Great. Good morning, everyone. Thank you for joining us for this session at the Leerink Healthcare Crossroads Conference. I'm Mike Cherny, the healthcare tech and distribution analyst. Much more importantly, though, we have a team from Quest Diagnostics, Jim Davis, Chairman, CEO, and President. I always make sure I like to get everyone's titles in there. Sean Bevec, who heads up IR, and is a long-ago former colleague of mine, so this is always a fun reunion. So, I'll tell you the story after, Jim.
All right.
I guess just to kick off, and I don't know if you have any, anything from a perspective, but obviously, you're coming off a really strong performance in the last quarter after a continued building volumes basis. As you think about where you sit right now, and maybe using 1Q as an example, how is that being viewed, you know, from. I'll start volume first in terms of underpinning, the dynamics versus your long-term guidance that you've laid out.
Well, the volume we saw in Q1 was very strong. Let's just go to the revenue growth, right? The base revenue growth just under 6%. Do we expect that to continue in the long term? Probably not. Okay. So we certainly saw continued to see in the first quarter higher utilization trends, utilization trends reported by the health plans, in particular, with respect to the Medicare, Medicare Advantage population. Just put it all together. As you know, there's shifts between the two, but if you just look at the two together, that book of business was the fastest growing in our portfolio. So will that continue at that rate? Probably not. Now, you know, it wasn't just there, though. The commercial book of business was strong. Medicaid, managed Medicaid, was still strong.
We did see growth in the exchange plans, so maybe there was a bit of shift from Medicaid, managed Medicaid into some of these exchange plans. But it's unusual. It's the strongest growth we've seen since I've been in the company.
Yeah. Not a bad problem to have, and nor is anyone expecting that level of elevated growth, but I think-
And so, you know, we're not changing our long-term guidance, right? Mid-single-digit revenue growth, you know, with some acquisition built into that, and, you know, on the EPS side, we've said higher single digit, so.
When you think about that volume dynamics, I like the fact that you broke it down by market base and seeing those pockets of growth across the board. How do you think, you know, especially as we see growth like in the exchanges and the continued expansion of Medicare Advantage, that moving pieces and the ability to drive lower-cost settings of care, which you offer from a testing perspective, does it start to resonate? I mean, this is kind of a dumb question, but does it start resonating more and more in the market, given that there are so many other cost overruns from a high utilization perspective, where it's almost like an encouraged level without having a preferred or forced-
Yeah
forced dynamic?
Yeah. So for straight Medicare, there's no difference in pricing. Medicare pays everybody the same rates, and we actually think that's a very prudent policy that the health plans should continue to move towards. When it comes to Medicare Advantage, you know, what we get paid, us and our nearest competitor, is dramatically different than what health systems are getting paid, okay? Along with our commercial book of business. Now, I'll shout from every mountaintop, you know, in this country, that if your work is going into a hospital lab, you are paying significantly higher out-of-pocket expenses, and your employer that's covering your healthcare expenses is paying 200%-300% of Medicare rates. You know, what we get paid by the commercial plans, as you know, is a number that has a decimal point in front of the Medicare rate, okay?
Zero point something, okay? And so it is one of the biggest, you know, inconsistencies in healthcare today that ends up costing patients a lot more money, ends up costing employers a lot more money. And we'll continue to preach that gospel. And some of the commercial players or commercial payers are starting to make some changes with that.
I want to come back to the commercial pricing side, but I've never understood this philosophically. You know, hospitals, the vast majority of hospitals, which you're competing with, lab is not a core solution for them. It's something they do when they need to, but there's still so many other things going on inside the hospital that the efficiency created by you and your closest peer on the independent side is just so much stronger.
Yeah.
And so as you think about that, you talked about you'll shout as loud as possible. What do you think are the pivot points that continue to evolve that further and further role of independent market, where you have a large market share, but are still a small fraction of the overall testing market?
Yeah. So health systems in general today, let's just talk about the outreach business, right? Forget about patients in hospital beds, okay? On the outreach side, health systems today still control around 35%-40%-
Thirty-five, yep
of the outreach market, okay? Meaning doctors who-
The physician
outside of the hospital are sending work into the hospital. My brother-in-law is an OBGYN who works for a major health system on the East Coast. Okay? He sends all of his work into the hospital because that's what his employer basically tells him to do. So now, I think some of the more progressive, smarter health systems are waking up saying: "Do we really need to be in this outreach book business?" They have a hospital lab. They need that lab to treat inpatient patients, as well as people that come into the ED. But do they need to try to run it as a for-profit entity? I actually think when the CFOs of these health systems look at that book of business, probably isn't generating a lot of profit.
