth.

So those tend to be on the longer end.

Then you'll notice that a number of the deals that we did in the latter part of 2017 were more like that as opposed to outreach purchases, so we take a little bit longer.

And then on the volume question, Ricky, I know you'd like some great specificity.

And all I can share is that typically, there's tiny share for out-of-network lab in terms of their share volume within a national payer.

And we were not tiny but we certainly were not large.

And just on the acquisition.

Remember, we have this feathering going on that we had a nice slug of acquisitions in 2018.

We're again giving you some perspective on the outlook that we have for 2019 of the acquisitions.

We'll definitely be in that 1% to 2%.

Those '18 acquisitions have another year another under their belt, '19, where we get some of the integration done, that helps us layer that on top of the new acquisitions bringing in '19.

But we're hopeful we have a more regular cadence around that 1% to 2% that you already see in the numbers.

So it comes in, it takes some time to mature with the expiration coupled with the ones that are just showing up.

That's already in the numbers for past years as well.

Your next question comes from Lisa Gill with JPMorgan.

I just want to follow up on a couple of things.

You've talked a lot about revenue growth as we think about '19.

You've talked about having EPS growth.

When we think about some of the efficiency gains, like you think about in '19 and beyond, how does the retail strategy fit into that?

Can you remind us if that is more economically better for Quest versus your own Patient Service Centers?

And two, are you seeing incremental test volume through that?

I just want to better understand how you're thinking about the retail setting as we think about '19, '20 and beyond.

Yes.

So what we said about the retail strategy, it is better -- it's a better location in these sites, so it serves our patients in the market better.

And therefore, it's beneficial to the patients.

It's beneficial to our employees and our partners -- in one case, it's Safeway, in the other case it's Walmart -- are happy as well.

Now with all that, what we've shared in the past from a rent perspective, the cost of using that space, there's not a big difference between the 2. However, we're getting much better space.

Many of our Patient Service Centers that we could collapse are Patient Service Centers with 1 to 2 phlebotomists.

This affords an opportunity to take down those locations and put them into a better location, and that's better again for all stakeholders.

And so it's not a cost savings, but what it provides us is a better quality and better patient experience.

And what I said in my remarks, while we do now have enough data points where we look 6 months of what we close versus what we open, we believe the volumes are better in those locations.

So it is positive financially for us, and it's one of the ingredients of us gaining share.

Now, Lisa, again, this for our core business.

We also believe there's an opportunity for us, particularly with the Walmart JV, to tag on to those physical locations more health care services that we'll be working with Walmart, with local partners, to be able to bend the cost curve for whatever partner we're working with.

So that just affords us another opportunity beyond our core diagnostic service business.

So hopefully that's help you -- helpful.

Yes, just to add.

At least, we have shared in the past that in Safeway, because we leverage some of the overhead, there is some cost savings.

The greatest cost is the phlebotomists, and that doesn't change when we go into a retail setting.

But there is some cost savings despite the fact that the rent generally is somewhat comparable -- smaller space, higher rates for more attractive market and the overall footprint cost, that's relatively the same.

But this is a business with small detail.

So a little bit of cost savings combined with, as Steve mentioned, some volume upside certainly can make a difference, especially if we continue to expand.

And then Walmart as a JV.

So it is different.

It's not just putting a phlebotomist draw center within a retail outlet versus one of our independent Patient Service Centers.

And while we are starting with phlebotomy, we are definitely intending to add more health care services together with Walmart to build their presence within health care, and then as a JV, so therefore, we've got a majority position but we're going to be sharing the economic value creation of that venture with Walmart.

Our next question comes from Donald Hooker with KeyBanc.

I'll just ask one real quick question here, maybe just a little bit more elaboration on the M&A environment.

I know you guys target 100- to 200- basis points of inorganic growth annually.

It sounded like from your comments, just to clarify, you're already there for next year, and we still obviously have a lot of time.

So maybe kind of an update on your acquisition pipeline.

And is there potential for you to potentially exceed that 200- basis points of growth next year?

Yes.

So what we said as what we've announced so far, puts us in that 1% to 2%, which is a good place to be at this point.

We also said that given the environment and given the pressure that we see on hospital outreach operations, we think that's a catalyst we look forward as a nice pipeline.

We just announced another deal of buying an outreach business this week, an outreach activity called -- out of the Hurley Medical Center in Flint, Michigan, and there will be more to come.

So we've got a low share at this point, 1% to 2%, we're comfortably there for next year.

But we do have a funnel that could add to that going into '19.

Our next question comes from Ann Hynes with Mizuho Securities.

So 2 quick questions.

One, obviously, 2019, you said you expect top-line in EPS growth, and that is in the face of 200- basis points of, I guess, incremental pricing pressure.

Can you let us know how much market share gains on the UNH contract and some of the Aetna loss you're assuming on that to get to that?

And I guess my second question would be around cash flow and share repurchase.

Obviously, your stock's very weak today, but it's been down since the last earnings when you had to reduce guidance slightly.

You have a great balance sheet.

You didn't change cash flow.

I guess at what point will go into the market and do some incremental share repurchase?

Sure, Ann.

So first off, let me clarify.

We don't have incremental 250- basis points of price going into next year.

What we talked about was a total of 250- versus something that's more in lines of 150- this year.

So I want to make sure that I'm clear on that.

And about 50- basis points of the increased pricing pressure, PAMA related, and the other 50- basis points related to other things.

In terms of share, obviously, we don't get into that level of detail.

We're very cognizant of the need to retain our [ethicist] list.

We've got people who've been actively working for the last several months, continue to work to make sure we serve those customers appropriately and we retain as much of that Aetna business as possible.

And certainly, at United, as we mentioned earlier, we're very excited about the opportunity.

