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Quest's Q4 Revenues Grow 4 Percent; Tax Law Expected to Offset Effects of PAMA

NEW YORK (360Dx) – Quest Diagnostics today reported 4 percent year-over-year growth in revenue for the fourth quarter of 2017, and net earnings that beat analyst estimates.

Revenue was $1.94 billion for the three months ended Dec. 31, 2017, compared to revenues of $1.87 billion in the fourth quarter of 2016. It matched analysts' average estimate for the quarter.

Quest posted a profit of $254 million, or $1.82 per share, for the quarter, versus $155 million, or $1.09 per share, for Q4 2016. On an adjusted basis, its EPS was $1.40, beating Wall Street's consensus estimate of $1.38.

During the fourth quarter, the company spent $453 million on SG&A, up 13 percent from $400 million in the same quarter of 2016.

The reduced Medicare prices for lab tests announced by the US Centers for Medicare & Medicaid Services resulting from the Protecting Access to Medicare Act continues to pose a "significant headwind" for the company, according to Steve Rusckowski, chairman, president and CEO of Quest Diagnostics. The new, lower PAMA rates are expected to impact revenues by 4 percent in 2018 and 10 percent in 2019 and 2020.

Those headwinds will be more than offset, however, by a windfall the company is expected to receive from the recently passed tax legislation in the US. Quest expects $180 million in tax savings on an adjusted basis for 2018, Rusckowski added.

The company plans to reinvest $75 million of that savings before taxes through a combination of bonuses to employees and business investments that will target advanced diagnostic innovations and "high touch" patient services including advances to the company's MyQuest mobile app. The company also plans to award nearly 40,000 employees with bonuses of up to $500, to be paid based on the company's 2018 results.

The company also plans to offset changes to Medicare rates through a fairly aggressive acquisition strategy, Rusckowski said. Two acquisitions completed in the fourth quarter of 2017 – the acquisitions of Shiel Medical Lab and Cleveland HeartLab – top off a year in which the company completed seven acquisitions overall, Rusckowski noted. The acquisitions completed in 2018 are expected to enable the company to exceed 1 to 2 percent top-line growth for 2018, according to Rusckowski.

Heading into 2018, the company's M&A pipeline "remains very strong," Rusckowski said, pointing to its announced plans to acquire Mobile Medical Examination Service as a first example of a continued focus on acquisitions.

The company is also continuing to expand a strategy of providing professional lab services to hospitals and health systems, Rusckowski said.

"We have had a number of conversations with hospital C-suites that indicate their increased sense of urgency about rethinking their lab strategy," due to cost pressures in the industry, Rusckowski said.

The company is also focusing on enhancing its patient-facing services, Rusckowski said. More than half of the company's 2,200 service centers are live with e-check-in services to free up time of service center employees, and the remainder of the service centers will have e-check-in by the end of 2018, he said. The company's MyQuest mobile app added 1.3 million users in 2017, and is now used by 5 million customers he said.

In addition, the company opened lab locations in six Walmart stores in 2017 – five in Florida and one in Texas.

"There is more to come in 2018 as our collaboration with Walmart expands to include basic healthcare services," he said.

Quest also now has 184 lab testing locations in Safeway stores in 12 states, he added.

The company is also building a "data analytics pipeline" for health plan companies, pharmaceutical companies, and contract research organizations interested in leveraging the company's data, Rusckowski noted.

The company's full-year 2017 revenues of $7.71 billion were up around 3 percent from $7.52 billion in 2016 and beat analysts' consensus estimate of $7.69 billion. Its net earnings for the year were $772 million, or $5.50 per share, versus $645 million, or $4.51 per share, for FY 2016. On an adjusted basis, EPS for 2017 were $5.67, topping Wall Street's expectation of $5.65.

As of Dec. 31, 2017, the company had $137 million in cash and equivalents compared to $359 million at the end of 2016.

For 2018, Quest expects full-year revenues between $7.70 billion and $7.77 billion, representing revenue growth for the year of 4 percent to 5 percent. The company expects 2018 reported diluted earnings per share of 5.42 to $5.62.

In mid-day trading, shares of Quest were trading at $103.68, down 2 percent from yesterday's close.