Quest Diagnostics Q1 2024 Earnings Call Transcript

Quartr
Provided by Quartr
April 23, 2024

There are 13 speakers on the call.

Operator

Welcome to the

Speaker 1

Quest Diagnostics First Quarter 2024 Conference Call. At the request of the company, this call is being recorded. The entire contents of the call, including the presentation and the question and answer session that will follow are the copyrighted property of Quest Diagnostics with all rights reserved. Any redistribution, retransmission or rebroadcast of this call in any form without the written consent of Quest Diagnostics is strictly prohibited. Now I'd like to introduce Sean Bevec, Vice President of Investor Relations for Quest Diagnostics.

Speaker 1

Sir, please go ahead.

Operator

Thank you and good morning. I'm joined by Jim Davis, our Chairman, Chief Executive and President and Sam Samad, our Chief Financial Officer. During this call, we may make forward looking statements and will discuss non GAAP measures. We provide a reconciliation of non GAAP measures to comparable GAAP measures in the tables to our earnings press release. Actual results may differ materially from those projected.

Operator

Risks and uncertainties that may affect Quest Diagnostics' future results include, but are not limited to, those described in our most recent annual report on Form 10 ks and subsequently filed quarterly reports on Form 10 Q and current reports on Form 8 ks. For this call, references to reported EPS refer to reported diluted EPS and references to adjusted EPS refer to adjusted diluted EPS. Any references to base business, testing revenues or volumes refer to the performance of our business excluding COVID-nineteen testing. Growth rates associated with our long term outlook projections, including consolidated revenue growth, revenue growth from acquisitions, organic revenue growth and adjusted earnings growth are compound annual growth rates. Finally, revenue growth rates from acquisitions will be measured against our base business.

Operator

Now here is Jim Davis.

Speaker 2

Thanks, Sean, and good morning, everyone. In the Q1, we delivered nearly 6 percent base business revenue growth continuing the strong momentum of recent quarters. We also grew total revenues for the first time since the height of the pandemic nearly 3 years ago. Our strong commercial focus on physicians and hospitals combined with our broad health plan access enabled us to take advantage of sustained high rates of healthcare utilization and drive new customer growth. Our investments in advanced diagnostics also enabled double digit growth within multiple key clinical areas, including brain health, women's health and advanced cardiometabolic health.

Speaker 2

In addition, our Invigorate initiative, which includes ongoing investments in automation and AI, continue to improve productivity as well as service levels and quality. Given the strength of our business, we are raising our guidance for the full year. Before turning to highlights from the quarter, I'd like to briefly discuss the FDA's proposed rule to regulate laboratory developed testing services. We still encourage the administration to withdraw the proposed rule and engage in advancing appropriate legislation that preserves the critical role of laboratory diagnostics. We are disappointed that the FDA continues to move forward with this regulation, which we believe, if enacted, will compromise patient access to critical lab testing, slow diagnostic innovation and add unnecessary healthcare costs.

Speaker 2

We also believe that the rule raises serious legal issues, including that the FDA lacks the statutory authority to unilaterally regulate these services. While we will be prepared to comply with the rule, we will continue to work with our trade association, ACLA, on potential next steps. Now I'll recap our strategy and discuss highlights from the Q1. Then Sam will provide detail on our financial results and talk about our updated financial guidance for 2024. Our strategy to drive growth is focused on delivering solutions that meet the evolving needs of our core customers, physicians, hospitals and consumers.

Speaker 2

We enable growth across our customer channels through advanced diagnostics with an intense focus on faster growing clinical areas, including brain health and molecular genomics and oncology. In addition, acquisitions are a key growth driver, with an emphasis on accretive hospital outreach purchases as well as smaller independent labs. Our strategy also includes driving operational improvements across the business with the strategic deployment of automation and AI to improve quality, service, efficiency and the workforce experience. Here are a few key updates on the progress we've made in each of these areas. In Physician Lab Services, we delivered high single digit base business revenue growth, driven by sustained high healthcare utilization, overall market growth and share gains.

Speaker 2

This growth also reflects new customer wins and our strengthening relationships with physician practices of all sizes, including large multi specialty physician groups and those owned by large retailers. A significant driver of our success in the physician channel is our broad health plan access as approximately 90 percent of health plan members in the U. S. Have access to laboratory services at Quest Diagnostics. Health plans value our size, scale and innovation.