Second is, when you, you know, start to think about the rising cost of capital and you think about the investment needs and the core capabilities of a health system. This is what New York-Presbyterian did. New York-Presbyterian decided to get out of the outreach business. Why? They were making money on it, okay? But when you look at, you know, what are their core competencies? Neurology, cardiology, women's healthcare, and the investment requirements to stay competitive in their market, it, it just, this lab was not one of the top five investment priorities, okay? So they sold that book of business to us. And I think the more progressive hospitals are, are coming to that conclusion, especially knowing that this 200%-300% premium that they're getting eventually is going to come down.
Right.
Okay? Market irrationalities, inconsistencies do have a way of working themselves out over time.
And that's a great example. And again, I will come back to commercial pricing, but the dynamics of the hospital outreach and acquisition market, I know an organization can only go as fast as resource-led. You don't want 10% of the markets all come to you tomorrow and say: "Hey, we're for sale, buy us," because that has a number of other constraints. But as you think about the pace of the hospital outreach acquisitions that you've been doing, is the pace that you've been comfortable with, is there potential for acceleration? And I guess to that point, you mentioned New York-Presbyterian as one example, but what tends to be that decision point? Is it inbound on your part or outbound from them that allows these acquisitions to take place?
Well, I think, you know, from a strategic standpoint, we look at the markets around the country where we have great access from a payer standpoint, but very, very low market share, okay? And generally, these are going to be markets. I'll give you one: Milwaukee, Wisconsin, my hometown. Very, very few independent doctors left there. Most of the physicians in that marketplace work for the Aurora, now Aurora Advocate in the merger with the North Carolina company, or they work for Froedtert, or they work for one of the Ascension hospitals, okay? So, our only way to break into that market is to do an outreach deal with one of those systems, okay? So strategically, we look around the country, and we've picked, you know, four or five markets where we think they're right for some type of transition.
We've got an active, you know, very healthy funnel, and I think you'll hear more from us this year. But those are the types of markets we look for markets with great payer access, so we're in network with all the plans, and we have very low share because there's very few independent physicians left. So our only way into those markets is generally to try to partner with one of those health systems.
Shifting back to pricing, and certainly, we'll bounce across a lot of these things, but you talked about the dynamics of commercial pricing and payer recognition. And from my perspective, this to me, you know, qualitatively, but you're also seeing it show up in your results, feels like as positive a pricing environment as I can recall seeing in my various different years tracking, following-
Yeah
lab space. And so, you know, we're long past the days of exclusive payer relationships-
Yeah
for the most part. How do you think about that strategic discussions that you're having every time now that you go into a pricing negotiation, contract recycling process with especially some of the large national commercial payers? And, what are the push and pull that they're looking for to make sure that both sides get the best value possible?
Yeah. So it starts with a discussion of, in any given marketplace, you know, we try to point out again, "You're paying us some percentage of Medicare, and you're paying these health systems, you know, 200%-300% of Medicare." They then come to us and say: "What can you do to help us redirect those requisitions from these high-priced institutions, you know, to us?" And we have partnerships, you know, with all the payers that do that. Now, having said that, if they want us to provide a great patient experience, then we need to keep investing in the business. So cutting our rates is not going to be, you know, is not the recipe to us providing a great customer experience.
So those patients actually come to us and don't go into the health system for their routine lab work. So it starts with that. It starts with a discussion of, you know, here's the other rates in the marketplace, here's what you're paying us. We obviously have had very thoughtful discussions around rising labor costs and inflation in our business. You know, this was a business that, from 2013 to 2019, had on average a 2%, you know, salary, wages, and benefit increase every year. We're able to offset that, but, you know, during the COVID period, you know, it was touching 4% and 5% in some of those years. And, you know, this year we've guided, we've said 3%-4% wage inflation, wage benefit inflation, but it's still significantly higher than it was. So it's a combination of those things, right?
They wanna continue to invest in us to keep the requisition volume coming to our labs, 'cause, again, good for the patient, good for the employer-
Yeah
and good for them, where they're taking risk as well, right?
