Quest Diagnostics Incorporated ($DGX)

Perfect. Good morning, everyone. Welcome to Day 3 of the Leerink Global Healthcare Conference. I'm Mike Cherny, the health care tech distribution analyst here at Leerink. But it's my pleasure to have Quest Diagnostics with us, CFO, Sam Samad, finance exec -- temporary IR, Dan Haemmerle, long time Quest exec with us as well. Team didn't bring any slides, which I appreciate, which good jump rate questions.

Maybe, Sam, to kick things off, capsulating 2025, we saw a year building volume strength that really resonated in 4Q with a particularly impressive performance. Can you maybe just give us a little bit more of a breakdown of what you're seeing in terms of where you're pulling from the pockets of improving volumes?

Sure. And Michael, first of all, thanks for having us here. So a pleasure to be here. You're right. I mean '25 was a very strong year for us. If I think about utilization specifically, think about a few things that both we are driving, but also from a macro utilization sort of environment are helping create a really positive tailwind. But in terms of the things that we are driving, I would say, access -- increased access across the country. We are up to 92% now in terms of coverage across the entire country. We recently got -- and when I say recently, at the beginning of 2025, we got access in 4 remaining states with Elevance, which helped us also increase our share and increase our capture in those states. We are gaining share overall. In addition to access, I think some of the acquisitions that we've done, some of the offerings that we have, have enabled us to gain share as well. And then as I think about the utilization market overall and what's driving some of that higher utilization. I think about things like, for instance, increased access to early cancer screening to increase screening overall, things like, for instance, brain health screening, more screening options that physicians are relying on that are driving more utilization in certain cases. The focus on wellness, the consumer offerings that I think a lot of -- whether it's baby boomers or patients that are more focused on having control of their own health outcomes are really going to, those are driving utilization as well. So there are a number of factors. But in general, I would say things that we've driven like increased access things that are, from an overall health care utilization standpoint are also helping us like early access to screening options and also improved guidelines favoring those.

And I'm going to come back on the specialty side, but I'm glad you mentioned Elevance, because called out a significant payer 4 states. What about that book of business has been added. Is it just simply that you have access to lives? Is there anything you've seen from a behavioral perspective that has driven excess growth in that book of business, especially as part of that share gain dynamic...

Yes. I don't think it's anything unique to that book of business, Michael. I think it's more as you -- we had those 4 states where we really didn't have access. And so you really -- it's hard to go to certain physician offices get that business when you're not basically in network with a certain payer. So as you get more coverage, and as I said, now we're up to 90-plus percent you're able to just drive market share in those states because you can go to physician offices, you can now compete for that business, you're in network with all their payers, and so they're more likely to shift that business over to you. And then you can build on that with additional market share gains. So I don't think that's -- what we saw in '25 is the end of that expansion of our capture in those states. I think that was the bulk of it, but we will likely see also a tail to that as well going forward.

And along that dynamic of share gains, share capture, seems fairly straightforward, that it is happening based on where we see market growth versus your growth. How is the share gain changing, especially against the hospital labs at this point in time? It's been obviously a long-time push by you to make sure you're establishing a position? Like what are you seeing now that's changing some of the behavior that's allowing you to gain share?

Yes. I think I'd like to break that down into sort of the physician market, the physician testing market and then the hospital market because there are 2 different dynamics there. In the physician testing market, where we today have about 12% of that market. It's about a $60 billion market. We've gained share. Obviously, the things that I just mentioned around having more coverage across the country, having a very comprehensive test menu having, frankly, better prices as well than the health systems, which helps the payers. It helps the patient because they have sometimes lower co-pay that's out of pocket for them. And it helps employers because they know that their employees are not going to incur the same cost and for self-directed care or employers that are basically funding their own health care, it saves them money. So I think we've been able to grow our share, both organically but also through acquisitions, acquisitions of some of these physician outreach books of business from the hospitals. And the reason for the acquisitions getting momentum is the reasons that I've just mentioned around it's more cost beneficial and we can perform the work more cost effectively. Now in the hospital space, I think a key driver of our share gains has been the collab initiative. The -- what we used to call PLS, now we call it collaborative lab solutions. And basically, it's the ability to grow our scale through taking on the operations of labs across health systems. Again, health systems realize we can do this more effectively. We can do this more cost effectively. We can drive cost reduction. And so there's been this, I would say, real attitude on the part of health systems to basically outsource some of that lab management to us.