Speaker 2

We're partnering closely with them to reduce laboratory costs through programs that redirect volume from hospital outreach labs and out of network labs, which often charge significantly higher prices than we do, raising healthcare costs for patients and employers. We also remain disciplined in our pricing strategy as we increase our investments in improving the customer experience, such as through digital platform enhancements and adjustments to frontline pay. As we highlighted previously, we successfully renegotiated our large health plan contracts that were up for renewal last year. In addition, more than 50% of our health plan revenues now have some type of value based incentive. In physician services, our recent acquisition of Lenco, an independent lab in New York, also contributed to growth in the quarter.

Speaker 2

Our M and A pipeline continues to be robust and we are making progress with several promising opportunities. In Hospital Lab Services, we grew base business revenues by mid single digits. Hospital reference testing in particular continued to grow faster than pre pandemic trends, maintaining the momentum from last year. Hospitals are sending us more reference testing largely because of our innovation, our quality and our value. They also face persistent challenges with staffing certain roles in specialized fields like histology, microbiology and cytotechnology, which we can more easily fill with our talent and our technology.

Speaker 2

In general, as hospitals face both staffing and cost challenges, they continue to reevaluate their lab strategies. Additionally, as the cost of capital continues to rise, some are revisiting their investment priorities and are directing more capital into other clinical areas that generate better returns. Quest provides hospitals with a range of ways to help optimize lab operations, whether through reference testing, savings and efficiencies through professional lab services or access to capital by selling their outreach programs. Many hospitals and health system leaders are approaching us with a heightened sense of urgency for help with their lab strategies. As a result, our pipeline of both PLS and outreach opportunities remains very strong.

Speaker 2

Consumer initiated testing revenues grew double digits, while base business revenues nearly doubled, building on the gains that we delivered last year from our consumer facing platform, questhealth.com. Some of our most popular test categories included general health panels, STDs and tuberculosis testing. We also continue to expand our test menu, such as with our launch of PFAS testing for assessing potential exposure to dangerous forever chemicals and are extending our reach through various channel partners. In advanced diagnostics, we generated strong double digit revenue growth within several key clinical areas, including brain health, women's health, particularly prenatal and hereditary genetics and advanced cardiometabolic health. Growth in brain health was driven largely by our Alzheimer's disease portfolio of tests, which includes our Quest AD Detect blood tests for early risk assessment of Alzheimer's disease and our CSF tests for diagnosing and monitoring.

Speaker 2

We are launching our AD Detect p Tau-two seventeen blood test to providers this week, and we intend to add additional bio markers this year to further expand our menu. In Molecular Genomics and Oncology, we completed the validation of our Haystack MRD test in March and have oversubscribed our Haystack MRD Early Experience program with nearly 20 leading cancer institutions as participants. The early experience program is the final step to prepare for our broad national launch of the clinical test later this year. We are also excited about the opportunities in early blood based cancer screening. This quarter, our Louisville, Texas site received the first specimens for the PROMISE clinical trial on a liquid biopsy screening test for colorectal cancer from our partner, UniversalDx.

Speaker 2

We look forward to supporting Universal's efforts to gain U. S. Regulatory approval for this test. And lastly, our STEP-five hundred somatic tumor sequencing service, which helps providers select therapy for late stage cancers based on tumor mutation profiles, is generating interest from large cancer centers. Our investments in cancer screening, treatment selection and monitoring are positioning us to be a leader in the MRD space and other fast growth molecular genomics and oncology markets.

Speaker 2

Turning to operational excellence, our Invigorate program aims to deliver a targeted 3% annual cost savings and productivity improvements. During the quarter, we continued to deploy automation and AI to improve productivity as well as service levels and quality. For instance, we made progress creating what we term a digital front door, which will use AI in our website and service center kiosks to answer basic questions from patients, reducing workload on phlebotomists and calls to our customer service team. We also recently automated elements of the specimen preparation process in several labs and expect to deploy these systems across other sites in 2020 4. These systems make our front end operations more efficient and improve quality while also freeing our employees to focus on other value added work.

