Quest Diagnostics Incorporated (DGX) Earnings Call Transcript & Summary

Good morning, and welcome to the 2021 Jefferies Global Healthcare Conference. It's day 3 of the conference. And today, we have Quest Diagnostics with us as our first presenter of the day. I'm Brian Tanquilut, I'm the health care services analyst here at Jefferies. And joining us this morning is Steve Rusckowski, the CEO of Quest. And Shawn Bevec of Quest. He's Head of IR. So Steve, thank you for doing this. Really appreciate you taking time today. I guess, oh yes, I'll just go jump straight into that, right?

So obviously, a lot of people are focused on -- or have been focused on COVID and your role there with COVID testing. But as things slowed down, I think the focus is starting to shift back to the core business. So just anything you can share with us in terms of what you're seeing with the ramp down of COVID testing? And how that's benefiting or that's translated to the other side of your business in the core?

Yes. So thanks, Brian, and thanks for having us this morning. So first of all, last year was a wild [indiscernible] best described it. As Q2, as you recall, was the year or the quarter that -- our base business was down by about 50%, and we started to bring up COVID testing. And then in the back half of the year, we saw a recovery in the base, and we started to see record level COVID testing for Q3 and Q4. So as we exited the year, in 2020, I remind you, because you got 2 things going on. One is we saw base business recover from that down by 50% to a high single-digit down versus '19, okay? So saw some nice recovery. And then we battled our way through the winter months where we had the third and fourth wave, depending upon your perspective. And we got into the first quarter, and you asked the question, will it bring our focus again on base? We never lost focus on the base, okay? Just to make sure it's clear. We brought up COVID testing. We continue to execute our strategies and continue to focus on that base and we do. Eventually this COVID testing would be an opportunity for us and an important role that we have in the country. But eventually, we needed to get that base back to where we wanted it to be as we entered the pandemic. So we've seen nice steady recovery in the first quarter. We mentioned that in March we're about mid-single digits, clean compare for the base business. And then we also mentioned that April was a little bit better, and I'm also sure that May is a little bit better. So nice kind of tracking of improvement in the base business. And what we have shared is we expect to have recovery in the back half of '21.

That makes a lot of sense. Steve, the other day, Abbott was out there with commentary on the ramp down of COVID testing for them. And I know you gave some comments on that in the Q1 call in terms of your expectations for COVID testing, right? So if you can help us just match their comments versus what your expectations are, and what you've assumed in your guidance?

Yes. So what we said going into the year is that our COVID testing volumes will come down gradually over time throughout the year. And we saw that in Q1. We continue to see it now, and we'll continue to see it in Q3. As we said, the reason why we didn't provide second half guidance because there isn't a lot of visibility on what's going to happen around the country. But you see what's happening with the turn ons, your [indiscernible] rates coming down, in the case is dropping and hospitalization is dropping and death rate is dropping. So testing is clearly lower now than it was. We still have a reasonable share, and we believe it continues to have an important role. Because, Brian, we're still not through this. And my worry, if I have one about where we are right now, is we can't loosen up at all with the need for people to know if they've been exposed and they get tested and take themselves out of the workplace or the community to get through the virus. So we still have some ways to go. So we do believe there'll be testing in the back half, but it will be lower than the first half.

Shawn, we talked a little bit about why Abbott's comments probably do not match or do not directly translate to you guys? I mean, anything you could share with us on that front?

Yes. The comments that I was making was that we're kind of a real time view. We're giving you what we're running basically every couple of weeks we're giving you guys an update in terms of the daily volumes or the average daily volumes, if you will, whereas some of the IVD companies, because they're products companies, there could be some stocking issues, particularly with the demand coming off as much as it has. There was a lot of products in the channels. They could see some issues. So that's where I would maybe say that there are some differences.