Yeah. And along those lines, you know, thinking about the wage dynamics, how has that spread out across your business? How much of it is... You have a ton of scientists. I think that's one of the other things that maybe gets overlooked at times, is just the sheer magnitude of PhDs you have on staff. You know, you have the phlebotomist staff, you have the people that work in the, in the labs. How is that spread out in terms of where you're seeing the areas of wage inflation, and how much of it is, I guess, to use a better term, like replaceable versus people where the wage inflation is there because you need that scientific rigor and expertise within the organization?
Yeah. So let's divide it into two. I would say most of the wage inflation we saw from 2019 to 2023 was actually in these frontline positions. And I think in general, in the country, you know, phlebotomy, logistics, or specimen processing, but it was also retail workers. It was people working in fast food, it was people working in grocery stores and hotels. That's where the majority of the wage inflation was occurring in the country, and it was no different than us. We have actually very good stability on the very technical side of what we do. Pathologists, M.D.s, Ph.D.s, people that are developing some of our tests.
Yeah, more often than not, the things they kind of value is working from home and so, we've had very little turnover there. It's been in those other frontline roles where we've seen most of the turnover.
I guess that's a good segue to think about the more high technology side of your business. You talked about your pathologists, your the MD, PhD side. I think about it relative to the continued advancement of your respiratory testing portfolio, your specialty platforms.
Yep.
Maybe give us a kind of current state of the union on where you see your oncology franchise, some of your other franchises on the testing side, and how much of it is from consumer demand versus technological advancements, i.e., the ability to test for some of these conditions that didn't exist-
Yeah.
3-5 years ago.
Yeah. So I think there's three that we would point out. First, in the cardiovascular space. If you guys, if you go to your physicians, and the only thing they're ordering for you is a cholesterol panel of LDL and HDL, you're really missing-- you're probably going to the wrong primary care physician, okay? There's a lot of people that have very standard normal LDL levels, and are dropping dead every day, okay? Why? Because, you know, it could be the nature, the, the characterization of those LDLs, the particle side, it could be inflammation within the coronaries that really contribute to this. So tests like Lp(a), tests like MPO, tests like ApoB, are all becoming mainstay, and that's what's really, you know, we talk about this thing called ref per rec, right?
There's price per test, and then there's test per rec, and, you know, and test mix. So cardiovascular advanced cardiovascular testing is a really big growth area in Quest Diagnostics. On the brain health side, in particular with Alzheimer's, three tests that are in our portfolio that 18 months ago were not in our portfolio. This AB 42/40, which is looking at the early development of amyloid plaque on the brain, and then two very important protein markers, tau 217, tau 181, also in the portfolio, blood-based tests, right? These biomarkers were available in a CSF, cerebral spinal taps, but, you know, painful, costly, or patients were instantly put into a PET CT, a $2,500 you know, exam.
So, as these tests become more and more available, and they are available, now it's about educating physicians, it's about establishing guidelines with both primary care and the neurology community, but all of that will continue to drive growth. And then, on the cancer side, you know, our MRD assay that came to us through our Haystack acquisition, we're in what we call our early experience program. We have 20 customers that are now sending us specimens on a daily, weekly basis. We'll continue to work out that workflow, with those customers, from order all the way to reporting, and we'll be in a position to launch that assay later this summer, earlier this fall.
And along the Haystack side, at what point in time do you really get into the nitty-gritty of the reimbursement discussions there, and the pricing discussions, and how do you think about that versus other MRD tests that are on the market, and the dynamics of potential for reference pricing versus, you know, the kind of working backwards and the proof point on appropriate reimbursement?
Yeah. So I think there's a couple of things involved. One is to prove out that the assay is, at a minimum, equivalent to other assays on the market today. That should be no problem. Stay tuned, an important oncology conference coming up this weekend. Okay, ASCO. Now, once you have the medical evidence, how you pursue it first with one of the CMS organizations, whether it's MolDX, whether it's Novitas, we're thinking that through.
Okay.
We'll get through this early experience program. That will continue to generate enough evidence along with, you know, some of the publications that will be coming out. And then it's just a matter of approaching CMS, you know, through the organizations that actually pay for these tests and proving out the asset.
Yes, I've heard of ASCO. I think it's a few people show up.
Yeah.
And then just sticking again, different type of technology, but broad-based technology discussion is the whole advancement of point-of-care diagnostics. You know, there's always been this, is this a opportunity? Is this a threat? Like, how do you see where we sit right now in terms of product availability and what it means to the efficiency that will happen in your patient service centers and some of your on-site hospitals, and where the opportunities sit in terms of driving more value to your patients and therefore to Quest?
