Hi. Good morning, everyone. Welcome to the Morgan Stanley Healthcare Conference. I'm Erin Wright, Healthcare Services Analyst at Morgan Stanley. We're happy to have Quest Diagnostics with us today, the Chief Financial Officer, Sam Samad. Thank you so much for coming. For important disclosures, please see the Morgan Stanley Research Disclosure website at morganstanley.com/researchdisclosures. With that, we'll get started with our fireside chat.
I think we'll start out with the most recent quarter, if that works, Sam. You raised 2026 guidance again, to, I think it was 8.3%- 9.2% growth on top of the first quarter trends. Can you talk a little bit about the key drivers in the first half strength that led you to the guidance increase and those broader tailwinds, headwinds that you're contemplating in your guidance range for the second half?
Sure. Thank you for having us, Erin, first of all. I'm accompanied here by Damini Chokshi, who's our new Head of Investor R elations, so I don't know if you've met her. She came to us from Merck. Now it's been, what, two months? Welcome. Let's talk about 2026 and the guidance increase and the take-up that we had. Listen, first I'd say very strong start or first half of the year. We're seeing some really broad-based strength across utilization, across revenue per requisition. We have these new partnerships that we established towards the end of last year with Corewell Health, which is a large health system in Michigan, as well as Fresenius around performing clinical testing for their dialysis business.
All of those things are giving us lift, in addition to our consumer business, which is really performing also very well. Almost 30% growth year-on-year. All of those things, I would say, have given us confidence about the year, especially the strong utilization environment that we're in. That I do believe, by the way, is durable. As we think about the remainder of the year, I'd say we expect that strength to continue. In the first half of the year, we didn't see any material impact from the healthcare exchanges, the subsidies expiration.
We were expecting with the dis-enrollments for that to start to have a bearing on revenue and volume growth. We haven't really seen it. We have seen dis-enrollments, but not really materially felt that impact. We do expect that to be felt in the second half of the year, whether that's the right assumption to be determined, but that's what we have baked into guidance. That's really one thing that we expect to have an impact in the second half of the year, if you're looking at growth rates second half versus first half.
There's always the uncertainties or variable items like weather. So far, weather has been good. We haven't seen much in terms of hurricanes, but that always has an impact on our business in terms of disruption. Usually what we do see in the latter part of, well, in the summer months, et c, is we do see some more weather activity, but we haven't felt it yet. Those I think are the key ingredients. But I'd leave you with very strong first half and confidence about the year.
Okay. That deceleration in the second half that is implied in guidance, that is largely attributable to your assumptions around HIX and enrollment dynamics?
Yes.
Okay.
That is really most of the impact.
An element of weather conservatism.
Right. Exactly.
Yep. Okay.
The other one is the lapping of those Corewell and Fresenius partnerships, which helps our margin rate, but has an impact on revenue growth because those started in October of last year, and we are going to lap them in October of this year.
Great. That brings me to my next question, which is on margins for the year. You are anticipating or expecting full-year operating margin expansion. What does that mean? How do you think about that into the second half?
We are expecting operating margin expansion for 2026. I will repeat that. We talked about it on our Q2 call. We still expect it. We are making really good progress on margin rate, this whole period post-COVID, where we have been working very actively on improving our productivity in the labs, margin rates, etc , and we are expecting margin rates to be up in 2026. If you are looking at Q2, for instance. Q2, we had a 40 basis point reduction in operating margin rate versus same period last year. It had a few things in it. What I would call not necessarily just one-timers, but things that impacted it.
The Corewell, Fresenius mix impacted margin rates by about 30 basis points. Those are profitable relationships, but they are, at least at this stage of the partnership, dilutive to operating margin rate. Nova expenses, which is our multi-year transformation of order to cash, was about a 20 basis point impact in Q2. Then you have this thing we call supplemental deferred compensation impact, which is a net neutral EPS impact, but it impacts operating margin rate because it is really based on market performance across our deferred compensation plan.
