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    Quest Diagnostics Inc (DGX)

    Business Description

    Quest Diagnostics Incorporated is a leading provider of diagnostic information services, primarily operating through its Diagnostic Information Services (DIS) and Diagnostic Solutions (DS) segments. The company offers diagnostic insights from laboratory testing, serving a diverse clientele that includes physicians, hospitals, patients, health plans, employers, and government agencies . Additionally, Quest Diagnostics provides risk assessment services for insurers and healthcare information technology solutions for healthcare providers and payers . The company conducts most of its business in the United States but has recently expanded into the Canadian market through acquisitions .

    1. Diagnostic Information Services (DIS) - Provides diagnostic insights from laboratory testing, serving a wide range of customers including physicians, hospitals, patients, health plans, employers, and government agencies. This segment is characterized by a high volume of relatively low-dollar transactions, with revenues recognized primarily upon completion of the testing process .
    2. Diagnostic Solutions (DS) - Offers risk assessment services for insurers and healthcare information technology solutions for healthcare providers and payers. This segment includes solutions under various brands, such as:
      • AmeriPath - Specializes in anatomic pathology services.
      • Dermpath Diagnostics - Focuses on dermatopathology services.
      • ExamOne - Provides risk assessment services for the insurance industry.
      • Quanum - Delivers healthcare information technology solutions .

    Q3 2024 Summary

    Initial Price$137.52July 1, 2024
    Final Price$153.95October 1, 2024
    Price Change$16.43
    % Change+11.95%

    What went well

    • Quest Diagnostics is benefiting from increased utilization in Medicare Advantage plans, especially due to the shift towards narrower networks, which favor independent labs like Quest that offer high quality and lower costs.
    • The acquisition of LifeLabs in Canada provides significant growth opportunities in a market with favorable demographics, such as higher population growth and an aging population, which can lead to increased testing demand. Quest expects to improve LifeLabs' margins to align with company averages over the next few years through synergies and best practices.
    • Quest is expanding its market reach through new contracts with major health plans like Elevance Health and Sentara Health Plans, opening up access in previously limited states and representing commitment from health plans to include independent labs offering great quality, service, and competitive pricing.

    What went wrong

    • The integration of recent acquisitions, especially LifeLabs, is expected to take several quarters to achieve the desired profitability, potentially weighing on near-term margins. Additionally, LifeLabs' operating margin rate is lower than Quest's company average, which will take a couple of years to improve.
    • There is uncertainty surrounding Medicare reimbursement rates due to ongoing PAMA legislation delays, with potential reimbursement cuts that could negatively impact revenue. Quest is pressing for Medicare rates to go up, but legislative outcomes are uncertain.
    • Higher-than-normal wage inflation of 3% to 4%, compared to historical norms of 2% to 3%, along with tight labor markets for frontline employees, may lead to increased costs and pressure margins.

    Q&A Summary

    1. Organic Growth Outlook
      Q: How will organic growth look next year?
      A: Management expects organic growth of approximately 3% in 2025, driven by strong utilization and share gains, including the impact from being in-network with Elevance starting January 2025. They note that utilization remains strong, and the assumption of 3% growth is solid.

    2. LifeLabs Acquisition Impact
      Q: What is the margin and earnings impact of the LifeLabs acquisition?
      A: The LifeLabs deal closed earlier than expected, contributing about $70 million in revenue over five weeks in Q3. While initially dilutive to operating margins, it is expected to be accretive to earnings by $0.10 to $0.15 in the first full year. Management anticipates margins to improve over the next 2-3 years, eventually reaching Quest's enterprise level.

    3. Contracts with Elevance and Sentara Health
      Q: What can you tell us about the new contracts with Elevance and Sentara Health?
      A: Quest will be in-network with Elevance in Colorado and Nevada starting January 2025, with expanded access in Georgia and Virginia , which should help fuel organic growth next year. Previously, Quest was not in Elevance's network in those states. Sentara Health also added Quest to their network, which was previously served by other labs.