Speaker 2

Finally, I'd like to personally thank my Quest colleagues for delivering a superior customer experience. Our industry just celebrated Lab Week, which reminds us of the key role labs play at the heart of healthcare. I'm proud that our nearly 50,000 employees bring Crest's purpose to life every day, working together to create a healthier world, one life at a time. And with that, I'll turn it over to Sam to provide more details on our performance and our 2024 guidance. Sam?

Operator

Thanks, Jim. In the Q1, consolidated revenues were $2,370,000,000 up 1.5% versus the prior year, while base business revenues grew nearly 6%. Revenues for Diagnostic Information Services were up 1.7% compared to the prior year, reflecting strong growth in our base testing revenues, partially offset by lower revenues from COVID-nineteen testing services. Total volume measured by the number of requisitions increased 1.6% versus the Q1 of 2023 with acquisitions contributing 60 basis points to total volume. Total base testing volumes grew 3.3% versus the prior year, despite the impact of severe weather in the 1st 2 weeks of January.

Operator

During the quarter, weather negatively impacted volume growth by approximately 30 basis points. Revenue per requisition was up slightly versus the prior year, driven primarily by an increase in the number of tests per req and favorable test mix, largely offset by lower COVID-nineteen testing. Base business revenue per rec was up 2.6% due to an increase in the number of tests per rec and favorable test mix. Unit price reimbursement was flat. Reported operating income in the Q1 was $300,000,000 or 12.7 percent of revenues compared to $305,000,000 or 13.1 percent of revenues last year.

Operator

On an adjusted basis, operating income was $349,000,000 or 14.8 percent of revenues, compared to $350,000,000 or 15% of revenues last year. Adjusted operating income was relatively consistent versus the prior year due to strong growth in the base business, largely offset by lower COVID-nineteen testing revenues, wage increases and higher benefit costs. Reported EPS was $1.72 in the quarter compared to $1.78 a year ago. Adjusted EPS was $2.04 flat versus the prior year. Cash from operations was $154,000,000 in the Q1 versus $94,000,000 in the prior year.

Operator

Subsequent to the end of the Q1, we repaid $300,000,000 of senior notes, which matured on April 1. Turning to our updated full year 2024 guidance. Revenues are expected to be between $9,400,000,000 $9,480,000,000 Reported EPS expected to be in a range of $7.57 to $7.82 and adjusted EPS to be in a range of $8.72 to $8.97 Cash from operations is expected to be approximately $1,300,000,000 and capital expenditures are expected to be approximately 420 $1,000,000 The following are some key assumptions underlying our guidance to consider as you update your models. COVID-nineteen testing revenues to decline approximately $175,000,000 for the full year. In terms of M and A, our guidance only includes acquisitions that have been announced or closed to date.

Operator

No change to our expectation for dilution from Haystack Oncology of an incremental $0.20 to adjusted EPS for the full year. Operating margin to expand for the full year driven by volume growth and improved productivity Net interest expense to be approximately $190,000,000 Weighted average share count to be flat compared to the end of 2023. While we are only 1 quarter into the year, given the strong volume trends in Q1, we have raised our adjusted EPS guidance by 0 point

Speaker 2

Thanks, Sam. To summarize, our business delivered strong revenue growth across our core customer channels, physicians, hospitals and consumers, building on trends from 2023. Our strong customer relationships, broad health plan access and investments in advanced diagnostics are enabling us to take advantage of sustained high healthcare utilization and drive new customer growth. We are steadily improving productivity as well as service levels and quality, giving us confidence and improved profitability in 2024. Now we'd be happy to take your questions.

Speaker 2

Operator?

Speaker 1

Thank you. We will now open it up to questions. At the request of the company, we ask that you limit yourself to one question. If you have any additional questions, we ask that you please call back in the queue. Our first question for today will come from Patrick Donnelly of Citi.

Speaker 1

Your line is open, sir.

Speaker 3

Hey, guys. Good morning. Thanks for taking the question. I want to focus on the margins, Sam. Obviously, a big story throughout last year.

Speaker 3

Nice to see them come in a little bit better than expected this quarter. Can you talk about the moving pieces? It sounds like Haystack was as expected in terms of the dilution for the year. You're kind of maintaining that expectation. But can you talk about the better performance this quarter and then expectations as we work our way through the year, the right way to think about the cadence there?

