Quest Diagnostics Incorporated (NYSE:DGX) Q1 2024 Earnings Call Transcript

Quest Diagnostics Incorporated (NYSE:DGX) Q1 2024 Earnings Call Transcript April 23, 2024

Quest Diagnostics Incorporated beats earnings expectations. Reported EPS is $2.04, expectations were $1.86. DGX isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Welcome to the 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 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 Shawn Bevec, Vice President of Investor Relations for Quest Diagnostics. Sir, please go ahead.

Shawn Bevec: Thank you, and good morning. I’m joined by Jim Davis, our Chairman, Chief Executive Officer 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. 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-K and subsequently filed quarterly reports on Form 10-Q and current reports on Form 8-K. 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-19 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. Now here is Jim Davis.

Jim Davis: Thanks, Shawn, and good morning everyone. In the first quarter, we delivered nearly 6% 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 three 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. In addition, our Invigorate initiative, which includes ongoing investments in automation and AI, continued 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. 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 first quarter. 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. 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 based business revenue growth driven by sustained high healthcare utilization, overall market growth and share gains. 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% of health plan members in the U.S. have access to laboratory services at Quest Diagnostics.

Health Plans value our size, scale, and innovation. We partner 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.

Our M&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. 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. 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. We are launching our Quest AD-Detect pTau-217 blood test to providers this week, and we intend to add additional biomarkers 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 Lewisville, Texas site received the first specimens for the PROMIS Clinical Trial on a liquid biopsy screening test for colorectal cancer from our partner, Universal DX. We look forward to supporting Universal’s efforts to gain U.S. regulatory approval for this test. Lastly, our STEP500 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. 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 Phlebotomist 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 2024.

These systems make our front-end operations more efficient and improve quality while also freeing our employees to focus on other value-added work. 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 Quest’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?

Sam Samad : Thanks, Jim. In the first quarter, consolidated revenues were $2.37 billion, 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-19 testing services. Total volume measured by the number of requisitions, increased 1.6% versus the first quarter 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 first two weeks of January. 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 rec and favorable test mix, largely offset by lower COVID-19 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 first quarter was $300 million, or 12.7% of revenues, compared to $305 million, or 13.1% of revenues last year. On an adjusted basis, operating income was $349 million or 14.8% of revenues compared to $350 million 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-19 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 million in the first quarter versus $94 million in the prior year. Subsequent to the end of the first quarter, we repaid $300 million of senior notes which matured on April 1st. Turning to our updated full year 2024 guidance. Revenues are expected to be between $9.4 billion and $9.48 billion. 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 $1.3 billion, and capital expenditures are expected to be approximately $420 million. The following are some key assumptions underlying our guidance to consider as you update your models.

COVID-19 testing revenues to decline approximately $175 million for the full year. In terms of M&A, our guidance only includes acquisitions that have been announced or closed to-date. 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 million. Weighted average share count to be flat compared to the end of 2023. While we are only one quarter into the year, given the strong volume trends in Q1, we have raised our adjusted EPS guidance by $0.10 at the midpoint, which more than offsets the $0.05 to $0.07 headwind we experienced from weather in January.

With that, I will now turn it back to Jim.

Jim Davis: 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 in improved profitability in 2024. Now we’d be happy to take your questions. Operator.

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Q&A Session

Operator: Thank you. [Operator Instructions]. Our first question for today will come from Patrick Donnelly of Citi. Your line is open, sir.

Patrick Donnelly: Hey guys. Good morning. Thanks for taking the question. I want to focus on the margins Sam. Obviously, a big story throughout last year. 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 are 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? I 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 2024 here.

Jim Davis : Yeah, 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 in 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 $90 million less COVID this quarter versus last year same quarter, at a much lower price as well, because we were getting reimbursed at $100 price back then. 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, well 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. 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.

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

Ann Hynes: Great, thanks. Good morning. So you beat consensus by 11%, but only raised EPS by 1% – I mean, I’m sorry 1%. Can you tell us what Q1 came in versus your internal expectations? And should we view that differential as conservatism, or is it something else we should consider as we model? Thanks.