Steve mentioned, we expect that in some of these very loyalist accounts who would be sending us to United if we were in-network and would have been sending it to us will flip very quickly.

There are those accounts that have multiple providers, and we believe together with our value proposition, all the things we've walked through, which does differentiate us from almost all the other providers in a meaningful way around the patient experience with our app, with certainly the pricing transparency, which is a huge win-win for the physician and the patients to be able to go into one of our draw centers at no upfront, whether something is covered and how much it costs.

There just aren't many labs that can do that, and therefore these arguments around simplicity.

Why do you want to do business with multiple labs?

You've got 5 or 6 labs you send the work through to today, we could do almost all of that, if not all of that.

We've got more lives covered in a given geography.

So you don't have to worry about problems with the patients with high costs out-of-network work.

And we think that's pretty compelling, but that's not going to happen as quickly as the first piece.

And then obviously the third piece is where we don't have business today.

So now we feel very strong with that same value proposition, and we can go in and we can compete more strongly than we could have in the past and flip some of those accounts where we may not have any or very much work at all, but that's going to take even longer.

So this is a multiyear growth opportunity.

It's not all about 2019.

And we have plans in place, and we have strategies to go after each of those, and we're working hard to make sure that, that all comes.

So certainly excited about that and very confident about that.

And just to clarify, that incremental 50- basis points of price pressure next year outside of PAMA, that's primarily going to be coming from the United price headwinds.

Okay, so the total incremental is 50 or 100?

100.

50 from PAMA and 50 from primarily United.

Okay.

And just the share repo question, please?

Yes.

So obviously, I can't talk about any specific plans around share repurchases.

But given the fact that we have announced in our closing a number of transactions this quarter, we're going to be spending a fair amount of cash on those deals, and we certainly are excited about the pipeline coming up.

So at this point, we haven't announced anything specific.

We'll continue to follow our strategy which says with the half of our free cash flow that's not committed to our shareholders every year, we're going to make situational decisions depending on the M&A opportunities and the attractiveness of those returns versus share repurchases.

Our next question come from Brian Tanquilut with Jefferies.

Mark, just a quick question on United.

So as we think about 2019, putting it all together, out-of-network, in-network and then the volume expectations that you have in the ramp, is United a net positive revenue contributor in 2019?

Yes.

Absolutely.

Our next question comes from Kevin Ellich with Craig-Hallum.

Just with a strong M&A pipeline, given what you've done, do you have any strategic focus and things that you like to add, Steve, as we think about your pipeline?

Yes.

Continuing with what we have focused on, one is the opportunity around hospital outreach.

We think it's a -- of course, it's a nice opportunity to continue to consolidate the market.

And we do believe that will continue to build, and as I said we just announced another deal this week.

Number two, you saw that we just announced a number of acquisitions that afford us new capabilities.

The Immunotec acquisition gives us new blood tuberculosis testing capability, with tick-borne capabilities, so it's a nice add.

ReproSource gives us nice women's health capability.

And then we also talked about PhenoPath out in the Pacific Northwest so capabilities around pathology and molecular.

So we'll always look for new capabilities.

And then the third piece is, there are still regional laboratories that we believe are going to have as difficult time, if not a more difficult time in hospital outreach.

And you'll see some regional opportunities.

So if you look back in the last 5 years, if you look at the acquisitions, they fit in those 3 categories.

There's been ebbs and flows in each of the 3, but generally that's what we continue to look at and they're all strategically aligned to what we do.

And we have to have a path to value creation and hopefully you'll agree with us that we built up credibility around that.

So we will continue to work on that and going into next year, we already hit that 1% to 2% and we've got a nice funnel to continue to pursue ideas that we can make money on.

Our next question comes from Dan Leonard with Deutsche Bank.

Just one final one on the United health volume opportunity.

I think previously you talked about some potential increased volumes slipping into 2018.

Is that something you're contemplating in your guidance for the year or no?

Yes.

So there's certainly some early transitions.

It's not significant enough to call out, but I didn't want you to think we're waiting on everything until January 1. So yes, we absolutely already have some accounts that have moved and some accounts that are committing to move.

But at this point, it's still relatively slow.

Our last question comes from Eric Coldwell with Baird.

Most of mine have been covered, but there is one.

In your footnotes, which is obviously M&A is a big piece of the call today and I'm seeing that you're writing off the fair value contingent consideration on MedXM.

I'm just curious if we can get an update on that acquisition, and then maybe just kind of a broader swath on how other acquisitions have been doing.

You've announced quite a few here in the last few months.

Sure.

So we're happy with MedXM.

As I'm sure you're familiar, the reason you quote an earnout into a deal is when the buyer and the seller have markedly different views of the potential.

It's one way to get to a transaction point that shares the risk appropriately, but at this point, not quite 9 months into the acquisition, we feel from an accounting standpoint that it's highly unlikely to pay out the earnout.

That doesn't mean that we haven't achieved what we were expecting to achieve.

It just means that the seller had a very different view of where that might go.

And so that's all you should read into there.

We're very happy with MedXM thus far.

It's been a great addition to our portfolio, and I can tell you that as we're talking to payers about our laboratory testing, this is another opportunity to talk to them about ways that we can really help them beyond just the laboratory testing.

We're building with our great reach and population health and so on.

So it's another point why they want to do business with Quest.

Okay.

I think we've handled all the questions.

We thank all of you for joining us today.

We appreciate your support.

You have a great day, and hope to see many of you at our Investor Day in November.

Thank you for participating in the Quest Diagnostics Third Quarter 2018 Conference Call.

A transcript of prepared remarks on this call will be posted later today on the 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) 483-9044 for domestic callers or (203) 369-1586 for international callers.

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

Eastern Time on October 23, 2018, until midnight Eastern Time on November 6, 2018.

Goodbye.