DGX
#Thanks, <UNK>, and thanks, everyone, for joining us today
This morning I'll provide you with highlights of the quarter and review progress on our strategy and then <UNK> will provide more detail on the results and take you through updates on our 2017 guidance
We began 2017 with a strong first quarter across the board drawing revenues, EPS, operating income, margins and operating cash flow
Here are some of the key highlights ---+ revenues were up approximately 2% on a reported basis and 3% on an equivalent basis
Reported EPS of $1.16 increased 63% in 2016. Adjusted EPS grew approximately 18% to $1.33 which includes $0.11 of excess tax benefit associated with the employee stock-based compensation; more on this later from <UNK>
Cash from operations increased 28% to $196 million
Now before I describe the progress we've made to accelerate growth and drive operational excellence, I would like to briefly discuss PAMA
CMS postponed the deadline for labs to report private commercial payer pricing data under PAMA for 60 days until May 30. We fully support the decision
However, we continue to have some concerns about the current definition of applicable laboratory, which are those laboratories per quarter to report private commercial payer data
According to the office of Inspector General's analysis, the current definition of applicable laboratory would cover only 5% of laboratories, representing only 69% of Medicare payments for lab test in 2015. While we support reform of Medicare payment system, we believe any modification should be market-based and appropriately include all applicable independent and hospital outreach laboratories
Now let's review progress we've made
As we detailed at our Investor Day at November, our two-point strategy is to accelerate growth and drive operational excellence
We grew revenue in the quarter empowered by continuing to expand relationships with hospital health systems
Our existing professional lab services relationships including RWJ Barnabas in New Jersey, HCA in Denver and most recently, Montefiore in New York City are performing better than expected and our pipeline for new relationships remains strong
So in the first quarter we announced the acquisition of an outreach operation of PeaceHealth Laboratories and expect to close in the second quarter
In addition after the close, we will execute a professional laboratory services agreement to manage 11 PeaceHealth Laboratories serving medical centers in three states in the Pacific Northwest
We are hardening with health plans to improve the patient experience by improving price transparency which will also reduce bad debt
Our real-time payment determination which we begin piloting in early 2016 enables us to get patients an accurate picture of their financial responsibility or lab testing while those patients to pay at the point-of-care
We are currently live with Aetna, Highmark, UPMC, Florida Blue, and we expect to have more payers in place by the end of the year
The service benefits Quest and the entire healthcare systems; patients, providers and payers
Avis [ph] Diagnostics which generally includes our genetic and molecular based test grew in the quarter along with non-routine testing
Major drivers included neo-natal genetic carrier screening, prescription drug monitoring, hepatitis C and QuantiFERON TB testing
In the quarter we also announced the launch of the new test service that helps physicians evaluate the patient's response to the drug therapy used to treat infection with hepatitis B virus, HBV; this is the first test of its kind available in the United States
Physicians can use it to tailor more effective treatments for up to 2.2 million individuals infected with HBV
We're also making progress executing our strategy through provider-of-choice for consumers
In late January, we began providing genotyping for ancestor DNA, a service that today identifies and quantifies individual's ethnic origin based on results of DNA testing
We are pleased with the initial execution of this program and look forward to building on a relationship with ancestors
We continue to expand our relationship with SafeLink that are now operating at 65 stores
Consumer and employee satisfaction remain high and we are on-track to open a total of 200-patient service centers and Safeway stores by the end of 2017. We continue to drive operational excellence and remain on-track to deliver $1.3 billion of run rate savings as we exit 2017. Our revenue services partnership with Optum is on-track in helping us to drive down bad debt and denials
As we have often said, quality and efficiency go hand-in-hand
We continue at near Six Sigma levels of many areas and in the quarter of mid year-over-year gains and many quality measures including reduced patient service center wait times and approved test turnaround times
We expect our commitments to enable our processes will deliver results
We expect to cut paper acquisitions by 50% by the end of 2017. It will enable patients to check-in electronically at roughly half of our patient service centers by the end of the year
Additionally, we expect our lab systems to be 85% standardized by the end of the year
We received some meaningful recognition in the quarter, once again being named one of the World's Most Admired Companies by Fortune magazine
Quest was one of only six companies in healthcare, pharmacy and other services industry and the only diagnostic information services company to attain most admired status
Looking forward to the remainder of 2017, we are well-positioned to continue to accelerate growth and drive operational excellence
We have the right strategy and the right team to execute and create value for our shareholders
Now, let me turn it over to <UNK> who will take us through our financial performance in detail
<UNK>?