    4. Wage Inflation and Turnover Rates
      Q: How is wage inflation impacting you, and are turnover rates improving?
      A: Turnover rates have improved to 18-19% from the low 20s last year. Wage inflation remains at 3-4%, slightly less than last year but higher than historical norms. Management expects wage inflation to stay around 3% next year, and is offsetting it through automation and AI in laboratories.

    5. 2025 EPS Growth Expectations
      Q: Should EPS grow faster next year given all the positive factors?
      A: Despite revenue growth from M&A and improved organic growth, management expects EPS to grow in the high single digits in 2025. They cite ongoing cost headwinds, including inflation at 3-4%, and competitive dynamics in the health system space.

    6. PAMA Legislative Update
      Q: Any updates on the permanent solution for PAMA?
      A: PAMA cuts have been delayed for five consecutive years, which is welcomed. Management plans to push for a fix that acknowledges inflation since 2019, advocating for Medicare rates to increase rather than continuous delays.

    7. Haystack Asset Performance
      Q: What is the outlook for the Haystack asset?
      A: The dilution from Haystack is approximately $0.20 this year, expected to be less next year. Quest is preparing to launch the assay in the next few months and expects to obtain reimbursement as they move forward.

    8. Revenue Details and COVID Impact
      Q: Can you provide details on revenue growth and COVID impact?
      A: Total revenue grew by 8.5% in Q3, with organic growth at 4.2%. M&A contributed about 4%, including $70 million from LifeLabs. COVID impacted revenue growth by about 50 basis points year-over-year.

    9. Unit Pricing Outlook for 2025
      Q: What is the expected unit pricing trend for 2025?
      A: Management expects unit pricing to be flat to slightly positive in 2025. While health systems present a net negative in pricing dynamics, health plans are modestly positive, and government business remains flat due to PAMA cuts being deferred.

    10. Hospital Outreach Deals and Market Share Gains
      Q: How are hospital outreach deals contributing to market share gains?
      A: Quest has acquired outreach businesses from Allina Health, OhioHealth, and University Hospitals, entering markets where they previously had minimal share. These deals place Quest in strong positions in big, growing markets, and they continue to look for similar opportunities.

    Key Metrics

    View all financials →
    Revenue by Segment - in Millions of USDFY 2013Q1 2014Q2 2014Q3 2014Q4 2014FY 2014Q1 2015Q2 2015Q3 2015Q4 2015FY 2015Q1 2016Q2 2016Q3 2016Q4 2016FY 2016Q1 2017Q2 2017Q3 2017Q4 2017FY 2017Q1 2018Q2 2018Q3 2018Q4 2018FY 2018Q1 2019Q2 2019Q3 2019Q4 2019FY 2019Q1 2020Q2 2020Q3 2020Q4 2020FY 2020Q1 2021Q2 2021Q3 2021Q4 2021FY 2021Q1 2022Q2 2022Q3 2022Q4 2022FY 2022Q1 2023Q2 2023Q3 2023Q4 2023FY 2023Q1 2024Q2 2024Q3 2024
    DIS Business2,2592,2682,2282,2218,9762,2982,3332,427
    DS Businesses72706767276686461
    Routine Clinical Testing1,142.191,192.381,170.451,213.984,719---
    COVID-19 Testing116.5546.7622.95-1.26185---
    Gene-based and Esoteric862.47888.44895.05870.043,516---
    Anatomic Pathology139.86140.28137.7137.16555---
    All Other Services69.9370.1468.8569.08278---
    Physician Lab Services----6,106---
    Hospital Lab Services----1,943---
    Other DIS----925---
    DS Revenues----278---
    Total Revenue2,3312,3382,2952,2889,2522,3662,3972,488
    Revenue by Geography - in Millions of USDFY 2013Q1 2014Q2 2014Q3 2014Q4 2014FY 2014Q1 2015Q2 2015Q3 2015Q4 2015FY 2015Q1 2016Q2 2016Q3 2016Q4 2016FY 2016Q1 2017Q2 2017Q3 2017Q4 2017FY 2017Q1 2018Q2 2018Q3 2018Q4 2018FY 2018Q1 2019Q2 2019Q3 2019Q4 2019FY 2019Q1 2020Q2 2020Q3 2020Q4 2020FY 2020Q1 2021Q2 2021Q3 2021Q4 2021FY 2021Q1 2022Q2 2022Q3 2022Q4 2022FY 2022Q1 2023Q2 2023Q3 2023Q4 2023FY 2023Q1 2024Q2 2024Q3 2024
    - United States--------
    - Foreign Operations--------
    Total Revenue2,3312,338--9,2522,366-2,488