No. I appreciate that. Okay, shifting gears. So during your Investor Day in March, you laid out some good long-term kind of like, I would say, long-term guidance, right? So 2% to 3% organic growth and more than 2% growth from acquisitions. So if you don't mind just walking us through what the drivers of those would be? What initiatives are out there that you've rolled out that will get you to that -- to those growth guidance ranges?

Yes. Sure, Brian. So what we said is top line growth is 4% to 5%, okay? 4% to 5%. And in that 4% to 5%, there's the 2% to 3% for organic, and roughly 2% from acquisitions. And to get there, it goes back to, again, what I said earlier, we've been -- we entirely focused on continuing to drive our first strategy, which is to accelerate growth, despite the pandemic that we have 5 strategies within that. One was to continue to acquire at least 2% per annum of strategically aligned accretive acquisitions. And we've demonstrated with our past performance that we can do that. And we think prospectively, given the setup, if you will, post pandemic, we're actually in a very nice position to continue to do that. So that's number one. And then what we laid out at Investor Day are 4 strategies that are substantial growers for us that will change. And the first is what we've done around health plans. We entered 2019 with the best setup we've had with health care access in over a decade, and we continue to work that. That's United. The work we're doing with Anthem. And work we're doing with other payers as well. Second is the hospital system, strategy that we've had in place for some time. We've been executing this for over 5 to 6 years. It's really picking up momentum. Over the last 6 months, Brian, we've landed a number of key relationships. In the back half of last year, we announced a big commercial lab services relationship with Hackensack Medical Center in New Jersey. We just announced yesterday that we closed Mercy, based in St. Louis, one of the largest systems in the country, where, again, we're working to take over their outreach business. We're working within their hospital, laboratory services and then equally talking about sophisticated testing and population house. So that continues to be a good driver for us for growth. And then third, is advanced diagnostics. So we believe we still have a big opportunity. We're large, but we need to grow faster and grow with the market. We've been growing about 4% growth in advanced diagnostics, and we want to get to at least what we believe the market is at, which is close to 8% or high single-digit growth. And we're steering our portfolio and made some incremental investments to get us there. We afforded that because of the pandemic. And then finally is the consumer. We have been working on direct-to-consumer. This is not new. We brought this up a number of years ago. Fortunately, the pandemic allowed us to exercise it a little more with some of the testing required for COVID. And so we share that. We believe this is a big opportunity, a longer term opportunity, particularly for growth, where we see at least a $2 billion market there, and we should have a considerable share of that market going forward. So that's the first strategy and then we combine that with what we've been on for some time, which is operational excellence, taken out about 3% of cost or adding about 3% productivity. When you put those 2 together, that yields the 4% to 5% top line and high single-digit bottom line growth.

No. That makes a lot of sense. By the way, for the audience, if you guys have questions, I think we have a question box here. And if not, you can e-mail your questions to Jack Slevin, jslevin@jefferies.com, and he will ask them for you. Steve, you gave us a lot to nibble on with your comments there, but I'll start from the last one. I think direct-to-consumer is interesting because a lot of investors haven't really thought much about DTC yet, right? So if you don't mind just walking us through what the initiatives are and what the strategy is there with DTC and digital as well? And how you think COVID has accelerated the adoption or the rollout of those initiatives in direct-to-consumer?