Speaker 3

Just want to make sure we have that metric kind of ironed out as we think about the progress as we work our way through 'twenty four here.

Operator

Yes, sure, Patrick, and good morning. So maybe the best way to look at it is think about it in terms of year over year, we were 14.8% operating margins in Q1 of this year compared to 15% last year. So some moving parts for you to consider and think about, because you can look at this many different ways. But versus last year, obviously, a big headwind in terms of COVID, both in terms of volumes, but also price. We had CAD90 1,000,000 less COVID this quarter versus last year, same quarter at a much lower price as well because we were getting reimbursed at a $100 price back then.

Operator

If you think about other smaller headwinds, I mean, Haystack, as you said, we still expect it to be $0.20 incremental dilution versus last year for the full year, but you saw that in Q1. But then offsetting these headwinds, the biggest one being COVID was base volume growth and productivity improvement. So we actually offset almost the majority of the COVID headwind through base improvement in terms of margins. The consumer initiated testing business also expanded operating margins as well. We continue to see great momentum in that business and good improvement in profitability.

Operator

Our base gross margins actually improved quite significantly from Q1 of last year. So very encouraged by the start that we've had and the momentum that we see going forward. In terms of cadence, I think to answer your second question, it's I'd say normal seasonality that you would expect going forward, a step up in Q2 in terms of operating margins, maybe consistent operating margins to Q2 and Q3 and then a step down in Q4, which is I would say normal pre COVID seasonality for us. Operator, next question.

Speaker 1

Yes. The next question will come from Ann Hynes of Mizuho Securities. Your line is open.

Speaker 4

Great. Thanks. Good morning. So you'd be consensus by 11%, but only raised EPS by $0.01 I mean, I'm sorry, 1%. Can you tell us what Q1 came in versus your internal expectations?

Speaker 4

And should we view that differential as conservatism? Or is it something else we should consider as we model? Thanks.

Operator

So let me start, Ann. Thank you for the question. By the way, this is Sam. And Jim, if you want to add anything as well, by all means. We beat in Q1 both in terms of versus external expectations, but also versus our own internal expectations.

Operator

So we came in better. We had called out at the beginning of the year on the Q4 earnings call that we expected to be a $0.05 to $0.07 headwind from weather in terms of EPS headwind from weather. And that was at the time driven by the fact that really the first 2 weeks, 3 weeks of January were quite tough for us in terms of utilization and in terms of weather. We offset a significant portion of that. I mean, you heard on the prepared remarks that we had a 30 basis point headwind impact as a result of weather.

Operator

But really, we offset most of the headwinds in terms of the EPS impact. So the $0.05 to $0.07 largely we feel good that that's behind us and that's essentially taken off the table. So we felt comfortable increasing our EPS by $0.10 at the mid point. Now it's only we're only in the Q2 here. We still have 3 quarters to go.

Operator

Utilization was really strong, specialty based business utilization in the Q1. We're expecting in the next three quarters that we go back to, I would say, more normal utilization, not what we saw in Q1. So that's what our EPS range is also driven by. But I would say very pleased with the beat that we had in Q1 and taking the weather headwind off the table.

Speaker 2

Yes. The only thing I'd add, Ann, is that the volume growth was broad based. We saw it across all physician channels and we saw it in health systems as well. So, it did beat our internal expectations after a slow start in January. It came back very nicely in February March and we finished strong.

Speaker 4

Great. Thanks.

Speaker 1

The next question comes from Kevin Caliendo of UBS. Your line is open.

Speaker 5

Hey, thanks for taking my question. So I wanted to ask a little bit about LDT. I'm sure you were hoping that the ruling was going to come out before you report it so that you can actually address it. But maybe talk a little bit now that you've had some time to go over the initial proposal and maybe what you're expecting in the final proposal. Maybe can you let us know about the scope of the tests that you think are going to be included in any sort of financial implications that you might have for fiscal 2024?

Speaker 5

Did it change the way you were guiding? Is there anything in the guidance for this? And maybe how you think it plays out with regards to are you going to try to get an injunction or anything like that through NACLA?