As we think about the full year, Erin, here are some things that improve, especially as we look at the next six months or the second half. For the same reasons that I mentioned about Corewell and Fresenius, lapping those partnerships will improve the margin rate because they are dilutive to our overall margin rate at this point. But as of October, we lap them, so they are not a dilutive impact anymore. Then those partnerships themselves, both Corewell and Fresenius, we are improving the profitability.
We have some initial expenses, initial integration costs, especially with Fresenius. With Corewell, as is typical with core lab relationships in our business, they always start out less profitable, and as we go further, we start to improve the productivity of those relationships. So as we exit the year, Corewell will be approaching double digits or at double digits in terms of. When I say double digits, I am referring to approximately 10% margin rate. And Fresenius, it is definitely improving in terms of margin as well. So not only do we lap them, but we also are improving the margin rates of those relationships.
Yeah. I want to go back to the organic trends that you are seeing. You have 4%-5%, for instance, long-term revenue CAGR in your guidance. That implies about organic growth of about 3% over the longer term. You have been tracking well ahead of that. What are some of those key drivers? Even excluding some of the dynamics around whether it is Corewell or Fresenius, your underlying trends here are still relatively strong. Break down what is really driving that.
The underlying rates are very strong, you are right. We have had underlying volume growth excluding those two partnerships of about 4%. And we have had the revenue per requisition in Q2 approaching 3%. It was 2.9% excluding those partnerships, and I am talking, the volume growth that I mentioned was organic volume growth excluding those partnerships. I think there are a few key things, Erin, that factor into it. When I think about our physician channel, where we call on physicians and they order tests for their patients in the physician office.
Expanding guidelines favoring early screening. And it is not just cancer screening, it is brain health, it is cardiometabolic screening. We are definitely seeing a shift from acute treatment care to preventive care. So we are seeing high single-digit growth or utilization on the physician channel. If I think about our health system business, in the core lab side, we have talked about Corewell, that is definitely driving it, but we also continue to see good traction in terms of onboarding new relationships on the core lab side.
If I think about another key channel in our business, which is consumer, we are seeing pretty significant growth in consumer. That business is now annualizing to close to $300 million, and it is growing at about 30%. We think it can grow over the next three to five years by north of 20%. That is another driver. When you look at all of these things, I think a lot of it is driving. The key factors are similar. People owning their health, owning their health outcomes, shifting more focus to preventive care from treatment care, and that is really helping our business. I do think there is durability to that.
What are you seeing though, across your hospital customer base? We get the question a lot in terms of bad debt exposure, but there is also just this swirling narrative of a potential slowdown in broader medical utilization trends. Are you seeing that at all?
We are not really seeing it. We are seeing typical utilization rates from our health systems customers. We operate in health systems across, I would say, two categories. One is reference business, where health systems reference out certain testing to us, which is usually advanced diagnostics, non-routine testing that they do not perform themselves in their own labs. The other portion is the core lab business, where we basically perform a key service for health systems, and we run their hospital lab, their inpatient lab. It is kind of really a partnership. On the reference side, that is a competitive business.
We compete with other players who perform that testing service for health systems. We are seeing mid-single-digit growth in that business, and traditionally, we have seen that same type of growth. Maybe low to mid is what traditionally we have seen, and we are seeing mid-single-digit growth there. On the core lab side, setting aside Corewell, which was a big partnership that we had this year. Listen, hospitals, I will not dispute the fact that they are feeling the pinch.
They are struggling. There is definitely some of the coverage issues, the health exchanges, subsidies impacting patients, them having to perform work for uninsured patients. That is impacting them. But we perform an essential service there. When we run their hospital lab on the core lab side, for instance, we usually provide savings for them. We provide 10%- 15% savings to perform that service for them, to run the lab. That helps them in terms of managing their own cost structure as well.
Yeah. I think that's a good point in terms of labs being a solutions provider for strained healthcare systems. But how much of the growth that you're seeing improved access, for instance, whether it's Elevance or otherwise, or is there any way to parse out, for instance, underlying market share gains where you're going into some of these physician relationships and really seeing some of that halo effect and reaching that tipping point in terms of the volume going to the low-cost, high-quality kind of provider across this industry?