Well, to summarize, we delivered strong growth across the board in the first quarter with gains and revenues margins, operating income, EPS and operating cash flow
Our agreement with PeaceHealth will further booster our growth later in the year and we are laser-focused on our two-point strategy to accelerate growth and to drive operational excellence
I'd like to now open up for any questions you might have
Operator, please? Question-and-Answer Session
You know, so thanks, <UNK>, certain I'll start and <UNK> will add to that
Sure, first of all we're off to a good start, we're pleased with our first quarter performance here
Yes, there's up a number of elements that contributed to the growth in the first quarter, we highlighted some of those in our script
First of all we do believe that will continue to get growth from our professional lab services work that we're doing
We saw some growth from that
Second is we continue to get nice growth from our advanced diagnostics portfolio and some of the more advance, what is typically referred to as esoteric testing that we do would call about some of those, and we've mentioned in the past the prescription drug monitoring and the work we're doing with the TV coiffure opportunities drive serious growth for us
We also got some nice growth through some other areas of the business, like our Wellness business, some or other ---+ some of our other services business
Across the board good balance growth consistent with our strategy that we had to focus at hospitals
That focus on our clinical franchises and bring new products to the marketplace to commercialize those better than we have in the past
And finally just good execution across the board
So let me turn over to <UNK>, to give some color round this and throughout the rest of the year
First of all it is going well, we announce it in the fourth quarter of last year
And a big component of it is what we're going round revenue cycle management and our billing operations and as a I said in our opening remarks it's going very well, we're pleased with that
Like you said this is a relationship so there is multiple areas beyond what we're doing around billing, we continue to build on that relationship and it's ---+ it's going well as well
We have a good relationship around our wellness business, we are their partner for wellness along with other ---+ other partners that we sell-through
Second is we continue to work with them on what we do with clients around data and population health and if you think about what we're doing with our professional laboratory services business, we're calling on the same people that are trying to become more efficient and better in delivering integrated delivery system and so that areas is promising as well; so often good start, doing what we said what we would do and the relationship will only get stronger overtime
Thank you
First of all the pipeline as we said is the support of our long-term goal of 1% to 2% of growth through acquisitions; we're hopeful about that going forward
As far as competition ---+ I would say the competition is stable versus what we've seen in the past
And finally is in regards to the PAMA, I think PAMA in general is changed that some would argue ---+ could look more catalyst in hospital outreached business as considered their strategy going forward
So when we engage with hospital systems run their lab strategy, many CEOs that are engaged with do understand that both the commercial rates as well as the clinical lab fees schedule rates will be under pressure
And this is one of the considerations that they think about as far as potentially selling their business or partnering with us in their business going forward
So if in fact there is some price pressure related to the refresh of the clinical fee reschedule that could be a further catalyst to accelerate some of this going forward but as you know, PAMA ---+ the data submission has been postponed by 60 days, we're still believing based on what they've told us so far that they are committed to trying to refresh the clinical lab fee scheduled by the beginning of '18 but we'll see on that
But there is another fact that we think is helping us with our discussions with hospital systems around their lab strategy
It's not that directly linked
I think it's a fact out there that CMS is looking at refreshing ---+ we couldn't let fee schedule as we often talked and so we get all the data, we don't know what's going to happen with that, but it's just a fact out there that is going to be pressure on rates
And therefore hospital CEOs are thinking about their options for outreach
Yes, so thanks Ricky
Let me give you some color around PAMA, now first of all the data put in all the data has been pushed out for 60 days and yet, CMS still is holding to the goal of refreshing the clinical lab fee schedule by the beginning of 2018. Now with all that said, we just took two months of really tight schedule and the way this will work is they'll get all the data by the end of May - let's call it June
They have to work through that for four months in of which in those four months, two of those months are in the summer months and then publish their rates that they will look to comment on in the September timeframe
And then they'll publish upon the rates in the fourth quarter for that beginning of January 2018. So as you think through this, the two-month delay in data reporting clearly is putting pressure on the schedule and that's why people are saying, 'Okay even that they still have the goal, it's impossible that they can get there
