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Quest Q3 Revenues Grow 2 Percent

NEW YORK (360Dx) – Quest Diagnostics today reported 2 percent year-over-year growth in third quarter revenues despite the impact on its business of the hurricanes in Florida and Texas.

For the three months ending Sept. 30, the firm recorded $1.93 billion in total revenues, compared to $1.89 billion in the year-ago quarter. It beat the consensus Wall Street estimate of $1.92 billion in revenues.

Diagnostic information services revenues rose 3 percent year over year to $1.85 billion from $1.80 billion in Q3 2016.

During the recently completed quarter the Centers for Medicare & Medicaid Services published its draft Clinical Laboratory Fee Schedule for 2018, as mandated by the Protecting Access to Medicare Act, with lower than expected Medicare rates for many lab tests. Quest also completed two previously announced acquisitions during Q3 2017 and recently made two more, including the acquisition of Cleveland HeartLab, announced yesterday.

Also in the quarter, hurricanes in Florida and Texas, where the company has a proportionally large presence, impacted the company's service in the area. The company estimated the impact of the recent hurricanes reduced revenue by 130 basis points in the third quarter, slightly lower than what the company had estimated September.

Following the PAMA announcement, Quest continues to urge CMS to delay implementation of its proposed 2018 lab test rates, which are set to take effect on Jan. 1, 2018. Quest alone represented nearly 40 percent of all the market data that CMS collected in formulating the new rates, Quest Chairman, President and CEO Steve Rusckowski said during the conference call, despite the fact that Quest's estimated share of the Medicare market is less than 15 percent.

"These rates should not be finalized as proposed, and this view is shared by 22 respected medical societies and health groups," Rusckowski said.

The company has been collecting facts to support the argument that the rates are not market-based as Congress had intended, Rusckowski said, adding that the company has found a "receptive audience" among legislators and policymakers. On Oct. 6 the company sent a letter, along with other groups calling for CMS to take immediate action to address "significant deficiencies" in the new clinical lab payment rates, Rusckowski said. He added that Quest employees are engaging in grass-roots mailings to CMS and legislators regarding the rates.

"I feel very good about the effort we are putting into this. CMS is hearing loud and clear that they got it wrong and they need to get it right," Rusckowski said.

Meanwhile, the impact of PAMA is expected to be offset by the company's active acquisition strategy, targeting growth of 1 to 2 percent per year through strategic acquisitions, Rusckowski said. In addition to closing the previously announced acquisitions of Med Fusion and Clear Point labs, the recently announced buy of Shiel Medical Laboratory will strengthen the company's presence in the New York City metropolitan market, and the just announced acquisition of Cleveland HeartLab from Cleveland Clinic will become the company's advanced diagnostic center of expertise for cardiovascular testing.

"With the acquisitions we have completed this year and those expected to close by the end of 2017, we are well-positioned to exceed our long-term M&A for 2018, and any accretion realized from the deals of 2018 will offset the potential impact of new Medicare rates," Rusckowski said.

In diagnostic innovation, through its acquisitions of Med Fusion and Clear Point, Quest has assembled a national precision oncology center of excellence, Rusckowski said. The company has also made progress in noninvasive prenatal screening, with prenatal testing providing double-digit growth year over year. The company recently added a screening panel that helps women and men of multiple ethnicities assess the risk of passing 22 genetic diseases to their children. Also in the quarter, the company introduced a new method of calculating cholesterol that is more accurate at diagnosing heart disease and does not require patients to fast prior to testing, Rusckowski said.

The company also continues to expand its relationship with Safeway, with Quest labs in 128 of its stores currently and approximately 30 more expected to open before the end of the year. The company also expects to open more new lab locations in Walmart stores before the end of the year, Ruskowski said.

During the quarter Quest spent $423 million on SG&A, up 3 percent year over year from $409 million.

For the third quarter 2017, the company reported a profit of $161 million, or $1.15 per share, compared to a profit of $192 million or $1.34 per share, a year ago. On an adjusted basis, EPS for Q3 2017 was $1.39, up from $1.37 a year ago, beating the average analysts' estimate of $1.35.

Quest had $350 million in cash and cash equivalents as of Sept. 30.

Quest updated its outlook for the year, primarily due to the financial impact of the hurricanes and recently closed acquisitions in the third quarter. Reported revenue is now expected to be approximately $7.71 billion, which would be the midpoint of previous guidance of between $7.69 billion and $7.74 billion.

EPS is now expected to be between $4.87 and $4.92, down from the prior range of between $4.90 and $5.00. The firm lowered the high end of its forecast for adjusted EPS. The expected range is now between $5.62 and $5.67. Prior guidance was a range of $5.62 to $5.72.

In late morning trading, shares of Quest on the New York Stock Exchange inched up a fraction of 1 percent to $92.85.