DGX
#Thanks, <UNK>, and thanks everyone for joining us today
This morning I'll provide you with the highlights of the quarter and review progress on our strategy
Then <UNK> will provide more detail on the results and take you through updates to our 2017 guidance
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've made to accelerate growth and drive operational excellence, what I'd like to do is 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, that means energy and commerce held 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 associations sent a letter to CMS recommending postponing the calculation of publication of the new clinical and fee schedule redefining the definition of then applicable laboratory to ensure in a good hospital outreach laboratories and upon gathering data from hospital outreach laboratories publishing new clinical and fee schedule rates effective not 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 and Congress
While we continue to believe that CMS has not carried out the congressional intent of PAMA, we recognize that a new clinical and fee schedule could be in place by January of 2018 and we will be prepared
Now let's review progress we've made executing our two-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 out our leadership position in advanced diagnostics with our recently completed acquisition of Med Fusion and Clear Point
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 at 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 in the POS 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 Clear Point will not only accelerate Quest growth in U.S
oncology diagnostics but also host the promise of improving cancer care
Quest will become the preferred provider of the U.S
oncology diagnostics for the U.S
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 in-patient and out-patient diagnostic services for 12 hospitals of 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 Q-Natal, which is our offering for non-invasive 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 continued 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 risk of passing on heritable disorders on to their offsprings
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 convenient scores are above 90% for our Safeway locations and feedback from these sites remains overwhelmingly positive
We can't say it any better than two recent feedbacks we have received from our customers on our Safeway locations
One from a network member from Alexandria, Virginia recently wrote, 'I really like the location of this Quest center at Safeway, it saves me time, grocery shopping, pharmacy, plus blood test, all in the same location
' And my personal favorite is one from Longmont, Colorado where a customer goes on to say, 'the best blood draw I've ever had, you rock
' Now this is an exciting era 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 million patients are receiving their lab results through our MyQuest 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 cost of providing basic health care services
The collaboration will initially launch at 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 offers 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 of this system, data provides us real-time insight into patients' flow, enabling us to direct phlebotomists to the locations where they are needed most
Since we introduced this service earlier this year, more than 7 million people have utilized this service to date
Finally, 2017 is our 50th anniversary of empowering better health with diagnostic insights
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 50 year legacy and look forward to promoting a healthy world, building value, and creating an inspiring workplace over the next fifty years
So now, I'd like to turn it over to <UNK> and he will take us through our financial performance in more detail
<UNK>?
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? Question-and-Answer Session
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, it's what we are entirely focused on
So I'll turn it over to <UNK> to provide a little bit of color around what's in the mix
<UNK>?
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 in-patient laboratory, and that's what we refer to as professional laboratory services engagement
The second part of this is the inside diagnostics that I referenced, testing, and we believe we could be very effective provider of more and also help them with what they do, so a significant part of the discussion
And then the third case is that we are in that discussion to decide what their strategy is from hospital outreach, and [indiscernible] is a good example of that where we bought their operating [indiscernible], we're helping them with 11 of their hospital in-patient laboratories
And to your specific question, in that relationship we are also helping them with the reference work as well
So, in all these engagements, we typically become a stronger presence in that account for reference work
Thanks for asking
We are quite excited about it as well
There are a lot of different reasons
That goes down there last week, we had our date one [indiscernible] with a town hall meeting and spent some time with the management team
So this acquisition actually kicks four elements of our accelerated growth strategy
First of all, obviously it's part of our growth through acquisition, so that's good news
Second is in terms of innovation, it brings to us a nice [indiscernible] up our portfolio around what we could do around oncology and precision medicine, so we are encouraged about that
Third is to your point, it brought it to present 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 health care at better cost levels, and we think with some of the work they've done in the engagement for instance with U.S
Oncology, we can help with the data and understanding what we would do to form 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 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
So first of all , we study with two of the largest states, Texas and Florida
We also have a strong presence in Florida, so two nice states, second and third largest state now in the country for us to make progress in the large states
Yes, we will look at some of their sectors for our patient service centers, but as importantly, what I said in my introductory remarks is, we are actually going to use this strong metric to provide some of the basic healthcare services that help with what we could do with population [indiscernible] to cost curve
So what are some of those things? Now can we help with people dealing with hypertension and do blood pressure checks, can we make sure that people are staying out their [indiscernible] beyond a diuretic suffering, congested heart failure, that we help you with that by periodically taking your weight, making sure you stay in your diuretic staying range
We can also help with diabetes management
We're also working with some of the healthcare insurance companies where we could close gaps in care to help them with their quality scores so they get reimbursed by the healthcare that we all know is the best healthcare
So those are the basic healthcare services, and fortunately at Quest, we have the world's largest laboratory, so we'll be, absent for the last five years, we are in the field of diagnostic information services