Yeah. So first, I'd say we're definitely seeing market share gains in our space for us. We're definitely gaining share in the market. Some of it has been gaining access in those four new states with Elevance, which happened at the beginning of 2025. The way to think about that is, in the first year, when you gain access in a new state, and in our case, we gained access in four new states, that's the bulk of your market share gains is in that first year. You'll get some in the second year, which is this year, and then it'll start trailing off.
The impact, I would sort of cap it at about 50 basis points in terms of growth, Erin, from gaining access in those new states and the ability to win new businesses, because now you have full access with all payers. But in addition to that, we're gaining market share through, and I think you alluded to it, redirection efforts we make with the-- We partner with the payers on figuring out how we can redirect volume from high-cost labs, meaning health systems, to labs which are high-quality labs like us that perform the work at much lower cost.
We also have made acquisitions over the last two, three years physician outreach acquisitions in states where we had really good access, but let's say lower capture. So Ohio, where we acquired the physician outreach business of OhioHealth and University Hospitals. In Minnesota, where we acquired the physician outreach business of Allina Health. Those have driven market share gains as well, because today they're part of our organic growth picture, but they're helping us in terms of growing volumes.
And just, you mentioned, during the most recent quarter, that the last three weeks of July were consistent with what you were seeing in the second quarter. I guess any update on that front? Then you mentioned at the beginning your HIX expectations into the second half. So is that actually playing out like you thought?
Yeah. I won't talk much about what we're seeing in Q3, but I'll give you a sense as to broad-based what the trends that we have been seeing. Structurally, no change in our commentary about utilization. Durable, strong, and continue to see elevated utilization, as we exited Q2 into July. We feel confident about the guidance that we've given this year. In terms of health exchanges, here's what's happened with the health exchanges, just to give some background to the audience here, and I'll talk about the second half. What we saw was over 20% dis-enrollment in the exchanges when the subsidies were removed.
After the dust was settled, roughly 21% dis-enrolled from the exchanges. The impact to us in Q2, what we saw, was basically an 8% reduction in requisitions. However, a 6% increase in tests. So basically, tests per req actually went up. What we are seeing there is, frankly, what we saw in Q2 was relatively a neutral impact. So, no real impact for us as a negative from the people that dis-enrolled. So what it's telling you is the people that remained are more acute, high acuity patients that required more care and more healthcare.
The people that dis-enrolled were ones that really were very low, in some cases, non-utilizers of healthcare. So we saw no impact on the first half. We set 30 basis points for the year. We saw no impact in the first half. We still have kept the 30 basis point assumption for the full year, which by default obviously means 60 basis points for the second half. I would say, that's what's in the guidance, but we haven't seen that so far.
Okay. All right. That's helpful. This brings me to my next question, which is about test per req and driving much of the revenue per req rather than necessarily unit price. So how do we think about the incremental margin on that mix benefit?
Yeah, the margin is definitely significantly higher because when you see higher tests per req, you're not having to incur proportionately the same cost as you know. You know our business well. If you're doing four tests per req or if you're doing six tests per req, you're going to incur more reagent costs, you're going to incur some more material or supplies costs, but you're not going to incur, in most cases, more labor costs. You're not going to incur, if you're performing a draw in one of our patient service center, a higher cost because you're performing a draw on a six tests per req or four tests per req. The cost of the draw is still the same. So it's definitely a higher drop-through.
But not something you can quantify.
I wouldn't give a number, but let's just say it's a good step up from our usual 35%-40% drop-through that we get.
That's fair. On PAMA, I want to switch gears to PAMA. How are you thinking about the next set of data? Your peer competitor out there was out there still somewhat pointing to that $100 million in terms of their impact. Do you anticipate it being drastically different this time around?
I don't. There's a lot of still uncertainty around it. I don't think it'll be more than the $100 million. I think there's a 15% cap in the way that they've communicated this, so I don't expect it to be more than the 15% at worst case. Then again, we have to see what the data collection brings. There's uncertainty still as to who participated in the data collection. Obviously, the results of the data collection, I can tell you we participated. We submitted well before the deadline. We think that we will get clarity, maybe by beginning of October, is currently the prevailing thought.