    Executive Team

    NamePositionStart DateShort Bio
    James E. DavisChairman, Chief Executive Officer, and PresidentNovember 1, 2022James E. Davis became the Chief Executive Officer and President on November 1, 2022, and was appointed Chairman of the Board on April 1, 2023. He joined Quest Diagnostics in April 2013 and has held various positions, including Executive Vice President, General Diagnostics .
    Mark E. DelaneySenior Vice President and Chief Commercial OfficerMarch 2022Mark E. Delaney is responsible for all sales operations at Quest Diagnostics. Before joining, he was Vice President of Sales and Marketing at Hill-Rom Holdings Inc. and later at Baxter Healthcare .
    Catherine T. DohertySenior Vice President, Regional BusinessesMarch 2022Catherine T. Doherty manages the regional Diagnostic Information Services business. She joined Quest Diagnostics in 1990 and has held various roles, including Senior Vice President, Physician Services .
    Mark A. GardnerSenior Vice President, Molecular Genomics and OncologyOctober 2022Mark A. Gardner oversees oncology, pathology, specialty genetics, and R&D. He previously worked at Corza Medical and OmniSeq Corporation .
    Karthik KuppusamySenior Vice President, Clinical SolutionsAugust 2022Karthik Kuppusamy is responsible for clinical franchises excluding oncology, and other services. He joined Quest Diagnostics in 2014 from General Electric's healthcare business .
    Patrick PlewmanSenior Vice President, Diagnostics ServicesApril 2022Patrick Plewman manages a portfolio of data-driven analytics and services offerings. He joined Quest Diagnostics in 2013 and has held various roles, including Vice President and General Manager of the West Region .
    Michael E. PrevoznikSenior Vice President and General CounselAugust 1999Michael E. Prevoznik joined Quest Diagnostics as Vice President and General Counsel in August 1999. He took on additional responsibilities for governmental affairs in 2003 .
    Sam A. SamadExecutive Vice President and Chief Financial OfficerJuly 25, 2022Sam A. Samad is responsible for finance, accounting, investor relations, internal audit, and treasury activities. He joined Quest Diagnostics from Illumina, Inc. .
    Robert B. CarterDirector (Board of Directors)May 16, 2024Robert B. Carter serves as a Director on the Board of Directors for Quest Diagnostics Inc. He was required to file an initial statement of beneficial ownership of securities on May 16, 2024 .

    Questions to Ask Management

    1. With COVID-19 revenues becoming insignificant and impacting growth by only about 50 basis points , how does Quest plan to compensate for this decline and maintain or accelerate organic growth going forward?
    2. Considering that M&A contributed approximately 4% to revenue growth in the quarter and that LifeLabs alone added about $70 million , is the company's growth overly reliant on acquisitions, and what risks do you see in integrating multiple acquisitions, especially in new markets like Canada?
    3. As you expand into new geographies where health systems previously limited your reach , what challenges do you anticipate in gaining market share in these areas, and how might this affect pricing and relationships with local providers?
    4. Given the anticipated increase in interest expense due to recent debt issuance and the plan to retire lower coupon senior notes in 2025 , how will this higher interest burden impact your margins and ability to invest in growth initiatives?
    5. With the dilution from the Haystack MRD acquisition being approximately $0.20 this year and expected improvements next year , can you detail when you expect this investment to become accretive and what is the plan if reimbursement does not meet expectations?