We have over 20,000 health care workers, 10,000 [indiscernible] with 10,000 other health care workers that provide services already for wellness services from Florida that help insurance companies
We are also providing health checks for life insurance pre-qualification physicals and checks
So, we are leveraging those resources and its relationship as well
So, we are excited about it
We think it's a great opportunity for us to just expand our already unsurpassed access to the marketplace, but also engage with the ecosystem healthcare with some of these basic customer services that can in our mind really help them to cost curve for healthcare in populations that are difficult to get access to
So the current schedule as you know, we submitted the data already
That was delayed by two months because their portal was not available and so we recognized they'd listen to us and postpone it
We have put it in our data
Those people that are submitting the data have done that by the end of May
The current schedule thereon is to publish tentative rates in September, so 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 had collected
One is they haven't included all the data from those laboratories that they are buying from, typically 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 officer and Inspector General that [indiscernible] that only 5% of the laboratories are being asked to submit data will submit data, which is about 69% of what they actually buy from
The second is what we have heard from some of the smaller laboratory association that affect some of the data input
So we have shared this with them because some of the smaller laboratories did not have good access to retrospective data
And while our concern is that they use that data for the basis of publishing at tentative [indiscernible] fee schedule in the fall, it won't be right
So our strong recommendation to them, and we have got word from Congress broadly, many different leaders of Congress as well as the center [indiscernible], we believe the best thing for us all is to take some time to get it right
So our recommendation is to 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 in that aggressively, they possibly could publish the due clinical and fee schedule no earlier than July of 2018. So that's the path we are on, but the current schedule we have is that they are going to extend the schedule to get out some rates in the fall with the refresh clinical and fee 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 it does not reflect the impression or intent to get a full sampling of the marketplace and get that data in a good form and get good quality data to establish a rate for itself
So we are pushing that in a big way across the trade association
We continue to be excited about the prospect here
And again, to start at the highest level of possible systems, and I have shared in the past their lab strategies are on the shortlist 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 in-patient 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 of running the world's largest laboratory
And to answer your question about across that spectrum, where is that set, I would say it's equally distributed across the lowest level of involvement, the most no predominant necessarily of 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'd do to help with them their reference work, and then also in that context, we do continue the 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's just the beginning of engagement
And then we also use this as a discussion broadly of what we could do for them in terms of what their mission is and their strategy, which gets us into discussion about population health and what we could do in data analytics
We've got a lot of capabilities there, we have talked about that in the past, we've seen a nice value-added
These new extended care services are of great interest, particularly those integrated delivery system, that are taking on risk [indiscernible] they are quite interested and probably can leverage these access points for putting in place with our two [indiscernible] with Walmart is one example
So, this strategy is really a strategy of how we serve possible systems in a bigger way, and one aspect of what we could do with them is around their professional answers is engagement in their in-patient laboratory, but it's much broader than that
Now what we talked about five years ago just for 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 the 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 hospitals as primarily a competitor, we thought [indiscernible] 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 can provide better patient care
And then finally, they are 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're a good provider of that
So it's a nice service [indiscernible]
And then as we get in, similar to what I said to <UNK> in 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 could help them with that
So we have brought out a broad line of information products
We launched this a couple of years ago with the [indiscernible], we call it Quanum
And in that portfolio of products, we offer capabilities to take a look at your utilization for diagnostics, 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 [indiscernible] what happens next in healthcare, which is an important part of delivering good health care at lower cost
Second is we also served up with a nice access to the workflow within the physicians workflow, the ability to look at all past data from our relationship with [indiscernible], and that data we think is valuable to get a full view of what happens to that patient
So those data analytic services I think are helpful
So that's the 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 the 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
As a matter of fact, we have talked about our brand and our tagline being action from inside
Our vision is to have better health with diagnostic insight, not just [indiscernible]
So in that consumer strategy, which is part of our growth strategy, there's multiple aspects to that
One is the migrating access
So we believe our retail strategy helps us with that
We started with Safeway, we said we're 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 have talked in the past earnings call about what we're doing to be a provider of testing directly to consumers
We have launched a pilot, we're doing some of that in Arizona
We are now expanding that pilot of selling testing where states allow it to be done, to Missouri, to Colorado
We have a great business that's growing around wellness
We have a product coupled for wellness
We have expanded that to the field of sports where we have the sport diagnostic product
We have done the work with [indiscernible]
So there's a whole portfolio of more consumer-oriented products that we've rolled out as well
And then we have also improved on the access and consumers remarkably want to have all their health information, and frankly we're quite surprised by the pickup of our MyQuest application, I mentioned in my introductory remarks over 4 million of people have registered with us
We believe we are tracking to be on track to get above 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 [indiscernible] the diagnostic testing, and over time we believe with better transparency, because we do offer we believe one of the strongest [indiscernible] proposition in the marketplace, the physician will ask the consumer which laboratory do you want to test and to go to and they will remember this great experience that they had at Quest Diagnostics