Speaker 2

Yes. So thanks, Kevin. So look, we don't know what the final rule is yet. We've all seen the proposed rule. It largely follows 21 CFR Part 820, which is the regulated device code.

Speaker 2

So we're preparing for it. But let me just tell you, look, we start with a strong quality management system and a very strong quality organization in Quest Diagnostics today. As you know, we follow the CLIA guidelines. CLIA was implemented in 1988. It's a very robust and strict set of guidelines that we follow, and we feel good about that.

Speaker 2

I would also tell you that myself and many other people in Quest Diagnostics have come from regulated device manufacturing companies in the healthcare space. So we know what to do. We know how to do it. Certainly, there's gaps between what CLIA recommends and what 21 CFR recommends. And we'll address those gaps once we know what the final rule is.

Speaker 2

But we'll be prepared. There's not going to be any impact on earnings or EPS here in 2024. As you know, the timeframe laid out was a 3 to 4 year timeframe. So we'll address this in a thoughtful way. We'll be prepared and we've got the confidence and quality organization in place to do it.

Speaker 1

The next question will come from Brian Tanquilut of Jefferies. Your line is open.

Speaker 4

Good morning. You've got Taji on for Brian. Thank you for taking my question. So first, just on the M and A contribution, obviously called out 60 basis points contribution to total volume. Just curious is the 50 basis point expectation for the full year contribution to revenue still stand?

Speaker 4

Thank you.

Speaker 2

Well, if we don't do any other acquisitions this year, then yes, the 50 basis point trend will continue for the following quarters. But as we mentioned in the script, our funnel is good. It's robust and we would expect to close some additional transactions this year. But timing is involved and these things do take time. So but we're cautiously optimistic.

Speaker 2

Yes. And just

Operator

to be clear, our consistent approach is always going to be that we will include in the guidance that we provide only the things that have been announced and our carryover acquisition. So anything that we haven't announced will not be included in our guidance. So to Jim's point, if we do close any other transactions, we will include them in our guidance prospectively going forward.

Speaker 1

The next question will come from Erin Wright of Morgan Stanley. Your line is open.

Speaker 6

Great. Thanks. I wanted to ask on just the broader Advanced Diagnostics segment, how that's tracking relative to kind of internal expectations. You've made advances in areas like Alzheimer's, for instance, and obviously of the Haystack acquisition. And can you talk a little bit about potential holes in your offering that you see as opportunities?

Speaker 6

And then on the Haystack front, just what's the next catalyst on that front? Thanks.

Speaker 2

Yes. So, from an advanced diagnostic standpoint, it certainly met and even exceeded our expectations here in the quarter. So let me talk about brain health first. The uptake of our AB-four thousand two hundred and forty test, which is a blood based test for amyloid plaque has again exceeded expectations. We're really, really pleased with how that test is doing.

Speaker 2

We announced yesterday in a press release that we've added p Tau 217. We had already introduced p Tau 181. So we feel like the brain health, blood based portfolio is in great shape. As well, the CSS side of the portfolio continues to do well as well. On the women's healthcare side, prenatal genetics and carrier screening are doing very well.

Speaker 2

We continue to see double digit growth there. With respect to Haystack, as you know, it's still pre revenue, but we are about to embark on what we call our early experience program. We've said in the script that we were oversubscribed. We saw it somewhere between 15 20 partners to start the program with and we filled that up a lot more quickly than we thought and had to cut it off at 20 customers. So feel good

Operator

about that. We're going to run

Speaker 2

that early experience program for the next several months, which will position us for a broader national launch later in the quarter. So feeling good about the contribution of advanced diagnostics across our portfolio of tests.

Speaker 1

The next question will come from Michael Cherny of Leerink Partners. Your line is open.

Speaker 7

Good morning and thanks so much for taking the question. Maybe Sam, if I can turn back to the guidance, you talked about the dynamics of utilization and the expectation that it will be a slightly more normal environment. As you think about that, how does that factor into your expectations for organic volume, not only on the total number, but also on mix and how that

Operator

Hey, Mike, sorry. We kind of lost you for a few seconds there. Can you please repeat the question because I missed a portion of it. Yes.

Speaker 7

Is this better?

Operator

Yes. This is much better. Thank you.