There's going to need to be CBO scoring of also that data collection to see what the impact is on CMS budgets. The prevailing assumption I would say for us is that if obviously it will depend on the data collection, but it shouldn't differ materially from the $100 million is at least what we're expecting. As I said before, we would offset a portion of it. It's not going to be the majority of the $100 million, but we will definitely offset a portion of it. So it's not going to be $100 million drop to us. But again, I caveat the $100 million by saying it really depends on the data collection and based on the number of labs that participated.
Right. Would 30% mitigation sound about right to you?
I won't give a number. I know you're cornering me into a number. You've done that before, but there will be a mitigation. It won't exceed 50%.
Okay. That's fair. Okay, and then you're going to still push for RESULTS.
Absolutely
even if this does get even put into place, right?
Yes, absolutely.
Okay.
Our efforts on the RESULTS Act still are working concurrently with this. It definitely requires some work to get it through, but there's 100 congressmen and women that are supporters of the RESULTS Act, so it's a bipartisan effort.
Okay. One other thing on regulatory, just because we were talking about HIX earlier at the exchanges, Medicaid and work requirements, what are your anticipation there?
We've sized it before, and I'll size it again consistently. I'll say we expect between the health exchanges, which I said this year is expected to be 30 basis points. So far it hasn't been. Medicaid, which only begins to impact us in late 2027, we believe, and 2028. We think the combined impact of both of those by 2028 is about 50 basis points- 60 basis points of impact on volume.
Okay. I want to switch gears a little bit to advanced diagnostics or esoteric testing or specialty testing, however we want to characterize it. Whether it's liver fibrosis, Alzheimer's, oncology, how do we think about what will really kind of move the needle for you?
Well, we've got five key high-growth areas that we've identified as part of advanced diagnostics. It's about $1 billion in those high-growth areas that's growing mid-teens. Okay, so not in that order, but I would capture, here are the key things that are really driving our growth. Brain health. This whole early-onset dementia testing, blood-based testing, and introducing more biomarkers, more analytes into testing, whether it's amyloid beta 42/40, whether it's p-tau 217/181, whether it's introducing ApoE. All of those help you really identify and diagnose with better sensitivity the early onset dementia and earlier than a [CT- scan] can.
So that's critical, and we continue to advance that menu. Cardiometabolic. Guidelines are favoring these, by the way. They're favoring AD-Detect and early-onset dementia testing. They're favoring cardiometabolic with tests like ApoE, ApoB, I mean, and Lp(a). Those are really critical now for understanding cardiovascular risk based on genetic factors, based on not just your cholesterol score, but including your Lp(a) risk markers. Then you have oncology. The whole journey of oncology in terms of early cancer screening, therapy selection, MRD, and we play in that. We play in all through that journey.
Then you have women's and reproductive health with non-invasive prenatal screening, and carrier screening, for instance, to identify risk for pregnant women or risk for women and men who want to have children. Then finally, and very importantly, autoimmune. We have this test called ANAlyzeR, which really allows us to diagnose and understand what type of autoimmune condition. A lot of these autoimmune conditions represent in similar ways, but with ANAlyzeR, you can diagnose and understand what type of autoimmune condition a patient has so that you can treat it appropriately. Those are kind of this basket of, and these are not all the tests, by the way, I just gave you some samples, but those are really high-growth tests that are helping advance our advanced diagnostics portfolio.
I want to ask on Haystack. You received New York State approval in the second quarter, integrated with Flatiron. You have a pilot underway with American Oncology Network. What is the next important step from a commercial milestone perspective? Obviously, reimbursement is a huge factor here. I think, relative to some competitors that have made inroads into this space, I think you're taking a relatively measured approach as you think about the cost and sort of profitability of thoughtfully expanding this partnership.
Yeah. No, I mean, I think your point is very accurate, which is we are taking a more measured approach, especially commercially. We do have about 40 sales reps that are promoting this test. But until we get reimbursement, full Medicare reimbursement, not third-party payer reimbursement, that's a ways off, but Medicare reimbursement, we'll end up performing a lot of testing that we don't get reimbursed for. We do get reimbursed on a case-by-case basis today, but we'd like to have more Medicare Advantage reimbursement.