They will have information that's provided to them
They will 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 picked up the powerful element of our strategy and it's where healthcare is headed
Consumers will have more choice and consumers will direct more at healthcare
So we are making a lot of progress, we're excited about it and we think that's going to help us with our core business today but over time it will become a larger piece of our portfolio over time that we really do direct healthcare in a better way where it is needed, which is not necessarily only in hospitals but throughout the health care system and communities that are touched not by traditional healthcare but other places like our retail strategy
So that's where we are going with it
Part of our discussion with these hospital systems were on their lab strategy, 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 and fee schedule will be refreshed
And as we talked about in the past, they have more exposure than we do to that
<UNK>ughly 12% of our revenues is a much more meaningful percentage of their laboratory revenues
So, when we engage in these conversations, one aspect of their consideration of what they are going to run [indiscernible] is they are going to be under pressure both on the commercial side as well as on Medicare
But the other aspect as you know is related to what their strategy is, do we want to put more capital and increasing more complicated area, and in some cases they decide not to
Second is they realize that our scale is significant and as we move away from a fee-for-service model to a much more value based reimbursement model, it's still longer to be in activity, it's going to be making sure we 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 where we have bought their [indiscernible] business, it's because they see reimbursement changing and they believe that they have to move to team up with someone like Quest that has a very efficient model delivering the necessary diagnostic services, so as part of that overall strategy for the integrated delivery system, a part of this is looking at pressure and range, but it's more comprehensive than that as well, Issac
Yes, so we shared this at our Investor Day
Look at the market we compete in, ourselves and the nearest competitor, 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're 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 the strategy of 1% to 2% growth through those strategic [indiscernible] acquisitions
We have announced a number this year with [indiscernible], we're moving forward down with Med Fusion and also we also announced recently [indiscernible] in Massachusetts
So our march continues to drive that strategy
So we think the commercial rate pressure on the rest of the marketplace will help accelerate the strategy we are on and we should over time take up more share both organically and through acquisitions
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 House side as well as the Senate side
We have also met a couple of times with the 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
To get the right data, take the right approach to bringing on those rates is important for all of us
And what we remind them of is the reason why we have PAMA is reflective of the work that's to protect access to Medicare Act, and it's important for Congress and it's part of their congressional [intent] [ph] 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's 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, smaller labs that are very necessary in smaller rural areas, in some segment of the marketplace the majority of what the testing is has provided the Medicare marketplace could be substantially cut, and the example of that is what's happening in nursing homes where a majority of their single 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'll share is we think they are very, very responsive to listening to our concerns
We realize there is an element of administration
They realize that what was put in place was put in place over the last couple of 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
We have been at 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
[Indiscernible] being one example of that, Harvard Health Care 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 [indiscernible] at all
It's more the [indiscernible] factor to making sure we have deals that we believe are strategically aligned and we could make money on
I appreciate that
First of all, the relationship is getting nowhere near
We said we are going to focus on two largest states, Florida and Texas, and we're going to pick 15 sites that will be our initial pilot sites
And what we'll provide at those sites are some of our patient service center capabilities like we've done with Safeway, but we believe there's more we could do on those sites with basic healthcare services
And what will specifically get done is really dependent upon where we forge relationships with healthcare insurance companies, their integrated delivery systems for ACOs within those geographies where we think there could be some value of providing with 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 we'll be off to a good start and we'll 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 half way into what fully we can realize, about 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 [CBS] [ph] [indiscernible]
We believe Walgreens has a different strategy as well
And what we will do is – Walmart and what we will do with Safeway, we believe there are other ways we could work with other retailers that could be complementary to what we agree to do with these two that we have announced so far
We are working our way through that
The Safeway relationship is different than what we're going to do at Walmart and we already have working relationships with some other retailers
I mentioned CBS 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 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 totally focused on executing against what we've 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 trend, [indiscernible] how we could be helpful, but a good way of thinking about this, we started with one, we've now moved to two and a handful will be a good number that we could then manage over time to provide what we do and help them with their health strategy
So we are open to working with others
We want to make sure that what we do doesn't in any way contradict what we are doing with some other partners
But as you know, Walgreens continues to broaden their health presence
They have a working relationship as you know with Med Express
Med Express will provide healthcare services and that strategy will change over time
And as you know, most of these retailers work with all different brands, no matter what category and laboratory services are going to be different
So, they are selling all different bands in their stores, so therefore they are open to different brands and we believe that this strategy is 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 strategy
So, we think there is an opportunity here as well
Okay, so that concludes our day
We had a strong first half in 2017. We look forward to continue to meet our commitments by executing our two-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