Speaker 7

Okay. I'm going to try to fix my headset after this. I apologize for that. So just it's a question just on the dynamics of what's ingrained in the organic volume expectations, included both from a normalization of the market, but also a mix perspective and how that factors into your expectations for margin expansion and where are the push and pull points that will allow you to make sure you hit the margin expansion versus areas that you could potentially fall short?

Operator

Yes. I mean, I can start and by all means, Jim, you can add some color as well. I think as Jim talked about earlier, Mike, we've got some areas within advanced diagnostics that are growing in the double digits, which really helps us from growing some of the key tests that we have in that portfolio and also helps us from a profitability standpoint as well. But overall base volumes, we grew 5 in revenues 5.7%, grew less than that in volumes in Q1. Our expectation is that we're growing in the sort of close to mid single digits, maybe slightly below that in terms of volumes.

Operator

And that drives a lot of productivity and remaining three quarters, we expect that to drive an improvement in for the remaining three quarters, we expect that to drive an improvement in terms of productivity. Now remember, we are in the next three quarters, we're not assuming that we continue at the same level and same rate of whether you call it base revenue growth and maybe to some extent base clinical volume growth. We do expect that some of this utilization starts to come down and normalize. Maybe that's a conservative assumption, not sure. But at this point, we're more comfortable in saying that it's going to be volume growth is going to be closer to that, just slightly lower than mid single digits.

Operator

Jim, anything you would add there? Yes. I would

Speaker 2

just say, look, the mix in the quarter was really good. On a total basis, so all in, even with COVID, we still had 10 basis points of growth from a rep per rec standpoint, pricing relatively flat. So it suggests that test per rec and test mix were really, really strong. And remember that offset, as Sam said in the script, dollars 90,000,000 worth of a COVID decline. COVID that last year was at $100 per test.

Speaker 2

So, we completely offset that from a mix standpoint and still saw growth in rep per rec. So, really happy with the mix that we saw in the quarter.

Speaker 1

The next question comes from Jack Meehan of Nephron Research. Your line is open.

Operator

Thanks. Good morning, guys. I

Speaker 8

was hoping you could unpack the core growth a little bit more. So nearly 6%, that was a 3% beat versus what I was looking for. Historically, the lab has been a pretty steady business, so it opposed to beat like this is pretty notable. Can you just lay out the factors for why maybe outside of core utilization growth came in a lot stronger in the quarter? And any thoughts on share gains?

Speaker 8

Was that a dynamic? Thanks.

Speaker 2

Yes, I think it's all of the above, Jack. Certainly, the utilization remains strong consistent with what we've seen in the last 3 or 4 quarters. But we also said that, yes, we think we're picking up share. We closed several large transactions with 2 integrated large physician groups in the quarter. Our core physician volume growth was strong.

Speaker 2

Our hospital reference growth was strong. Our PLS volume relatively strong in the quarter. So that suggests utilization in hospitals was also up. And our pathology business contributing as well to growth. So we see it across all physician types, all physician channels, retailers as well as these large physician groups.

Speaker 2

And it's a combination of utilization plus share gains.

Operator

Yes. And Jack, this is Sam. I'll mention one other thing as well. If you're looking at overall base business growth, I mean the QuestHealth consumer initiated testing business as well was a very good strength and tailwind in the quarter. Basically that base business excluding COVID almost doubled in the quarter, so year over year.

Speaker 1

The next question comes from Elizabeth Anderson of Evercore ISI. Your line is open.

Speaker 9

Hi, guys. Maybe a slightly 2 part for me. In the first just to pick up Sam, what you're just saying about the consumer business. Can you talk about when you sort of think about how you think about the margin progression of that and sort of like what your expectations are for that to get more towards the corporate average? And then secondarily, could you just comment on the continued labor environment?

Speaker 9

How are you seeing sort of wages and turnover versus the prior quarter? Thank you.

Speaker 2

Yes. Hey, I'll address both. So the margins on our consumer business are consistent with the margins in the overall business. So it's right there. It's at the meeting for the company and it continued to improve all last year and so feel good about that.

Speaker 2

In terms of the labor environment, we definitely saw a tick down in or a tick up, let's just say, in our retention rates, not yet back to pre COVID levels, but below in the high teens below the 20% threshold that we were running at last year. So we feel good about that. We saw a downward tick in logistics attrition, our specimen processing, it was across the board. All frontline jobs improved in the quarter and feel good about the direction that that's moving in.