Sam Samad : 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. So we came in better. We had called out at the beginning of the year on the Q4 earnings call that we expect to see a $0.05 to $0.07 headwind from weather, in terms of EPS headwind from weather. That was at the time driven by the fact that really the first two weeks, three 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, 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 midpoint. Now, we’re only in the second quarter here. We still have three quarters to go. Utilization was really strong, especially base business utilization in the first quarter. 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.

Jim Davis : Yeah. 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 and March and we finished strong.

Ann Hynes : Great. Thanks.

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

Kevin Caliendo : Hey, thanks for taking my question. So, I wanted to ask a little bit about LDT. I’m sure you’re hoping that the ruling was going to come out before you reported, 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 are 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, and any sort of financial implications that you might have for fiscal ‘24? 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 an ACLA?

Jim Davis : Yeah. 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. 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. 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, 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 three to four 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.

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

Taji Phillips : Good morning. You’ve got Taji on for Brian. Thank you for taking my question. So first, just on the M&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? Thank you.

Jim Davis : 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. We’re cautiously optimistic.

Sam Samad : Yeah, just 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 acquisitions. So, anything that we haven’t announced will not be included in our guidance. To Jim’s point, if we do close any other transactions, we will include them in our guidance perspective going forwarded.

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

Erin Wright : Great. Thanks. I wanted to ask on just the broader advanced diagnostic segment. How that’s tracking relative to kind of internal expectations. You’ve made advances in areas like Alzheimer’s, for instance and now you did Haystack acquisition. Can you talk a little bit about potential holes in your offering that you see as opportunities? And then on the Haystack front, just what’s the next catalyst on that front? Thanks.

Jim Davis : Yeah. 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 42/40 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. We announced yesterday in a press release that we’ve added a p-tau217. We had already introduced p-tau181. So we feel like the brain health blood-based portfolio is in great shape. 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. 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 said in the script that we were oversubscribed. We saw it somewhere between 15 and 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 about that. We’re going to run 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.

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

Michael Cherny : Good morning. 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…

Sam Samad: Hey, Mike, sorry. We kind of lost you for two seconds there. Can you please repeat the question? Because I missed a portion of it.

Michael Cherny : Is this better?

Sam Samad: Yes, this is much better. Thank you.

Michael Cherny : Okay, I’m going to try to fix my headset after this. Apologize for that. So, it’s a question just on the dynamics of what’s ingrained in the organic volume expectations, is included both from a normalization of the market, but also a mixed 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?

Sam Samad : Yeah, 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 profitability standpoint as well. But overall base volumes, we grew 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, and that drives a lot of productivity and improvement in terms of our margins as we look forward. So, both in terms of mix and some of these advanced diagnostics tests that we have, but also in terms of volume growth overall 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 – as utilization starts to come down and normalize. Maybe that’s a conservative assumption, not sure, but at this point, we’re more comfortable saying that it’s going to be, volume growth is going to be closer to that, just slightly lower than mid-single digits. Jim, anything you would add there?

Jim Davis : Yeah, I would just say, 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 rev-per-rec standpoint, pricing relatively flat. So it suggests that test-pa rec and test-mix were really, really strong. Remember, that offset, as Sam said in the script, $90 million worth of COVID decline. COVID that last year was at $100 per test. So, we completely offset that from a mix standpoint and still saw growth in rev-per-rec. So, really happy with the mix that we saw in the quarter.

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

Jack Meehan : Thanks. Good morning, guys. I 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, to post a beat like this, it’s 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? Any thoughts on share gains? Was that a dynamic? Thanks.

Jim Davis : I think it’s all of the above, Jack. Certainly, the utilization remains strong, consistent with what we’ve seen in the last three or four quarters. But, we also said that, yeah, we think we’re picking up share. We closed several large transactions with two integrated large physician groups in the quarter. Our core physician volume growth was strong. 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. It’s a combination of utilization plus share gain.

Sam Samad : Yeah, 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 Quest Health 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 – year-over-year.