    Share Repurchase Program

    Program DetailsProgram 1
    Approval DateN/A
    End Date/DurationNo expiration
    Total additional amount$13 billion
    Remaining authorization$1.0 billion
    DetailsAuthorized since May 2003

    Past Guidance

    Q3 2024 Earnings Call

    • Issued Period: Q3 2024
    • Guided Period: FY 2024
    • Guidance:
      • Revenues: $9.8 billion to $9.85 billion .
      • Reported EPS: $7.55 to $7.65 .
      • Adjusted EPS: $8.85 to $8.95 .
      • Cash from Operations: Approximately $1.3 billion .
      • Capital Expenditures: Approximately $420 million .
      • Operating Margin: Expected to be down versus the prior year due to integration of LifeLabs and other factors, but up excluding these impacts .
      • Net Interest Expense: Approximately $200 million .
      • Weighted Average Share Count: Expected to be flat compared to the end of 2023 .

    Q2 2024 Earnings Call

    • Issued Period: Q2 2024
    • Guided Period: FY 2024
    • Guidance:
      • Revenues: $9.5 billion to $9.58 billion .
      • Reported EPS: $7.57 to $7.77 .
      • Adjusted EPS: $8.80 to $9.00 .
      • Cash from Operations: Approximately $1.3 billion .
      • Capital Expenditures: Approximately $420 million .
      • Net Interest Expense: Approximately $190 million, excluding interest expense related to debt financing for the LifeLabs acquisition .
      • Weighted Average Share Count: Expected to be flat compared to the end of 2023 .
      • Operating Margin: Expected to expand for the full year .
      • Dilution from Haystack Oncology: Incremental $0.20 to adjusted EPS for the full year .

    Q1 2024 Earnings Call

    • Issued Period: Q1 2024
    • Guided Period: FY 2024
    • Guidance:
      • Revenues: $9.4 billion to $9.48 billion .
      • Reported EPS: $7.57 to $7.82 .
      • Adjusted EPS: $8.72 to $8.97 .
      • Cash from Operations: Approximately $1.3 billion .
      • Capital Expenditures: Approximately $420 million .
      • COVID-19 Testing Revenues: Expected to decline by approximately $175 million .
      • Operating Margin: Expected to expand for the full year .
      • Net Interest Expense: Approximately $190 million .
      • Weighted Average Share Count: Expected to be flat compared to the end of 2023 .
      • Dilution from Haystack Oncology: Incremental $0.20 to adjusted EPS for the full year .

    Q4 2023 Earnings Call

    • Issued Period: Q4 2023
    • Guided Period: FY 2024
    • Guidance:
      • Revenues: $9.35 billion to $9.45 billion .
      • Reported EPS: $7.69 to $7.99 .
      • Adjusted EPS: $8.60 to $8.90 .
      • Cash from Operations: Approximately $1.3 billion .
      • Capital Expenditures: Approximately $420 million .
      • COVID Revenue Decline: Assumed to decline at least $175 million .
      • Net Interest Expense: Expected to increase to approximately $190 million .
      • Adjusted EPS in Q1: Expected to be roughly 21% of the full year earnings .

    Competitors

    Competitors mentioned in the company's latest 10K filing.

    • Laboratory Corporation of America Holdings, Inc.: Largest commercial clinical laboratory competitor .
    • Smaller regional and local commercial clinical laboratories: Compete in the clinical testing market .
    • Specialized advanced laboratories: Compete in the clinical testing market .
    • Hospital-affiliated laboratories: Compete for outreach testing and may leverage relationships with community clinicians .
    • Physician-office laboratories: Compete in the clinical testing market .
    • Anatomic pathology practices: Compete in anatomic pathology, including those in academic institutions and large physician group practices .
    • Providers of consumer-initiated testing: Compete in the clinical testing market .
    • Large physician group practices: Compete in anatomic pathology .
    • Providers of emerging digital pathology solutions: Compete in anatomic pathology .
    • New players such as employers and government agencies: Recently started to provide clinical lab testing services .