And maybe using that as an example, I'm going to jump back to some other questions. But on the collab side, you have a more sizable collab agreement going on with Corewell an additional JV that's building. Can you walk us through a little bit about the tenor of that relationship, especially given that there is a double component to it beyond just doing the collaborative work?

Right, sure. Yes, it's a very important relationship and a really big collab partnership. So -- but this has basically 2 facets to it to your point. Number one is we've taken on the collaborative lab solutions for -- across their entire health system. And Corewell, very large health system in the state of Michigan. And I think it's in excess of 20 health -- 20 hospitals that they run, and we're going to be running basically all of their labs across these health systems. And that started to happen across Q4 in 2025. We started to basically ramp that business. It's going to happen across 2026, and it's going to be an additional $250 million for us in terms of revenues this year in that collaborative lab solutions business. Now in addition to that, we have formed a JV with Corewell. And what JV means is that we basically bring our assets together, our employees together, and we're going to be building a lab together again in Michigan to basically stand up all of that work across their physicians, our physicians, their book of business, our book of business to come together. We're a majority owner. We have 51% of that JV. They have 49%. But we're going to be building the lab together this year across the majority of this year to stand it up, build it, staff it, put all the equipment in there. We expect to have that stood up early 2027. Okay. So the collab business, really important. As I said, it's ramping up now. It's $250 million. The margins on that business, especially in the first year are lower than our average book of business. The margins on that business in 2026 are going to be somewhere in the low single digits, okay, 3%, 4%.

For Corewell specifically.

For Corewell specifically, right? Collab overall is about a 12%, 13% margin business. And that's what Corewell by the way, will grow to eventually in its second year, maybe towards the end of its second year. Now the JV business, which ramps up in 2027, ramps to become, over time, almost on par with our enterprise average. It's regular business. It's not necessarily collab business.

Got it. Maybe jumping back to some of the other recent trends. The other dynamic that's driven organic growth has been test per session. There's some clear mix dynamics you've called out on the consumer side. But if you unpack what's going on with test per session, which has been durably higher than historical trends, what are you seeing in terms of the why behind that?

Yes. No, it's a good point. And just the fact in terms of where we are on tests per req, we call it test per requisition. So back before COVID, we were sitting at somewhere in the, I would say, 3.5 tests per requisition. And when I say before COVID, I'm going back to maybe 2015, 2016, we're somewhere about 3.5, 3.6. And now we're sitting at around 4.5, okay? So we've basically grown the density of our requisition over the last 10 years by almost an additional test. That's really important when you think about it because the cost to perform an accession and additional test is not proportional in terms of -- you already have the fixed costs covered. All you're incurring are some additional reagents and cost of testing but it's very profitable to have that increase in test per requisition to your question. Now what's driving it? A number of things. Consumer is one of them, and we can talk about it. But in terms of other things, the advanced diagnostics growth in our business that what we call esoteric testing. These highly specialized advanced diagnostics tests are really a key driver. The availability of new tests that are now being favored by physicians because if you have a patient coming in for whether it's for their annual physical or for a general routine testing visit, if they have certain risk factors, you might add an AD detect test, which is for brain health for early screening of early onset dementia. If you have certain risk factors, you might add a colorectal cancer screening test. You might add a general cancer screening test, for instance, a pan-cancer screening test. You might add a cardiometabolic test that you didn't have before. So there are many different things, I think, on the screening side that are starting to become much more prevalent and being favored by physicians and guidelines are driving towards that as well. We saw last year that blood-based testing was added to the guidelines as a screening option for brain health. So all that is helping, I think, driving test per requisition.

And as you think about the next leg, I'm not asking for guidance beyond the 4.5, but should we assume that there's a continuation of these trends you've seen? Obviously, we all have better information, better data applications of AI, are all these factors -- should we think about test per req being something that's a more permanent additive piece to organic growth?

Yes. I mean it's hard to project this out, right? Because you have to think about just physician behaviors, guidelines evolution, a lot of things that -- some of which we control, some of which we don't control. But I think at the least, I would say, we expect these trends to continue. Now is it -- does it mean that in the next 10 years, we add yet another test per req. No, I'm not saying that. But I do expect that these trends qualitatively would continue because I think that's where care is heading. Is more prevention, more screening, more rather than shifting a little bit of that equation from treatment to prevention. And I think U.S. health care is starting to catch up to the importance of that.

Give we're sitting here in the middle of March. I have a couple of start of year questions for you. First of all, a lot of people here live in Northeast, multiple weekends getting snowed in? Like what are you seeing in terms of how your network responded to some of the snow days and any impact that you think is relevant to think about at this point in time?