That's why the next milestone is the approval by MolDx of our technical assessment, which we have submitted, and we do expect, hopefully in the near future, to get. But to your point, we have also integrated Haystack MRD in the oncologist's EMR to make the experience much easier, much more seamless for oncologists. We have ramped commercial efforts, but we have taken a more measured approach. I think that's the right way to put it. We did get New York State approval, which was a big milestone, and we had also breakthrough designation on the test as well.
Yeah. I do think that Jim has characterized it as not exactly high switching costs either across this segment.
Yes.
There's still an opportunity, even with a more measured approach.
Exactly.
Okay, consumer. We've done a lot of work in this space. It's roughly $215 million, or you're saying $300 million annualized, I think, this year, so growing at a really fast clip. Can you talk about the TAM, how you think about that? Is it bigger than what you expected? Is it more durable than what you expected? Do you have some data points around repeat testing with some of these subscription services, and what types of partners make sense for you? Sorry, this is a bigger, broader question.
Yeah.
You can go where you want with it.
No, it's an exciting area, and it is right now annualizing at about $300 million, growing at about 30%. Think about it, $300 million, 30%. We think we can grow this more than 20% over the next three to five years. A third, roughly, of this $300 million is our own direct-to-consumer business, questhealth.com, where any patient can get online, order a test out of many, many tests that we have on the menu. The 2/3 of that business is partnerships. Partnerships with wellness enterprise customers, either that have a membership subscription model, and I know probably in this room some have tried them, or that are wearables and basically you can measure your biometrics, your biomarker through ordering lab tests.
We're excited about the Apple partnership that was announced last week during the Apple event, so that's our newest partner that we have signed up. The way we think about this. The market is fairly large, Erin, depending on how you define it. You can look at wellness across so many areas in terms of looking at the market. If we think about our own portion of the market, it's probably somewhere in the mid-single digit billions. So there's still a long road to go here in terms of potential uptake. The way we think about it in terms of the strategy is grow our direct-to-consumer business by offering a best-in-class experience for those patients.
The convenience, the fact that you don't have to go through a payer, the repeat testing that you can do without having to worry about what's covered, what's not covered, for our own direct-to-patient customers. But then really being the engine for a lot of these partners that want a seamless partnership with a provider that can offer scale. We have 2,000 patient service centers across the country. We can generate results within a day or two that can feed some of those providers and help them provide a comprehensive report to their patients.
If you're a wearables manufacturer, like a WHOOP and Oura, you go on the app, you order a lab panel, and you book an appointment with Quest Diagnostics, and it's really ease of use. It's a seamless experience. With Apple, which will be introduced later this year, through the Apple Health app, you can order a panel, which is eight to 10 tests, 50 biomarkers. You can get your results in the Apple Health app, and it's a really cool experience as well for their users, and we know they have a lot of users of Apple Health.
So it gives us really access to a very exciting area. Why do I think it has durability? Again, it's those fundamental drivers of people focusing on their health and preventive medicine, not treatment. It's Gen Z who don't really want to deal with a primary care physician sometimes, and they just want to be able to interact directly with an app, for instance. We think there's a lot of durable features to this.
With a partnership like with Apple, you do not need to build out anything, right? This is leveraging your existing kind of capabilities and size and scale and infrastructure that you already have in place.
Yes, absolutely. Whether it is Apple or the other providers or wellness customers that we work with, we are not directly undertaking any patient acquisition initiatives, incurring costs on patient acquisition. They manage that. We are the engine for them. What I am focused on, what we are focused on at Quest is the patient, the user having the best experience possible. If they go to one of our PSCs, we want to make sure they have the best experience. We want to make sure they have the best experience in terms of getting the results early. The turnaround time is quick. That sort of making sure there is no sand in the gears behind their experience.
They can serve as a marketing engine for you to some extent where we did not really have one before in lab world.
Yes.
