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Quest Q2 Revenues Rise 3 Percent

NEW YORK (360Dx) – Quest Diagnostics today reported 3 percent year-over-year growth in revenues for the second quarter, but fell short of analysts' average estimate.

Revenue was $1.92 billion for the three-month period ended June 30, up from $1.86 billion in the second quarter 2017. The consensus Wall Street revenue estimate for the quarter was $1.95 billion.

Net income attributable to Quest for the quarter was $219 million, or $1.57 per share, compared to $193 million, or $1.37 per share, in the same quarter in 2017. Adjusted EPS was $1.75 in Q2 2018 compared to $1.45 in year-earlier period, and slightly below the analysts' average estimate of $1.76.

Revenue for diagnostic information services grew 3 percent in the quarter compared to the prior-year period driven largely by acquisitions, Mark Guinan, Quest's executive vice president and chief financial officer, said in a conference call following the release of the company's financial results. Volume, measured by the number of requisitions, increased almost 3 percent compared to the prior year with acquisitions contributing approximately 200 basis points, he said.

Quest Chairman, President and CEO Steve Rusckowski noted that in the quarter the company completed its previously announced acquisition of the outreach business of Cape Cod Healthcare. In addition, integration of acquisitions completed in 2017 drove revenues.

The cost pressures of the new Medicare reimbursement rates for many diagnostic tests, introduced under the Protecting Access to Medicare Act (PAMA), are likely to contribute to more opportunities to partner with hospitals or acquire outreach labs, Rusckowski said.

"As we continued our conversations with hospitals CEOs around the country, it is clear from those conversations that there is a growing awareness of PAMA and the impact it has on their outreach laboratory business. CEOs are increasingly interested in talking more about how we can help them execute their lab strategy," he said.

The highlight of the quarter was the May announcement of the company's new national provider agreement with UnitedHealthcare.

Rusckowski said the new United agreement "includes a broad range of value-based programs rewarding high-quality easily accessible laboratory services at the best value, and real-time data sharing to drive more personalized care."

The company also has seen growth in its relationship with Walmart. Quest now operates in 12 Walmart-based patient service centers in Florida and Texas, Rusckowski said.

Headwinds that Quest faced in the quarter include an approximately 50 basis point from PAMA and less than a 100 basis point from all other factors, Guinan said.

Quest also experienced a faster than expected decline in hepatitis C genotyping and resistance testing, according to Rusckowski. He attributed the decline to the rapid acceptance of AbbVie's new Mavyret hepatitis C treatment that can treat all six major strains of hepatitis C and does not require the same level of testing as previous therapies. Rusckowski said the company still sees a strong opportunity in hepatitis C screening and estimated that more than two-thirds of an estimated 70 million baby boomers have yet to be screened.

Vitamin D testing also slowed in the quarter due to increased reimbursement denials, Rusckowski said.

In addition, while the company saw strong growth in prescription drug monitoring, the growth was less than expected because some payors enacted policy changes to limit testing, according to Rusckowski. The company is engaging with payors to demonstrate the medical necessity of this testing and has so far convinced one payor to reverse its policy change, he said.

The company is also enacting operational changes to save cost and improve the customer experience. Quest has encouraged clients to use electronic requisitions, which now make up 70 percent of requisitions, up from 60 percent in 2016. Electronic requisitions are more efficient than paper requisitions, which take four minutes to process, Ruscowski said.

In addition, more than 5,000 clients have switched to an online application launched last year that allows physicians and their staff to order specimen pickup electronically.

During the quarter Quest spent $351 million on SG&A, down 2 percent from $358 million in the same quarter last year.

The company ended the second quarter with $132 million in cash and cash equivalents.

Quest narrowed its guidance for full year 2018 revenues and adjusted EPS. Revenues are now expected to be between $7.70 billion and 7.74 billion, compared to previous estimates of between $7.70 billion and $7.77 billion. Adjusted EPS is now expected to be between $6.53 and $6.67, compared to previous guidance of between $6.50 and $6.70.

In afternoon trading on the New York Stock Exchange, Quest's shares were down 8 percent at $105.90.