Yes, sure. Some of it we talked about on the Q4 call as well. Listen, January was a tough month in terms of weather. I mean, I'm not saying anything that maybe a lot of us didn't experience firsthand. The Northeast had some really bad weather. The Southwest had some bad weather, we had bad weather across the country. Leading up to that sort of third week, maybe fourth week of January, we were seeing very strong utilization. Obviously, and as usually happens when you have bad weather, you get impacted by that because if you're snowed in, your first thought isn't going to be to go rush to a patient service center to get blood-based testing. You can defer that. Now we do think that a lot of these reqs, Michael, 30% to 40% of them do come back. So it's not like you lose that business and it's gone. 30% to 40% of them we estimate do come back. The general wellness type of testing usually does come back. If it's more episodic, if you're going in every 3 weeks to get a blood test done for a certain chronic condition, that might not come back because you might miss a certain visit, and then you do the next one. But the general wellness and the routine testing stuff does come back. We've seen that. We also have now the ability, and we've developed this over the last, I would say, number of months to really target patients as well that have missed appointments. We do campaigns to go and make sure we remind them to come back for testing. So we control some of that. But as I said, leading up to that bad weather, and thankfully now, it looks like we've turned the corner and weather is starting to become more manageable. But leading up to that, the utilization was really strong. And I expect it to continue at the same trends that we were seeing before. There is no reason for it to not to get back from that short-term disruption we saw.

And then, obviously, early in the year, but you've been pretty transparent on your views on the health insurance exchange and the volume headwinds. Is there anything you can parse out from your data yet, just see how it's tracking relative to your targets, your plans?

Yes. Just to remind everybody, we put in an estimate of roughly 30 basis points impact on revenue growth this year as a result of people not renewing their coverage because of the subsidies expiring. And the removal of the subsidies. I would say I'm encouraged by the early signs. In terms of enrollment, the enrollments have been stronger than we expected. The drop-off in enrollments has been lower than we thought as a result of the subsidies expiring. And there's still, I think, a bit of a wait and see to see the type of coverage that people opted to. For instance, if you signed up, but you before had maybe a gold plan. Now you're going to a bronze plan, you're going to a lower utilization plan because you just want to make sure you have catastrophic coverage, but you're not going to really utilize the plan. Will that impact utilization? Yes, of course, even though you're still covered, but you're going to be covered, but utilize your health care less. Now we factored that into our 30 basis point estimate. It's not like we expected everybody to even the people that stay on, we expected there to be a bit of a drop off in utilization. So I would say overall, Michael, I think it's probably gone better than we thought.

And then we're 1.5 weeks into some expanded geopolitical strike and obviously, subsequent increases in oil and gas commodity prices. It's been a while since we've talked about sensitivities of your business relative to some of the commodity dynamics. Can you just remind us how you manage through potential changes, both up and down when you do see spikes like we've seen? Obviously, no one knows how long it's going to be. But just curious to think about how Quest attacks it?

Yes. I mean, obviously, anything that's -- whether it's price of oil or other disruptions or other, I would say, shocks in the system, so to speak, are going to have an impact. We have a very large logistics network. We have 16 planes that fly across the country and transport samples. So the price of oil is going to impact us as do some whether other utility type sort of impacts that are out there. Now I'm not too worried about it. First of all, we started to really make this push to move our whole logistics fleet, our ground-based fleet to hybrids, which helps really save on the cost of on the cost of gas because that was a big cost factor for us regardless of whether the price of oil was $100 or $60. And I think to your point, now if this disruption is 8 months in terms of higher prices, yes, it will have a cost that I think we can manage, but it will have a cost increase. But I think we've started to take some steps to offset some of the negative impacts of that.

Got it. Turning back to some of the mix dynamics, especially around specialty. We talked about some of the growth in tests. Where do you see your portfolio lies today? AD detect has been a good advancement. What have been some of the other success points you've had in terms of the proactive push to drive better specialty mix?

