The operator introduces the Quest Diagnostics Second Quarter 2024 conference call and reminds listeners that the call is being recorded and is the copyrighted property of Quest Diagnostics. Shawn Bevec, Vice President of Investor Relations, introduces Jim Davis, Chairman, CEO, and President, and Sam Samad, CFO. Forward-looking statements and non-GAAP measures will be discussed and risks and uncertainties that may affect Quest Diagnostics' future results are mentioned. References to reported and adjusted EPS, base business, testing, revenues, and volumes are explained. Jim Davis then begins his presentation.

The company had a strong quarter with revenue growth and improved productivity and profitability. They also made progress in operational quality and efficiency. They announced four acquisitions, including LifeLabs in Canada and Select Lab Assets of Allina Health and OhioHealth in the United States, to expand in strategic growth areas and broaden their presence in areas where they have limited access to providers.

Quest has made successful acquisitions of top health systems and a digital pathology platform, showing their commitment to expanding patient access to innovative and affordable testing. The company's strategy for growth includes delivering solutions that meet the evolving needs of their core customers, driving operational improvements, and making strategic acquisitions. In the second quarter, they saw growth in their base clinical business due to strong performance among physicians and hospitals.

In the Physician lab services department, there was high single-digit revenue growth driven by increased healthcare utilization, market growth, and new customer wins. This was also due to favorable test mix and increased utilization of advanced diagnostics. Medicare Advantage plans and broad health plan access contributed to strong volume and revenue growth. In Hospital lab services, there was almost 4% revenue growth, with reference testing increasing due to hospitals struggling to fill open positions. The advanced diagnostics portfolio is a popular option for hospitals to send reference work. Hospitals face challenges such as high costs and patient demand for better value and easier access. This has led to an increase in outreach acquisitions and lab service arrangements with national labs. The specialized and scaled services offered by the company are more affordable for patients and provide a breadth of quality and innovative options.

Quest is a top choice for hospitals for reference testing, lab services, and outreach asset sales due to their focus on quality and efficiency. Their consumer-facing platform, questhealth.com, saw significant revenue growth, and they are continuously improving their growth and marketing strategies. In Advanced Diagnostics, key clinical areas such as brain health, women’s health, and cardiometabolic health drove double-digit revenue growth. Their Alzheimer’s disease portfolio was a major contributor to this growth, and they recently introduced a new test for assessing neuronal damage. In molecular genomics and oncology, their Haystack MRD blood test is showing promising results for assessing cancer recurrence and treatment response. They are also expanding the evidence for the value of ctDNA blood testing in cancer care.

A study published in JAMA Health Forum found that MRD testing could reduce costs for health plans and research has shown its effectiveness in identifying complete clinical response to immunotherapy. The company has expanded its research collaborations to include studying an investigational treatment for advanced pancreatic cancer. In addition, there is growing interest in advanced cardiometabolic testing, particularly in biomarkers for early detection of cardiovascular and metabolic diseases. The company's Invigorate program aims to deliver cost savings and productivity improvements through the use of automation and AI. The company has expanded its use of automation and AI in front-end specimen processing and microbiology to improve productivity, service levels, and quality.

In the second quarter, the company saw a 2.5% increase in consolidated revenues and a 3.8% increase in base business revenues. They also implemented AI in customer service to improve efficiency. Diagnostic Information Services revenues were up 2.8%, with growth in base testing revenues offset by lower COVID-19 testing revenues. Total volume increased by 1.1%, with acquisitions contributing 40 basis points. Total base testing volumes grew by 1.7%. Revenue per requisition was up 1.6%, driven by an increase in tests per req and favorable test mix. Clinical base business revenues were up 5.1%, while volumes grew 3.2%. Operating income was $355 million, or 14.8% of revenues, and adjusted operating income was $398 million, or 16.6% of revenues.