Yeah. So, you know, there's a role for point-of-care tests today, right? On the respiratory side, there's a lot of good, you know, tests that right at the point of care, that can help the clinician distinguish between flu A, RSV, COVID, and appropriately treat right at that point of care. Where we've seen, you know, some evolution is on the molecular side, so little point of care tests that can do that are, you know, miniature PCRs, if you will. We saw a rise of those during COVID. One of them apparently is just going away. I think it was Cue that-
Saw that, yeah.
So, you know, is there potential use of these devices? Look, I think you always have to consider the cost of doing the test, right, right at the point of care, the throughput that you can achieve, and, you know, and whether the test is going to be covered on that device, okay? Now, if you take, there's some small devices out there that will do on-site STD testing, but they're certainly not gonna have the throughput. You know, maybe these devices can do one test every 30 minutes, every 45 minutes. So if there's a patient that wants an STD test and wants to know the answer in 45 minutes, there's a market that's there for it.
Are there people that are willing to pay a premium to know right then and there, as opposed to finding out the next morning? There probably is. Now, we can also deploy these point-of-care devices into our 2,100 patient service centers. So if we think there's an opportunity, we can buy the devices, we can deploy 'em in our patient service centers and take advantage of that. But generally, they're not gonna be anywhere close from a cost position to what we can achieve in these large-scale laboratories that we operate.
I certainly doubt that the commercial payers are gonna pay more for a point-of-care test, unless there's some healthcare economic value that says treating that patient you know, at 12:00 P.M. today versus 9:00 A.M. tomorrow morning, when we have the result back, makes a substantial difference in the outcome of that patient's health.
Sticking on the more high science-y side, but maybe for the different pivot, the LDT rule that was released, I know there was a kind of bated breath waiting for figuring out what the rule will look like, and the read of it, to me, seems very advantageous to companies like yourselves that have broad-based scalability, ability to prove out your tests. Obviously, a lot of work in New York, in the past, within terms of regulatory environment.
Yeah.
You know, now, a few weeks past the release of the rule, where do you maybe give a snapshot into where you see the various different puts and takes of the LDT rule and how it factors into your long-term evolution on lab-developed tests?
Yeah. So let me start with: Look, I think it's unfortunate that the FDA took this unilateral position that we still believe, our trade association believes, goes well beyond the authority that Congress vested in the FDA. And, you know, agencies are only set up to do what Congress has authorized them to do. Okay, so still great debate on that, and we'll see how that gets straightened out in the long run. Having said that, the rule is in place, and we're going to comply with the rule. Now, today, as you know, we are regulated under what we call CLIA guidelines. CLIA guidelines is a very stringent set of regulations and guidelines that we operate our labs under.
This thing we call, you know, 21 CFR Part 820, is focused both on the operations end, which CLIA has established today. There's really nothing we need to do differently on the operating of our laboratories. What 21 CFR spells out, that is different from CLIA, is the upfront portion around the design and development of LDTs. Now, we have rigorous processes in place today, but it's... There's further things we will have to do in the design and development of our LDTs, in terms of what we call design controls. And so we're starting down the pathway. We will comply. In addition, now, it's a 4-year timeframe. There are certain things we have to have up and running within 12 months. One is called a Complaint Handling Unit, which is just a...
We track our complaints today, but it's just a more systematic, formal way of tracking complaints that come into the company. Once the complaints come in, you trend the complaints, you open up CAPAs, all things we do today, but it's just a more formalized process for doing that and documenting and showing the FDA that you're doing those things.
Yeah, and I probably should have started with the fact that this seems like this is something that should have been addressed through legislation versus regulation. But sitting here with where we sit now, it does feel like this is not something that's meaningfully disruptive to the way that you would invest in lab-developed test evolution from a cost perspective, from a capital perspective.
We, we believe we have very robust processes in place in the company today. When we develop LDTs, our validation processes, our verification processes, we think are very robust. Having said that, there's a set of regulations, there's a set of documentation, there's formal approval processes that will be put in place. So, if it's, you know, a de novo LDT, or it's predicated on somebody else's, there still has to be a formal submission to the FDA. That takes time, that takes money to do that. But that portion of the process, you know, won't officially, you know, kick off, you know, for 3+ years.
Okay.
Okay.