Operator

Great. The

Speaker 1

next question comes from Lisa Gill of JPMorgan. Your line is open.

Speaker 10

Thanks very much. Good morning. In your prepared comments, you talked about 50% of health plans now having some type of value based care arrangement. Can you maybe just give us an example of what that looks like and talk about what that means to the margin?

Speaker 2

Yes. So we call it value based incentives is what we're talking about here. And generally there's 2 types. So one is related to acquisitions. So when we acquire an outreach book of business and let's say, the health plan was paying that health system 200% to 300% of Medicare, it is not going to come down to the rates that we are contracted with that health plan with on day 1.

Speaker 2

It will step down over time. So, so in fact, there's again, since it doesn't step right down to our rate, we're getting paid a higher price for that work over some period of time. The second incent types of broad based types of incentives are really related to volume movement. So movement of high priced requisitions from health system laboratories or from out of network laboratories into Quest Diagnostics. And so it's in essence, it's you're getting paid for share gains at that health plan that are tied to share gains coming from moving those repositions from again health systems and out of network labs.

Operator

So really those are

Speaker 2

the 2 types of value incentives that we get.

Speaker 10

And Tim, just to confirm, there's no impact from the changed cyber attack at all on Quest in the quarter?

Speaker 2

No. Less than 2% of our requisitions were ever moving through those pipes from an adjudication standpoint. There's somewhere between $15,000,000 $20,000,000 cash impact, but no revenue impact

Speaker 11

in the quarter.

Operator

And just to be clear, the cash impact is really a delay, not necessarily any impact to revenue.

Speaker 10

Okay, great. Thanks for the comments.

Speaker 1

The next question comes from Michael Ryskin of Bank of America. Your line is open, sir.

Speaker 11

Hey. Hey, guys. Thanks for the question and congrats on the quarter. I want to follow-up on an earlier point you touched on the COVID headwind that you overcame in the quarter and just how to think about price for the rest of the year. So as you said, impressive that you saw revenue per requisition growth despite some of that headwind.

Speaker 11

How should we think about that through the rest of the year? I mean, and again, that's kind of a 2 parter in terms of COVID headwinds and

Speaker 2

phasing as

Speaker 11

you go through the year and then the pricing benefit. You had some you had some major health plan renegotiations that concluded last year. Is that what's driving some of that growth? And anything else in that arena that we should be thinking of for the rest of the year? Thanks.

Speaker 2

Yes. So let me start and then I'll let Sam make some comments. So remember in the rev rec calculation, there's multiple moving parts here. The first one is pure price. We said it was flat in the quarter and we expect it to be flattish for the rest of the year.

Speaker 2

We also said in the rev rec calculation is test per reqs test mix and then payer mix. Test per req positive in the quarter, we expect that to continue. Test mix was favorable in the quarter, we expect that to continue. So all told, we like the trend that we saw in the Q1. Now there's always puts and takes as we move through each quarter and we'll have to see how it plays out.

Speaker 2

But Sam, do you?

Operator

Yes. I mean, I'll add maybe a couple of things. 1st of all, the COVID point, Michael, COVID not really material for the rest of the year. We said for the full year is going to be $175,000,000 decline. We've had $90,000,000 of that decline happen in Q1.

Operator

So the biggest impact really was going to be felt in Q1. But yes, there is a price impact related to it given the fact that a small minor price impact actually because the price went down middle of May last year. So really it's a minor price impact. And then just a little bit of color on the pricing dynamics. As Jim said, it's flattish for the full year in terms of price impact.

Operator

If you look at the ingredients within that, the health plans, we expect them to be modestly up in terms of price. The health systems is a negative impact in terms of price. Then we have some other businesses where we've had some price increases that helps. So overall, I think the net neutral in terms of price impact for the year.

Speaker 11

Great. Thank

Speaker 1

you. Our next question comes from Stephanie Davis of Barclays. Your line is open.