On that front, though, margin profile for these types of partnerships, how do they compare to either Quest direct margins or the broader enterprise?
Yeah. So overall, the consumer business has better margins than our enterprise margins. The reason being two things. One, we don't have to deal with denials, patient concessions. In our questhealth.com business, we are getting paid directly online through a credit card by the patient who orders a test. In our enterprise business, where we support other companies, it's a client bill business, so they pay us. So no denials, no patient concessions. Number two, equally importantly, if not more, and this is especially true in the enterprise business where we support other players, is the revenue per requisition and the number of tests per req.
In certain cases, we're getting 10 tests per req. We're getting, in certain other cases, 18 tests per req. It helps really with the req density, and for the reasons I mentioned to you before when you asked me about the profitability of more tests per req, it really helps our profitability and our margins. In terms of the last part of your question, comparing between the two, the direct and the indirect, so to speak, the enterprise business where we're powering other companies, gets us a higher margin rate, and that's primarily because of the tests per req.
And so margins, broadly speaking, across the entire enterprise now, I'm flipping to broader Quest. You have initiatives like Project Nova. You have Invigorate Savings, which are tracking 3% annual cost saves. What do long-term margins look like at Quest?
Well, our focus. I won't give you a number, and we have our investor day in March of next year, and so stay tuned. But our focus is to continue to expand margins. We had a target going into 2025 of 75 basis points- 150 basis points of margin expansion for the three years. We're still on track for that target. There's always certain things that impact the margin rate, not margin dollars. Like for instance, the partnerships that we have with Corewell and Fresenius are lower margin rate, but still very profitable and strategic partnerships for us. But if you're asking about what are the key drivers, Erin, I would say structurally, volume growth is going to be the number one key factor.
Because every incremental dollar of revenue or volume percent will drop down at a 35%-40% margin rate. The other one is the consumer business structurally is a margin improver because it is a higher margin business. Continuing to see more technologies and expanding tests per req and these guidelines favoring more early screening will help margins because as you get your revenue per requisition up, that will help you. Price is obviously a key ingredient. Today, our expectations, X, the PAMA noise, which is uncertain, is that the price forces in our business are relatively neutral price, not favorable pricing, not negative pricing. It is definitely not a headwind. It used to be before COVID, but going forward, we expect neutral pricing across our business.
Okay, I am going to squeeze this all into one question. Okay, so capital deployment, what does the M&A pipeline look like relative to, let us say, what you were looking at a year ago? Are you seeing that hit some sort of inflection point with pressure across health systems? When I think about all these different drivers, some of this is relatively recent, whether it is the health system pressures that may drive more opportunities from a capital deployment standpoint or consumer and relationships like Apple or some of the more esoteric testing type stuff as well in underlying utilization trends. Why does not underlying long-term growth inflect higher, and why is not margin expansion even higher from a long-term target standpoint?
Yeah.
Maybe we just wait until March.
I will try to squeeze it into one answer. Number one on capital deployment, we are focused on acquisitions driving growth. We said 1%-2%. We are committed to our dividend, which we have been growing sort of almost at the same rate as EPS. We will do share repurchases to offset equity dilution, but our principle is return the majority of free cash flow back to shareholders. The acquisition landscape is still, I would say, robust. The physician outreach potential opportunities are still robust. They take time because you have to deal with hospitals, you have to navigate the bureaucracy and unions in certain cases.
They take time to come to fruition, but they are still there. in 2024, we did over $2 billion worth of acquisitions, and we have been sort of digesting some of them. One of the big ones with LifeLabs, the business up in Canada. In terms of the long-term growth algorithm, yes, you will have to wait till March. But listen, again, I go back to structurally, this business is performing better, and I do not think it is a timing issue.
I do not think it is pent-up demand. I do not think it is a one-time thing. I do think there are factors. All the things I have talked about around guidelines, early preventive focus, the dynamics, macro dynamics that where people want to take ownership of their own health. They want to see everything in an app in terms of biometrics and biomarkers. Those are here to stay, I think.
Yeah. Okay. All right. Thank you so much. Appreciate your time.