Yes. We've got -- first, let me talk about the portfolio overall. I mean we've got these 5 high-growth areas that we are really focused on. And those are in the areas of oncology, brain health, autoimmune, women's health and then cardiometabolic. Those are the key areas that have high-growth tests that are now about $1 billion in terms of size. And those high-growth tests within these 5 areas basically are growing in the double digits, somewhere close to the high teens. So we're seeing really solid growth there. And that impacts the mix overall back to your question about revenue per requisition and mix benefits, that really impacts favorably that revenue per requisition and also the number of tests per req. In terms of key tests, Michael, so let's focus on a few. Brain health, I talked about AD detect. But this is a really important test, and it's a portfolio of tests with different analytes. We have 4 analytes. You've got amyloid beta 42, amyloid beta 40, you've got p-tau217, p-tau181. So depending on the patient and what the specialists or the GP because this test is being prescribed by a lot of GPs or ordered by a lot of GPs. I mean they can order 4 analytes for that test, and it could be a test that's a price that gets reimbursed at about $400. So it's a good, high priced, high value test for us as well. But that test is really important for the early onset dementia patients, at least the ones that have risk factors. If you look at autoimmune, we have this test called analyzer, which is also fairly new. I mean, it's been around for maybe close to 2 years now. But it really can help physicians detect of 8 autoimmune disorders, which one they might be suffering from because for these autoimmune disorders, it's really hard sometimes to figure out autoimmune disorder does a patient have? How do they treat it? What's the next step. So this is a test that really informs of those 8 large autoimmune disorders, which one does the patient have and what are the next steps in terms of treatment. You have -- obviously, on the oncology, you have Haystack MRD, the MRD test that we have, which is having good momentum. We partner in oncology on some tests as well with companies like Guardant, with companies like GRAIL on their early cancer screening options as well. And in cardiometabolic, it's really a focus on a large number of tests, some of which really help in terms of understanding of patients' risk based on their cholesterol but also getting away from the traditional options like just looking at LDL and HDL -- that's a little bit outdated. Now we look at things like Lp(a) and ApoB, which really helps you understand the full risk factors behind cardiometabolic disease.

And on Haystack, in particular, what is the status update right now? Where are you seeing the commercial expansion and how is it tracking relative to your expectations for the ramp?

Yes. So we've made a lot of progress on Haystack, and I'll tell you in which areas we've made progress. First of all, back in late '24, early '25, we had this early experience initiative, which was with about 75 cancer oncology centers many more oncologists within those cancer centers that have tried Haystack, 90% of them based on the experience they had said that this really helped them think differently about their -- basically their MRD options going forward. So really big success. Now we launched the assay fully for commercially in April of 2025. So we've been at this now almost a year, not quite. We've scaled commercially in terms of the number of reps. We're now about 40 dedicated reps. And in total, between reps that are dedicated to Haystack and ones that co-promote it, it's about 60 or just over 50 reps that we have driving it. We've gotten reimbursement for the test for both baseline and recurrence monitoring. So the baseline test now is priced at close to $3,900, the monitoring is close to $800, the repeated monitoring, the blood-based monitoring. We've launched this ordering -- EMR ordering platform to help oncologists with the ease of ordering, ease of resulting which really helps oncologists not to have to deal with paper recs, et cetera. So that was really important. And I think we're getting really good feedback on the low limits of detection that we have for the assay, Michael. I mean we're getting feedback in some cases where they say, "I've used another option I got a negative test. I used your option and I got a positive test, which is really critical for patients. That means they had recurring tumor basically tumor fragments in their blood that were being shed by that tumor. And the previous test didn't catch it, and that's really critical.

And what comes next in terms of hitting your milestones to get Haystack to breakeven and eventually profitable?

Yes. No, I mean, continue to ramp. Obviously, we're going to continue to drive the commercial focus and execution. That's going to be the key thing. I mean at the end of the day, reps talking to oncologists are what gets adoption going. You can talk about all the scientific merits and those are really important. But unless you have reps really promoting the product, explaining to physicians and oncologists what this does, you're not going to get traction. And that's why we've increased the commercial focus. We have also the reimbursement that we got was with Medicare, and 50% of cancer cases are over 65. So that covers a big portion of the population. We're now focused on Medicare Advantage as well. So we submitted this technical assessment to MolDx for the purpose of getting Medicare Advantage coverage. That's next. And continued commercial adoption. That's the key thing. Now I won't give you revenue targets in terms of what the success look like for revenue targets because it's a test. At the end of the day, this is not a P&L. This is a test. We have many tests. We have hundreds of tests in our menu. But what's going to -- what the success look like? I mean, this is a market today, Michael, that's $1 billion, the MRD market. In 5 years, many have estimated this could be 5x that, $5 billion market. So every point of share really matters in this market. We're not expecting to have 50% share in this market in 5 years. No, that's that would be an unreasonable expectation. But we are expecting to gain share in a market that's growing. And every point of share really matters. And for a company like us, this can help us really be more accretive in terms of growth.