' I'll share with you exactly what we're hearing, but there is more pressure on them to put that altogether
Now with all that said, as trade association, we continue to be actively engaged with CMS
When we're down there for our annual meeting of UCLA several weeks ago, we've met with CMS
This is many members of our industry
They're very, very responsive to us, they listen to our concerns about data
Part of the response to see would postpone of the data collection is because we are engaged with them and we're also having discussions with them and members of congress about the definition of applicable laboratory
In the way CMS is implementing the approach right now is excluding a fair percentage of outreach which is a large portion of this market
So there will be another meeting next week with CMS and this is at the highest level CMS with [indiscernible] to talk about two issues; one is the timeframe and second is applicable laboratory
And we hope to engage as we've done so far as a trade association of being constructive and helpful to get the market-based approach right, which is the intent of the congress with this bill
We continue to work it with them
You also need to understand that this also has the backdrop of them having a lot on their table in the number of positions across the board in HHS and CMS not being filled
We also know that they've got to work through a lot
I'm giving you some of the color, but we're actively working this trade association and we believe that by doing so, it's going to serve this industry well
And just to round this off, we also said in our Investor Day in the fall that if in fact it is implemented in 2018, given the size of this business for us, the effect it could have based upon some of the estimates that we're going to be able to absorb that, given the opportunities we have around operators [ph] going forward in normal course of running our business
That's our position
We believe it's already implied in our outlook that there could potentially be some reduction here, but we don't know for certain until we get all the data collected
But we're managing this proactively going forward and we'll see what happens
And <UNK>, just to remind everyone, it's this the march we're on with growth
Back when we started with our strategy at 2012, we simply just restore growth and business that was shrinking organically
We have reduced that decline, we stabilized the business, we started to get some organic growth in '16 and our two strategy focus right now is number one, to accelerate growth
So what you see in Q1 is the continuation of that march of improvement and we believe a lot of the investments and capabilities and focus that we've put over the last several years is due to yield the results we expected
We're pleased with Q1. As I mentioned in my earlier comments, the results are a number of areas that led to the growth that you saw in Q1, but we believe we're off to a good start for the year
Something notable, <UNK>?
Good morning, <UNK>
That's correct
Just to make sure it's clear, PLS, it is a business
We're managing a portfolio of professional laboratory services accounts and like for any business, these accounts are different stages of the revolution
In that business, we have a number of accounts that have been with us for some time and like with any business, you're managing those accounts to make sure you have a referable account going forward
That's in our base as well
Second is we're growing new accounts, they're turning on
There might be some more opportunities to expand it into other hospitals so we've got growth within the install base as well with some growing accounts and then we're bringing on board some new accounts
So the highlights we've talked about at those new accounts, you put those three together and that has a business in its aggregate growing, but don't forget, we still have this install base of existing business that we could hear ourselves as well
We need to think about it as an existing business with managing accounts, growing accounts and then executing brand new accounts
But with all those three components, this is a growing business for us, it's a good business for us and it positions us nicely with integrated delivery systems
Let me start
First of all, the relationship with Optum for revenue cycle management has three components
First of all, we believe by working together with them, we can continue to become better and more efficient in our building operations and the efficiency associated with that, A
is part of our $1.3 billion bigger rate savings and efficiency goal that we have
So this is parts of many programs we have to drive efficiency
So a portion of our results and a portion of our achievement against that goal will include what we're doing here
Second is we believe by getting smarter with them around the interaction between class and patients and payers, we can go a better job of bad debt and denials and specifically, they will help us with what we talk about as far as real-time adjudication with patients that we've mentioned, four [ph] payers that are initially working with us on that, but we expect with Optum's help, we could get some more
And then finally, it's just completing the data set and their relationship with payers in general we think will be helpful of getting paid both from a standard perspective of bad debt, but also with the denials associated with more advanced diagnostics
<UNK>, anything you like to add to that?