The company's adjusted operating income increased due to growth in the base business, but was partially offset by lower COVID-19 testing revenues and wage increases. The company reported an EPS of $2.03, compared to $2.05 in the previous year. They have updated their full year 2024 guidance, with expected revenues between $9.5 billion and $9.58 billion. The company also expects to acquire LifeLabs, which is expected to generate $710 million in annual revenues and be slightly dilutive to GAAP EPS, but accretive to adjusted EPS. The increase in revenue guidance is mainly due to recent acquisitions and the strength of the base business. These acquisitions are expected to be initially breakeven to slightly profitable, with profitability improving over time.

The company is not expecting significant earnings from recent acquisitions in 2024, but predicts increased profitability next year. They anticipate a slight dilution from one acquisition and expect their operating margin to expand due to growth and improved productivity. The company also mentions a recent IT outage and hurricane that may have a small impact on their Q3 earnings, but it is already reflected in their updated guidance. The CEO thanks employees for their dedication and collaboration in achieving strong performance this quarter.

The commitment of the company's teams to restore outstanding service following a global IT outage is a testament to their dedication to their purpose of creating a healthier world. The conference call has been opened up for questions, with the first one coming from Ann Hynes of Mizuho Securities. She asks about the company's volume, specifically the employer-based business and the recent Canadian acquisition. The company's CEO, Jim Davis, explains that the decline in volume is due to decreases in their Employee Drug Testing Business, Employer Population Health business, and ExamOne, which does health risk assessments for life insurance companies. This accounts for the difference between the overall 1.7% increase in volume and the 3.2% increase when excluding the employer base. Davis also touches on some shifts in the drug testing market and provides more details on the Canadian acquisition, including its differences from the U.S. market and its growth potential.

The job growth in the services industry is creating a decrease in drug testing, especially for marijuana. There is also a shift towards on-site or oral testing, which saves companies money. Companies are also spending less on wellness events. The life insurance business saw a spike during COVID and the trend has continued. The Canadian market has a growing population and aging population, with favorable reimbursement models. LifeLabs is focused on British Columbia and Ontario, which make up half of the Canadian population.

The speaker discusses the potential for growth in the Canadian market for Quest Diagnostics, citing their familiarity with the market and their experience serving it in the past. They also provide financial information on their services businesses, which have been impacted by COVID-19, but are not expected to worsen in the future. The next question is from an analyst asking about the company's recent guidance raise.

The speaker is asking for clarification on the company's second half projections, specifically regarding the increase in revenues and EPS. They want to know if the increase is mostly driven by core business or other factors such as expected volume, mix, or cost. The speaker also mentions that the majority of the revenue increase is due to new M&A, with little contribution from M&A in terms of profitability.

The company is facing an IT outage in Q3, which is expected to have an impact of $0.06 to $0.08. However, they are absorbing this impact and have seen a significant improvement in EPS due to productivity, cost reductions, strong base volumes, and a positive pricing and reimbursement environment. Rev per rack has also improved due to strong test per req, advanced testing, and strength in Medicare Advantage and Medicare Book of Business.

The speaker discusses the company's strong performance in the second quarter, with a 3.2% increase in volume and 5.1% increase in revenue. They attribute this growth to higher pricing and more advanced tests being requested. The speaker also mentions that the company's base business, which includes physician and hospital testing, saw the majority of this growth.

The company is optimistic about their performance in the second half of the year, with expected revenue growth of 3.7%. This growth does not include any potential acquisitions, as the timing of those deals is uncertain. The utilization of their services has been strong in the first two quarters, and they believe they are gaining market share. The company expects utilization to remain elevated, but they are unsure of the exact trend going forward.

Sam Samad discusses the expected growth of the company in the long-term, with a projected organic growth of around 3% and an additional 1-2% from acquisitions. The current guidance for total growth is 3.1%, with a base revenue guide of 5%. However, the second half is expected to see a slower growth rate due to a decrease in utilization. The questioner then asks for a longer-term perspective on the business.

