DGX
#When you're talking about margins, I want to make sure whether you are asking dollars or percentages, so I will address both.
Typically, what we've said is an outreach purchase, it takes 12 to 18 months to get to its going rate on profitability of when we can get all the synergies achieved.
And the outreach businesses are typically at our corporate margin percentage.
So, we usually get some margin dollars pretty quickly on those outreach, but get to our going percentage of ratio profitability takes 12 to 18 months.
For PLS, it's somewhat similar to an outreach in that there is a transition period of time.
A lot of the savings is driven around moving the test menu partially off the hospital's site to ours.
It doesn't happen the first day.
The second piece is really the procurement savings.
It's either changing out the platform or burning through their reagents, which typically are at higher cost than ours, so it takes a little while before we get to that going profitability.
But I'd say the same thing, probably a little closer to 12 than the 18, when we get to the going rate of profitability for PLS within the first year to 1.5 years.
Those margins are going to be lower than the corporate average slightly, but, as I said before, still an excellent return on invested capital and they're still double-digit margins.
<UNK>, any given quarter, it may bounce around.
The outlook that we provided in 2014 and we're planning, and I'll do it personally, to update you on that at our Investor Day on November 11, and show a look back at how we have done and give you a general idea of what you can expect going forward.
It is really an annual basis or a CAGR basis.
It's not necessarily what you're going to see in any given quarter.
So, the things that are going to contribute to growing earnings faster than our revenue are unchanged.
It's really going to be as we have returned to organic growth that has a high drop-through, and then we have the Invigorate program, which certainly is large enough in this period of time to offset price and our cost pay-fors, which is our annual merit inflation and things like that, and still have enough to expand margin.
As you look at some of the PLS relationships that we have talked about, those have really started up this year.
And as I mentioned earlier to the question, how long does it take PLS to get up and going in its profitability, it's generally 12 to 18 months, so you would expect those deals to be contributing more to the bottom line and helping to expand our margin more than they did this year.
So, it really gets down to the fundamentals, which is the growth and the high drop-through we get there, our Invigorate program, which continues to drive efficiency, and then all of those things more are on an annual or a CAGR basis as opposed to any given quarter.
And year to date, we're up 5.4%.
That's a higher number than the third quarter.
And, again, the other thing is, as you're well aware, we're accelerating organic growth, and we couple that with our acquisitions of 1% to 2% growth.
That allows us, as they feather through our numbers, to also get some lift in operating income going forward.
We have actually contributed about 1%, so at the low end but we are still within the 1% to 2%.
And in terms of our appetite, it hasn't changed.
But we're very diligent about the deals that we move forward with.
As we've shared, we walk away from more deals than we execute.
It's not as if it's not an interest, it's not as if we're not investing a lot of time in evaluating assets and potential outreach deals, but we do have a lot of rigor around our financial metrics, and we don't execute a deal if we don't see a path towards value creation, importantly.
So, really, it comes down to our capital allocation strategy, which is, once you get beyond the 50% that we guarantee, of our free cash flow, to our shareholders, it comes mostly through the dividend but also through some share repurchases, and then the decision is what's the best value creation strategy.
And we have to feel very comfortable that we're going to create more value through M&A than we will through share repurchases.
Therefore, it's really situational.
So, it's not a change in strategy; it's not a change in appetite.
And certainly there's been a number of assets we have been evaluating.
There's a lot of things we're looking at.
And we are still having success with 1% growth from M&A, within the range.
And, really, nothing has changed other than we're at the low end of the 1% to 2%.
<UNK>, as you recall, we announced our 5-point strategy back in 2012.
Part of that in terms of restoring growth was to accelerate our organic growth, which we're doing, and then second is to couple that with acquisitions.
And if you look at 2013, 2014, 2015, and now 2016, we have been achieving that 1% to 2% growth through acquisitions.
So, we've developed a credible track record of being able to do that in the past.
And, as <UNK> said, prospectively our views haven't changed.
And then you couple that with our strong cash position.
We feel good about the cash we generated this quarter, and are using that cash wisely with our capital deployment plan.
So, going forward we think we have a solid strategy to continue to build shareholder value, and the growth prospects both organically and through acquisitions remain encouraging.
Sure, it's doing well.
We've lapped it already, one-year anniversary in July.
The initial work for both companies is to put both of our laboratory clinical trials business together, and then operationally integrate those.
By integrating those, we will benefit from that in our equity earnings.
We get 40% since we own 40% of the joint venture.
So, we believe we've made some excellent progress and there is more opportunities in front of us in terms of the yield we'll see from that joint venture, because it takes some time to get the integration completed.
But we're starting to see some of that already this year.
Thanks, <UNK>, for the question.
First of all, as I said, we're excited about the opportunity.
It's an embryonic field, it's building, it's evolving.
The field of precision medicine or personalized healthcare is very new, and it continues to provide opportunities.
But it also takes time to develop.
We believe, once again, that we, in this field, need to work together with others.
Two years ago we announced the relationship with Memorial Sloan Kettering.
We brought a product to the market called OncoVantage.
The opportunity we're going after, <UNK>, is to get to those community oncologists, which, as I said in my remarks, about 70% of cancer care is there.
What we realized is that Memorial Sloan is very strong and we have a strong presence in the United States.
But by working together with some others, once again, we can even enhance what we've done already.
The IBM opportunity allows us to use their platform and also their data capabilities in a much broader way.
Second is, as you know, IBM is building out their go-to-market plan for IBM Watson in general, IBM Watson Health, and IBM Watson Genomics.
We're hopeful that sales force, coupled with our sales force, will drive some additional demand as people become more aware of this.