Thanks, A
Safeway relationship, we believe is the beginning of our consumer initiative working with retailers in a bigger way and part of this is around providing better access
We believe we have unparalleled access in the market, we're 2,200 patient service centers, we have 2,800 phlebotomist and physicians' offices, about 6,000 access points, but we believe some of these retailers we could be working with and safely as one had better locations and there is anywhere from 15% to 20% of laboratory requisition orders that go unfulfilled
So we're helpful by having better access
We're going to get more fulfilled requisitions and that's going to help our growth and also help some share if we have better access
We hope when a patient has a choice and who ask the question, 'who do you like to go to?' for their laboratory testing, that the patient will remember a better experience in a more convenient location for that experience and they'll choose Quest based upon our movement here
That's both growth, but also as you would expect as we start to come on board with some of these centers, we rationalize our presence in a zip code and we might shut down some of our smaller patient service centers and saves us some money as well
It's both growth and efficiency
And we do continue to have relationships and we do continue to have pilots with some of the other players in this retail space
We continue to have UBS [ph] as the client and we're optimistic about other retailers as they continue to evolve their health strategy
They see it as a nice expansion from what they do today around pharmacy and also it helps these retailers for getting traffic into their stores as well
It's a multi-faceted program for us that directionally, we're very, very optimistic about and I think we're off to a great start
Yes
All that you mentioned are strategically in-lined with our direction
So we have for the last several years cleaned up our portfolio, we're entirely focused on diagnostic information services
Our first filter for any deal is does it fit into our scope of our strategy and from what you just mentioned all do
Second is we do believe that there's our growth strategies and we've outlined in the fall five areas that we're focused on for accelerating growth
One is related to partnering with hospital systems and so, the hospital average deal fits in that strategy as well
Second is to continue to invest in advance diagnostics and bringing new capabilities to the marketplace
So some of the potential acquisitions we could do there would fit there as well
As part of these priorities, what we have shared in the past is we continue to be very, very rigorous in making sure that if their strategically in-lined, that we have the thresholds we expect to make for our shareholders with any acquisition
I would say that's generally more of the cut we have is we're the strategic in-line where they fall out in terms of use of our cash and are they getting acceptable returns of invested capital, providing us with the growth we expect and at the same time, become accreted to earnings in a reasonable period of time
That's generally how we rack and stack acquisitions and it served us well so far
That fits into the strategy that we had or 1% to 2% growth of acquisitions
As you can see from our prior acquisitions over the past four or five years, do you see all those categories and it's more of a matter of when that come in and when we can execute it and less to deal with the sorting of what we'd like more of a priority than others
But we haven't had the problem having not enough cash to execute things
We think we should do strategically and also that we think has a good return for our shareholders
So <UNK>, anything you like to add to that?
Let me just underscore what <UNK> just said and remind you what we shared with you in the fall because it's important in our strategy in what we're doing every day
When we're talking about hospitals, it's about 60% of our market if we look at it and we have laid that out in three ways - one is what we could do to help them with their inpatient laboratory cost
These are cross centers that we could save the money
Number two, what <UNK> just went through as far as the reference testing, the advanced diagnostics to sell the hospital that they can't do themselves, they rely on laboratories like ourselves and then finally is outside of the hospital and some have outreach businesses, but they also are buying physicians and they're looking at serving geographic area and providing the laboratory services with those physicians that they now own or affiliate with
So when we have a discussion, it just was last week with a very large integrated delivery system, their lab strategy includes all three
We talk about our relationship with hospitals, yes it's the inpatient laboratory but it's a holistic view of how we approach the marketplace in a much more progressive holistic view as they build integrated delivery system
S it's all three components when we approach the systems and it's serving us well as you see in our good start of the year
We continue with all our partnerships, so this is the beginning
There's other things we could do with IBM
I'm not prepared to talk about that, but we believe all our partnerships start with something and they go from there
First of all, the refresh of the clinical lab fee schedule from PAMA ---+ I would just argue is a reality that's creating some catalyst on hospital systems; I must say all laboratories to consider their options going forward
And I would argue that as independent of whether any refresh takes place in 2018, 2019 or even 2020, it's just sitting there; that how they get paid for Medicare is being revisited and even though you've said that, its cuts is unclear on what the outcome will be until we gather all the data and we've talked about this before
Until we gather all the data, we don't have the visibility about the data, it's uncertain of what effect it would be
But we review that in general this review and the pressure that's on payment in general and we believe it's on the Medicare side with PAMA, but also on the commercial side is a good catalyst for us having these conversations with integrated delivery systems without the laboratories on the strategy going forward
So that's the first point I'd like to make
The second is the goal is still 2018; obviously if that's postponed or delayed, and if in fact you had a negative consequence associated with how we get paid, it would be helpful in 2018. But right now we're assuming that what they tell us is what they're going to do and therefore 2018 is what we're assuming and we'll see if that does happen
Okay, we appreciate all the questions
Thanks again for joining the call
As you heard, we had a strong quarter and we're off to a solid start in 2017. We're looking forward to meeting your commitments by our two-point strategy which is to accelerate growth and to continue to drive operational excellence
We appreciate your support and you have a great day