Turning internally a bit before we run out of time because it's going fast. Let's talk about AI. I mean you have obviously the Project Nova large-scale implementation going on. You're also doing some interesting things on AI. I was at one of your labs in December, I saw some of the microbiology sample work that you're doing sample sorting. How do you think about the strategic optionality on AI as both within the clinical side, so actually like testing advancements, analytical advancements versus the internal side, i.e. your world on finance operations?

Right, right. Yes. And I'm glad you went to Clifton and saw sort of the automation AI in action because that's a really impressive lab. I would say it's, if not the most advanced lab out there. It's definitely among the most advanced labs. But here's how we think about AI, Michael, and it's an evolving thought process, I'm sure for a lot of people because AI keeps changing in terms of how the use cases, the potential, how we size the value from AI, all these are still evolving, I think. And I'm struggling with them as much as I think any other CFO is. But we think about it as inside the lab and outside the lab, okay? That's how we categorize our AI efforts. Inside the lab, I'd say we're more advanced than probably a lot of companies out there in terms of how we think about AI, how we've deployed AI. I mean, we've deployed both automation and AI until a lot of our workflows. We've got 3 labs now that are -- that have end-to-end automation. Clifton is one of them. We have automated sample sorting. We are piloting automated accessioning, things where no human touches the sample. This all gets done by machines. On the AI side, we've got algorithms for detecting regions of interest around cytology, so automated cytology and also microbiology and pathology as well, where we basically have AI and large language models or AI algorithms, I should say, detecting regions of interest, highlighting them for either the lab tech or the pathologist to help them really diagnose much quicker and improve their productivity. You're always going to need a human to make the diagnosis but you don't need a microscope anymore for looking at samples. You don't need people looking at cultures. You need digital images that are being essentially assessed by an AI algorithm that's pointing regions of interest that's helping focus the detection on a much more concentrated area that now helps the -- either the lab tech or the pathologist/physician make that diagnosis. So that's in the lab. Outside the lab, there are many areas that we're looking at. More recently, we just launched this -- essentially, this language model and chatbot for interacting with your results. If you have MyQuest, the app that we have for all of our patients that can choose to download it and you get your results there, you go in and you interact with your results in a way that's much more fluid than it ever was. Now when you see outliers in terms of some of your results, you can ask questions, you can get answers. It's never going to give you a treatment option because you need a physician for that, but it's going to direct you to probably how you should be thinking about this and what questions to ask your physicians potentially. So it's a very interactive language model for your results. We're looking at what we call dynamic route optimization and logistics, where AI figures out the best routes on a very dynamic basis, not just a static hey, here's how we think you should go to point A to point B, but really helps both in terms of flight mapping and ground mapping how we think about the most cost-effective routes on a, as I said, a dynamic basis. In my area, there's tons of things. I mean I have a group now that's dedicated to focusing on how do we improve back-office functions, how do we make sure that we -- my goal, Michael, is in 3 years, take out every transactional function, every transactional function, not just, hey, 1 or 2, really, I think that's what we should be aspiring to.

And then last minute, Project Nova, you introduced it around this time last year at the Investor Day. You talked about the headwinds, I think it's $0.25 for this year embedded in the numbers. As you've gone through the process, any surprises yet on what's been unveiled, opportunities for more spend, opportunities for more optimization? Anything you could call out?

No, no surprises. It's going as planned. We signed with Epic in the second half of last year. We're starting to ramp all of the efforts around starting to think about how we're going to roll this out across our 24 labs. It's going to be a staggered rollout. We're going to have the esoteric labs, namely 2 esoteric labs being the first phase of rollout to be basically operational on the new lab information system by end of 2027. So that's the goal. That's the first step, and then you start to stagger the rollout post that. That obviously helps you to manage the risk. So you're not doing many labs at once. You want to do them over time. Our expectation is that we're going to start to see benefits in late 2027 when we start to roll this out, benefits in terms of easier integration with health systems, with physician offices that help you onboard businesses faster, lower denials through AI and automation there. We didn't talk about actually denial management as one of the AI initiatives, but that's also ongoing with companies that we partner with in the AI space. But Nova will help us do that. We're going to actually pull some of Epic's AI capabilities with our own as well that helps with Nova benefits realization. I think that's going to be important.

We're out of time. All right. Sam, thanks so much for being here.

Thank you.

Thank you everybody.

It's a pleasure.