And then, sticking on regulations that kind of annoy all of us, feels like every day we're waiting to see if PAMA gets kicked down the road another year. Obviously, we have the SALSA framework in place that would solve a lot of these annual re-ups. You know, as you think about the moving pieces here, how do you get visi-- or when do you get visibility into the, the puts and takes on some of these pricing changes, given that you still have to plan organization for what could be a one-year, you know, meaningful enough reset, but still something that would impact your overall organization?
Yeah. So our trade association, you know, I would say, two primary objectives this year. One is, you know, figuring out a path forward on our pricing with CMS. The second is obviously the FDA issue that, that you just talked about. I think the likelihood for another PAMA delay is very, very high. First, you know, the telehealth bill just passed. They need a way to fund that. It's already been discussed that the funding mechanism to support telehealth could come from another one-year push on PAMA. Why? Because the CBO recently scored, preliminary scoring, of north of $2 billion of savings if they delay the cuts one more year. Counterintuitive, but obviously the delay in cuts means delay in a new data collection process.
Everybody believes that that new data collection process will show that Medicare is underpaying the commercial labs with respect to when you put it in the construct of, you know, the entire outreach book of business. So we would like a longer-term solution called SALSA. We continue to work that through both the House and Senate subcommittees that will ultimately hopefully come to a resolution. But the likelihood of that getting done this year in a presidential election year is probably not that high, certainly less than 50%. So we think the likelihood of another PAMA cut is very high. Last year, we found out relatively early, right? I think it was-
November.
Mid-November, end of November. You know, and that's ample time, as you think about budgeting for 2025. Would we like to know by September? We sure would. It just makes planning for next year a lot easier.
Yeah. Unfortunately, I don't think SALSA is part of anyone's campaign strategies this year.
I haven't heard it mentioned to anybody.
No. You know, in the last few minutes, I wanna make sure we touch a little bit more on M&A. You touched on Haystack, which was the most recent larger deal that you've done. You have a frequent pipeline of hospital outreach works-
Yeah.
-other targeted work. As you think about balancing a range of M&A with the strong cash flow generation profile, what are the puts and takes that goes into the balance of capability versus ROI versus dilution taking on? 'Cause it's not a single, we're only looking at purple widgets, and we're gonna find the best purple widget for the best price. There's a lot more factors that go into how you've done-
Yeah.
So mostly successfully done M&A. So in this current environment, how are you thinking about all, balancing all those pieces to find the right, right things?
Yeah. So still priority number one is to grow our core business, existing capabilities, and extend those capabilities. And as I mentioned, on the hospital outreach, we're thoughtful, methodical about it. We look again at markets where we have low market share. When I say markets, these are, you know... you look at the biggest MSAs across the country. We look at where our share position is low and start having discussions with health systems in those markets. So the funnel of opportunities is certainly there. I think you'll hear more from us. You know, we've committed, you know, 1%-2% of our growth will come through M&A, and, you know, we still feel good about that. So that is still priority number one. These tuck-in deals are good. They're accretive.
The ROICs tend to be attractive. The three we've done most recently, New York-Presbyterian, was, you know, just over a year ago. Lenox was a small regional lab in Brooklyn. The lab gets shut. All of that work just comes into our Clifton laboratory, so good economics there. And then, as you know, we just bought the pathology laboratory. It hasn't closed. It's announced will close, hopefully, the second week of June here. The pathology laboratory that PathAI ended up buying two years ago, right? PathAI is an AI-based digital pathology company that develops algorithms to look at digital images. Go back three or four years, and they thought they needed to be in the laboratory business, right, doing real pathology work.
They bought a lab in Memphis, Tennessee, and decided after three years, that's probably not what they need to be doing, okay? So those are regional tuck-in labs. You know, again, good, good ROICs, accretive in the first 12 months, and always positive NPVs. Where there's gaps in our portfolio, we will address those. But in general, you know, we've certainly looked to our own R&D capabilities first, and if we're convinced, like Haystack, right, we know, you know, we know Natera will likely do $550 million-$600 million of MRD sales this year. There is a market that is there right now, and we wanna participate in that market. So this was our quickest, and best way to execute to get into that market.
Got it. And Sean's always unbelievably helpful with rank ordering the size and the deals. So an email I look forward to. We're out of time. Jim, Sean, thank you so much for being here.
Yeah, thank you.
Really appreciate it. Thanks, everyone.
Appreciate it.
Thanks.