Yes. Brian, first of all, we -- as I said, we've been on this for a while. Our consumer strategy was not just around direct to consumer, but it was more holistic than that, making sure that our experience is second to none. In fact you look at some of our net promoter scores from where we touch customers, they're exceptional. And also, if you look at the touch points we have, we have a smart app called MyQuest. And then MyQuest has now been really the landing page for consumers and patients to get results, schedule appointments and the number of participants or registrations in that application has gone up considerably, particularly during the pandemic. So direct to consumer, we started down this a number of years ago, and we tested the waters. And we weren't sure if really there was going to be a market. Because if you have full access with insurance coverage, why would people pay. We test it in a few states to tell that long behold, there is a market. People wanted to periodically test their, the cholesterol, check their A1c glucose to see what's going on with any risk of diabetes, sexually transmitted diseases. So we brought this up before the pandemic. And fortunately, for us, we've got to work out that platform more with the testing we brought up with COVID and also with serology testing. And you need to realize that this is a direct-to-consumer call from us, marketing and offering. Most of the collection, specimen collection happens within our patient service centers. And we're exploring with our Wellness business some real direct to consumer. We actually do the specimen collection in the home. And sometimes point-of-care diagnostics, broadly defined. We're doing actually some testing in home. But when we're talking about direct to consumer, it's really an online reach to the consumer to engage with Quest Diagnostics where we offer testing. The specimen collection is generally within 1 of our 2,200-patient service centers. We resulted in MyQuest and we have a network of physicians. This impact you in one of those states that requires you to have physicians order or if you want some advice you have to get your results back. So that's the piece that we're really pushing on, but it's part of a broader strategy we've had for some time about being much more consumer-focused in having an experience that reflects more of a consumer brand than the traditional professional laboratory brand.

No. Makes a lot of sense. Steve, shifting gears. We've talked to some of the hospital-owned labs recently and feedback is that the payers are starting to ramp up pressure for them to shift volumes out, right? So as we think about the PLN and the other contracts that you've signed that look a lot like the PLN, whether it's Anthem or some of the loose plans. What are you seeing in terms of the uptake or the traction that either the PLN is getting or some of the other plans are getting with their members and their clients?

Yes. Brian, this is part of a broader initiative, I could say, for all health care insurance. Certainly, we were the first in laboratory services to give it a try. And the United program, professional lab services is they are an example of that, where they're saying, we want the best. We want great quality, great service, great experience, at the same time at very competitive prices, and we're going to drive to make sure that more of our laboratory services get directed through a fewer providers. And they're going to copy/paste this for other health care services, whether it's radiology or physical therapy. And by doing so, it's going to provide more cost-effective better care for the patient. And so right in the middle of that. And in the laboratory space, clearly, if you look at the price points of what we offer to payers and eventually to the patient and their member, it's very competitive compared to hospital pricing. We've shared in the data is really available amount given all the transparency push. Now those rates could be 5 as much as 10x greater than our rates, in many cases, if it's not covered within the policy of the member, they're paying that out of their own pocket. And then equally, there's a lot of specialty labs and regional labs and have preferred pricing as well. So we believe this whole push by health care insurance companies that we're working with them on will help consolidate the marketplace and lead it to a better answer for the consumer that has great quality, great service at affordable prices and have them have transparency and choice around that. We think that's the direction of the industry and direction for this industry, and it benefits Quest.

Steve, do you think that the plans are putting it enough -- I don't know, is it incentives or enough of a push or giving the consumer enough tools to push back against the physicians? Because I think you and I have even talked about examples where the doctor says, well, you got to use my own lab, right, or at the lab down the hall. Are we at that point now where the consumer is aware or is able to shift to Quest because they understand the value proposition?

Yes. I think, Brian, it is a journey. And I think we're making progress. And it's going to be a journey that takes a while. I mean I've been in this industry for a long time. And everything in medicine, everything in health care takes a while. But you need to be persistent and you need to stay with it. And I think we're with the grain, okay? And I like the idea that this is not about laboratory. This is an overall theme. So it's not as if physicians and integrate delivery systems. They have to just do it for the lab. They're going to see this as an overall theme of how they work with other payers, within the ecosystem of health care. So what has happened is we do see the plans working with their sponsor employers to put in benefit designs and incent their employees to use a preferred lab within their network. We see payers putting an incentive for physicians to make sure they stay in network. We see price changes happening for those hospital laboratories, those outreach laboratories from payers. And so it's no longer as advantageous for those hospital systems to keep working on this portion of the business, and that's why you see so much engagement in our hospital business. So the momentum is building, but it is a journey. And the good news with the journey is we're going to see continuous progress year-upon-year for some time, which affords us a nice opportunity to continuously get better with a growth prospect.