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Quest Revenues Rise 3 Percent Despite Impact of New PAMA Prices

NEW YORK (360Dx) – Quest Diagnostics today reported 3 percent year-over-year growth in revenue for the first quarter of 2018, but fell short of the analysts' average estimate.

Revenue was $1.88 billion for the three month period ended March 31, up from $1.82 billion in the same period last year, which missed the consensus Wall Street estimate of $1.90 billion.

Quest Chairman, President and CEO Steve Rusckowski noted on a conference callthat the revenue growth came despite the fact that this quarter represented the company's first quarter operating under the new lower Medicare reimbursement rates resulting from the Protecting Access to Medicare Act, which affects an estimated 12 percent of Quest's business. The company's actual Medicare reimbursement in the quarter affirmed the company's projection that it would see an estimated 4 percent reduction in Medicare reimbursement under PAMA in 2018, Rusckowsi said.

"We continue to support efforts by our trade association to implement a market-based laboratory reimbursement schedule," Rusckowsi said. The company believes that a decision could be handed down mid-year in the lawsuit that the American Clinical Laboratory Association has filed against the US Department of Health and Human Services over PAMA, he added.

During the quarter the company also experienced an $8 million impact on operating margin due to winter weather, according to Mark Guinan, Quest executive vice president and CFO.

Prescription drug monitoring and noninvasive prenatal screening were key diagnostic growth drivers in the quarter, Rusckowski noted.

The company anticipates that the negative impact of PAMA will be offset by an estimated $180 million in tax savings on an adjusted basis in 2018, and Quest has already begun to invest approximately $75 million of those tax savings into the business, Rusckowski noted.

Despite industry predictions that PAMA would hurt labs, some observers have also said that the new legislation could be a catalyst to M&A among the larger labs, such as Quest. In March, Quest entered into a professional labs services relationship with an undisclosed integrated healthcare delivery system in New England, Rusckowski said.

"We acknowledged earlier that PAMA is a headwind for us; however reimbursement cuts are bigger headwinds for hospital systems operating outreach laboratories," Rusckowski said. "Hospital executives are starting to become more aware of the impact of PAMA and we are staring to have more conversations with them about their lab strategy and how we can help."

During the quarter, Quest completed its acquisition of Mobile Medical Examination Service, or MedXM, a provider of home-based health risk assessment and related services. The company is on track to grow by 1 to 2 percent this year through acquisitions, which is on par with the growth it has achieved through acquisitions for five consecutive years, Rusckowski said.

The MedXM acquisition fits into the company's strategy of supporting population health with data analytics and extended care services, he said. For example, MedXM, which is a home-based health assessment service serving health plans, identifies Medicare Advantage and managed Medicaid members who are at risk for diabetes. MedXM's call center reaches out to those patients to schedule health assessments, which include a series of tests, as well as a capturing a retinal image as part of a diabetic eye screening program.

"This program helps identify people at risk of diabetes and it enables health plans to improve their quality scores," he said.

The company has also seen "an acceleration of growth molecular tumor panels" since its acquisition of Med Fusion last year, Rusckowski said. Quest created a Precision Oncology Center of Excellence at the company's, Lewisville, Texas location. The lab puts a strong emphasis on collaboration with community oncology practices, he noted

Rusckowski said the company has also made "strong progress" on a consumer-focused strategy, particularly through its partnership with Walmart. The company plans to expand that relationship into new markets and open "many more" locations this year, he said.

"Our Walmart locations continue to perform well with an increase in patient traffic across the board and outstanding feedback on the customer experience," he said. Rusckowski declined to specify the number of expected new locations.

Also on the horizon, the company sees an opportunity in the fact that Quest's competitor Laboratory Corporation of America's exclusive contract with UnitedHealthcare will expire in 2018. Quest is "in dialog" with UnitedHealthcare and other payors as well, Rusckowski said.

"We continue to have productive conversations and make progress with a number of payors," said Rusckowski.

During the quarter the company spent $363 million on SG&A, up 2 percent from $355 million in the first quarter of 2017.

Net income for the quarter was $177 million, or $1.27 per share, compared to $164 million, or $1.16 per share a year ago. last year. They company's adjusted EPS was $1.52 and beat the consensus Wall Street estimate of $1.50.

The company ended the first quarter with $124 million in cash and cash equivalents.

For full-year 2018, Quest said that revenues are expected to be between $7.70 billion and $7.77 billion. EPS is anticipated to be in the range of $5.42 to $5.62. Adjusted EPS is expected to be in the range of $6.50 to $6.70.In mid-day trading, shares of Quest up less than 1 percent on the New York Stock Exchange at $101.72.