The speaker discusses the potential impact of digital pathology, particularly in light of the company's acquisition with PathAI. They believe that it will increase productivity and improve quality, but may not necessarily lower costs. They also mention the potential for routing images to expert pathologists, which could result in cost savings and improved accuracy. The speaker estimates that anatomical pathology accounts for about $500 million of their business.

The speaker discusses the potential benefits of digitizing slides and using algorithms for analysis in digital pathology. They believe there is a strong case for higher reimbursement for this technology. They also mention a new solution called "technical-only" where they take on the histology work for a health system. The next question is about value-based care contracts and the speaker mentions that they did not receive some of the payments from these contracts last year. They are unsure of the impact on a quarter-to-quarter basis and if the payments are one-time or ongoing. The second question is about the regulatory environment, specifically PAMA and SALSA, and the speaker shares their expectations for these regulations in the next few years.

In this paragraph, Jim Davis discusses the impact of value-based care on the company's second quarter results. He mentions that while it did make positive contributions, it was not as significant as the previous year. Davis explains that it is difficult to provide guidance on modeling these payments due to their lumpy nature and varying timelines. Sam Samad adds that there are accounting nuances that can affect the pacing of these payments. Overall, value-based care remains a positive factor for the company's pricing in the second quarter.

The company saw a positive benefit in pricing in the quarter, but it had a negative impact on total revenues compared to the previous year. The CEO acknowledged the difficulty in predicting future outcomes and mentioned the ongoing efforts to delay PAMA. The next question was about the company's Haystack product and the CEO maintained the current guidance for the year, but mentioned new partnerships that could impact its development and growth in the future.

Jim Davis, the CEO of the company, discusses the projected dilution for Haystack in the coming years. He mentions that 2025 will be less dilutive than 2024, and by 2026 Haystack is expected to be slightly accretive. The early launch has been successful and there is a high interest from key thought leaders and cancer centers. The company has also formed partnerships to evaluate the use of the assay in specific types of cancer. Davis also addresses the impact of the LDT rule, stating that their trade association has filed a lawsuit in response.

The company is expecting movement in their case in the latter part of the year and is currently operating with the rule in place. They are working towards meeting the requirements set by the FDA, including having a complaint handling unit and the ability to report adverse events by May of next year. They are also providing training for their teams and evaluating the cost of compliance. The recent Supreme Court ruling to overturn Chevron deference could potentially benefit their case, as Congress is responsible for setting the regulations for medical devices and clinical laboratories.

The speaker believes that Congress has made it clear what they intended, but others may have a different interpretation. They are optimistic about recent decisions from the Supreme Court and believe it will impact regulatory bodies. They also provide updates on wage increases and turnover rates. They did not give a specific margin target, but expect operating margins to increase compared to the previous year.

Sam Samad, the operator, introduces a question from Andrew Brackmann of William Blair regarding the company's upcoming debt maturities and assumptions for the LifeLabs acquisition. Sam responds that the acquisition is expected to close in 2025 with a $0.10 to $0.15 EPS accretion, funded 75% by debt. He also mentions that the company will evaluate market conditions and target a 2.5x to 3x leverage ratio for its balance sheet.

The speaker discusses the expected de-leveraging of the company's debt and the impact of recent acquisitions on their financials. They also mention the increase in volume from preferred network customers and the growth of their physician and health system book of business, indicating that they are likely gaining market share in the industry.

The increase in M&A activity this year is due to a combination of factors, including health systems that are not as aggressive in outreach, specialty and small regional labs, and a full M&A funnel. There has been no change in the company's strategy and the recent deals, such as Allina Health in Minneapolis and PathAI, are seen as exciting opportunities in new markets and for growth in existing ones. The location of PathAI does not matter as the work is done digitally and accepts specimens from all over the country.

The speaker discusses opportunities within the company's funnel, with a focus on outreach tuck-in deals and markets where their share position is declining. They mention that all recent acquisitions meet their criteria and will be profitable. The call concludes with thanks and information on how to access a transcript and replay of the call.

This summary was generated with AI and may contain some inaccuracies.