Speaker 6

Hey guys, congrats on the quarter and thanks for taking my question. You touched a

Speaker 4

bit on the automation opportunity in your centers in your prior remarks. So I was hoping you could help us tease out what the mix of the cost structure looks like in the centers. How should we think about the phlebotomy talent that would be difficult to improve with AI solutions versus how much of that cost is more admin or front desk and could have that AI opportunity coming up?

Speaker 2

Well, Stephanie, we've always said that about 50% of the cost structure in the company is wages, labor. And within the laboratories, it's obviously higher than that. Within phlebotomy, as you know, it's mostly a people expense, although there's supplies and rent for our patient service centers. I would say in the laboratories, much of the automation efforts continue in the specimen processing area, what we call sorting, aliquoting, pouring off tubes of urine and things like that. That's where our automation efforts continue to pay dividends for us.

Speaker 2

On the phlebotomy side, as I mentioned, yes, it's a highly labor intensive operation. Now in a typical 10 to 12 minute draw time, there's still probably 5 to 6 minutes of that time doing manual paperwork, computer entry type of stuff. The biggest opportunity there to improve that is still the movement from paper requisitions to electronic requisitions. What still comes into our patient service center today is 35% to 45% paper that we end up having that information into our Quest system. So we work back through the physician offices that send us that paper and try to convert that.

Speaker 2

I would tell you also we're working on some other kits that could allow for some self draw. So these are early stages, early stage development. But we continue to work on some other things that should make our phlebotomy staff even more productive.

Operator

And

Speaker 1

our final question of today will come from Andrew Brackmann of William Blair. Your line is open.

Speaker 12

Hi, guys. Good morning. Thanks for taking the questions.

Operator

Maybe just following up on some of

Speaker 12

the questions related to Advanced Diagnostics from earlier. I guess it's been about a year since you guys announced that Haystack acquisition. So can you maybe just talk about how your views on the MRD segment or that asset in particular may have evolved since then? And I know you mentioned no change in dilution or spending related to it this year, but how should we be thinking about potential additional investments here in

Speaker 2

the future to drive some

Speaker 12

of those share wins? Thanks.

Speaker 2

Yes. Well, our, Andrew, our thesis hasn't changed at all on the Haystack acquisition. The MRD market continues to grow, by our estimates strong double digits. I mean, there's one primary competitor in that space today that is doing very, very well with the test and making inroads in the market and we applaud them and they're doing terrific. So we think having a second, third credible offering in the marketplace that has a very, very good basis for competition, very strong and very low limits of detection.

Speaker 2

So feel good about that task. So it's we still feel great about the investment and where this market is going. We're going to build on that. We've launched our STEP-five hundred assay as well that allows cancer doctors, medical oncologists to get advice from a treatment planning, therapy planning standpoint. So we feel good about that.

Speaker 2

We like by the way on Haystack, it's a tumor informed test. And again, we feel good about the technology. As we mentioned earlier, we've signed up 20 pre launch customers for this early experience program. These are a broad based set of customers from community based oncologists to academic medical centers. So we like the mix of customers that have come to us right away for this.

Speaker 2

And once we wrap this early experience program up, we'll be launching on a national basis later this year.

Operator

And Andrew, just to add, this is Sam, from a dilution standpoint. So our expectations this year have not changed. It's still in total $0.35 to $0.40 dilution which is $0.20 of incremental dilution versus last year. For next year, we expect less dilution from Haystack. So on a year over year basis, it's actually a tailwind.

Operator

And then we expect to be basically to start being neutral to accretive as we look towards 2026. So nothing has changed from a dilution or financial expectations and we're really thrilled about the interest in the early experience program that Jim referenced.

Speaker 1

And that was the final question.

Speaker 2

All right. Thanks, operator, and thanks again for joining our call today. We really appreciate your continued support. Have a good day, everyone.

Speaker 1

Thank you for participating in the Quest Diagnostics Q1 2024 Conference Call. A transcript of prepared remarks on this call will be posted later today on Quest Diagnostics' website at www.questdiagnostics.com. A replay of the call may be accessed online at www.questdiagnostics.com /investororbyphone@203-690197 for international callers or 866-363-1809 for domestic callers. Telephone replays will be available from approximately 10:30 Eastern Time on April 23, 2024 until midnight Eastern Time May 7, 2024. Goodbye.

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Earnings Conference Call
Quest Diagnostics Q1 2024
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