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

Elizabeth Anderson : Hi guys. Maybe a slight two-parter for me. First just to pick up Sam, what you were 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? How are you seeing sort of wages and turnover versus the prior quarter? Thank you.

Sam Samad : Yeah. 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. In terms of the labor environment, we definitely saw a tick down 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 front-line jobs improved in the quarter and feel good about the direction that that’s moving in.

Operator: The next question comes from Lisa Gill of J.P. Morgan. Your line is open.

Lisa Gill : 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?

Jim Davis : Yeah. So we call it value-based incentives is what we’re talking about here. Generally there is two 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 one. It will step down over time. 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 incentive types are broad-based or 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.

In essence, you’re getting paid for share gains at that health plan that are tied to share gains coming from, moving those requisitions from, again, health systems and out-of-network labs. So, really those are the two types of value incentives that we get.

Lisa Gill : Just to confirm, there’s no impact from the change cyber-attack at all on Quest in the quarter?

Jim Davis : No, less than 2% of our requisitions were ever moving through those pipes from an adjudication standpoint. There’s somewhere between a $15 million and $20 million cash impact, but no revenue impact in the quarter.

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

Lisa Gill : Okay, great. Thanks for the comment.

Operator: This question comes from Michael Ryskin of Bank of America. Your line has opened, sir.

Michael Ryskin : 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 for requisition growth, despite some of that headwind. How should we think about that through the rest of the year? I mean, and again, that’s kind of a two-parter in terms of COVID headwinds and fading as you go through the year and then the pricing benefit. You had some major health plan renegotiation 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.

Jim Davis : Yeah, 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 expected to be flattish for the rest of the year. We also said in the rev-rec calculation is test-per-rec – test-per-rec, test-mix, and then payer-mix. Test-per-rec, 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 first quarter. Now, there’s always puts and takes as we move through each quarter and, we’ll have to see how it plays out. But Sam, do you?

Sam Samad: Yeah, I mean, I’ll add maybe a couple of things. First of all, the COVID point, Michael, COVID is not really material for the rest of the year. We said for the full year, it’s going to be a $175 million decline. We’ve had $90 million of that decline happen in Q1. So, the biggest impact really was going to be felt in Q1. But yeah, 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. 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. 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.

Michael Ryskin : Great. Thank you.

Operator: [Operator Instructions]. Our next question comes from Stephanie Davis of Barclays. Your line is open.

Stephanie Davis : Hey, guys. Congrats on the quarter. Thanks for taking my question. You touched a bit on the automation opportunity in your centers in your prepared 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?

Jim Davis: 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 the Phlebotomy, 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. 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 five to six 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 to input that information into our Quest system. So we work back through the physician offices that send us that paper and try to convert that. 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 our final question.

Stephanie Davis : Thank you.

Operator: Our final question of today, will come from Andrew Brackmann of William Blair. Your line is open.

Andrew Brackmann : Hi, guys. Good morning. Thanks for taking the questions. Maybe just following up on some of 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? I know you mentioned no change in dilution or spending related to it this year, but how so we’ll be thinking about potential additional investments here in the future to drag some of those share wins. Thanks.

Jim Davis : 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. So, feel good about that test. We still feel great about the investment and where this market is going. We’re going to build on that. We’ve launched our STEP500, assay as well that allows cancer doctors, medical oncologists to get advice from a treatment planning therapy – therapy planning standpoint.

So we feel good about that. We like, by the way, on Haystack it’s a tumor-informed test. 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 base 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. Once we wrap this early experience program up, we’ll be launching on a national basis later this year.

Sam Samad : Andrew, just to add, this is Sam from a dilution standpoint. So our expectations this year have not changed. It’s still in total 35% 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, and then we expect to be basically to start being neutral to a creative as we look towards ‘26. 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.

Operator: And that was the final question.

Jim Davis : All right, thanks, operator. And thanks again for joining our call today. We really appreciate your continued support. Have a good day, everyone.

Operator: Thank you for participating in the Quest Diagnostics first quarter 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/investor or by phone at 203-369-0197 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.