The other part of this, <UNK>, is we believe there is an opportunity for patients to become more aware of what they should gain access to in assessing what they need to do with their cancer care.
And IBM is a very powerful marketing machine, and we're hopeful that their work and their visibility around cognitive computing, particularly in healthcare, will help us with this effort.
Now, as far as future products, we have the existing products today.
We're offering that.
There is plans for us to expand that capability with a number of actionable genes.
And then also an expanded panel, which will touch close to 400 genes that we will look at.
Yes, we do believe that this will help us in terms of companion diagnostics with those cancer drugs, to rule in and rule out patients it can affect.
And also making sure that we can support in the right way connecting patients to the right clinical trials through their oncologist with this information.
So, this is ---+ work's in progress.
A lot will be introduced in time.
And it is a good example of the evolving nature of this whole effort across the world.
But we are lining up with some of the best, Memorial Sloan Kettering, IBM.
We talked about the Broad Institute and obviously their relationship they have with MIT and Harvard.
So, we have a good team working on this and we feel very encouraged about the prospects here.
First of all, one step at a time.
We announced this relationship with HCA with their Denver-based division.
They have six inpatient laboratories that we will manage for them.
When we do this, we make them more efficient.
If you understand how they work, and I would argue a lot of hospital systems work or for-profit corporations, they're going to see how it goes.
And we expect to deliver.
So, we're hopeful when we deliver, that we can then expand that discussion to say ---+ can we help you in some other areas.
The first piece of business right now is to do what we said we're going to do in Denver, and do that well.
And then we will grow the account, as you grow any account, going forward.
I would also say that this discussion around hospital interest in what we're doing is building.
What we find is that the C suite of integrated delivery systems, and hospital CEOs and CFOs, are quite interested in anything anyone could do to make them more efficient.
I personally get engaged in this in a very active way.
And I can tell you that when we go in and have a conversation with a CEO and a CFO, and share with them that we can save them 15% to 20% of their hospital inpatient laboratory cost, our batting average, if you will, of getting to the next conversation to start sharing some data is quite good.
Very few times do they say we are not interested.
Most times they say ---+ interesting, we should take a look at this, and we understand how you can help us, and let's see if the numbers work.
When we go in there, we also talk about their lab strategy.
Usually when we have a discussion around their inpatient laboratory costs, we then have a conversation around their reference testing, their most advanced testing that we provide to about 50% of hospitals.
We talk about us being able to provide more of that for them.
And then the third leg of the stool is they then start to question, if they are in an outreach business, essentially competing with us, do they want to remain in that business.
The best end state for us is to become their lab partner ---+ where it is Quest inside.
So, we do all three.
We're helping them with their inpatient labs, making them more efficient.
We're providing the most advanced testing for their hospital operations.
And then, third, is where their laboratory for their non-hospital portion of the care they are providing within their geographic area.
We have a number of examples of that, and probably some of the best examples is where we've actually formed joint ventures.
And we have a number of longstanding joint ventures ---+ University of Pittsburgh Medical Center, probably the most recent large one is University of Massachusetts.
We have a joint venture up in Massachusetts around that.
And there's others, too, that we have built.
So, I would argue that this is a growing trend.
It's a trend that we're ahead on.
It takes a while to build a services business.
We've built the capabilities.
We're now executing and we're now starting to see the results in our growth.
The year to year on what you should expect, I can't give you anything specific.
Obviously we're not giving guidance for next year.
But you should expect us to adhere to our capital allocation policy, which is basically half of our free cash flow is committed to shareholders.
And then above and beyond that depends on M&A and/or additional share repurchase.
In terms of our authorization ---+
First of all, last year, at the end of the year, we said that our advanced diagnostics grew by about 5%.
It's a sizable portion of our portfolio, about $1.8 billion.
We do not share quarterly performance related to that portion of our Business, but it continues to grow.
Some of the mentions I had in my introductory comments show that we continue to get good growth of some of the more advanced testing.
And particularly our last question around our work with IBM, and work in genetics, that field continues to provide nice growth prospects for us.
So, we're continuing to get growth, and, once again, we'll share the growth from that business in due course as we announce our results.
As far as pricing, it's already in that 50 basis points headwind, if you will.
We don't share specifics on what's happening with commercial contracts or what's happening per test, but it's implied in the 50 basis points.
So, it's very manageable, we believe.
There's always going to be some ups and downs in our portfolio tests.
We're bringing new products to the marketplace, as well, which have new price points.
So it's in that overall aggregate measure that we provide.
We continue to build our sales and marketing capabilities.
The way we've addressed the market is really to make sure that we capture the right level of focus around accounts.
And with 65% of physicians now working for hospital systems, we believe it's important to have a geographic orientation to our sales force.
So, we have about 108 sales districts and they have full responsibility for the whole portfolio of Quest into the market.
Because it's hard to separate hospital business from physician business, given where healthcare is today and how it's organized.
At the same time, we all know that healthcare is very specialized, so we also, in addition to the geographic orientation to our sales force, have dedicated specialized sales forces.
We have a specialized sales force for our neurology business, we have a specialized sales force for our anatomic pathology business, a specialized sales force for our women's health business.
And we believe we appropriately staff that for the opportunities in the marketplace.
We're always trying to optimize our investment in our go-to-market plan with the opportunities we see in the marketplace.
And we think we've struck the right balance to deliver on our goals of growth in 2016, and we believe we'll do so, also, as we go forward with accelerating growth, as well, in the future.
Thanks again for joining the call today.
As you can see, we're making good progress on executing our strategy.
We look forward to seeing many of you at our Investor Day in New York City on November 11.
Thank you very much, and have a great day.
