Quest Reports Continued Strong Core Requisition Growth in 3Q23 and Solidifies Payer Contracts; LDT Regulation and PAMA Reform Remain Uncertainties
Quest Diagnostics has reported its financial results for the third quarter of 2023. The company experienced a 7.7% decrease in third-quarter revenues with total revenue coming in at $2.3 billion compared to consensus forecasts of $2.19 billion. COVID-19 testing revenues saw a significant decline of $290 million year-over-year to $26 million total, leading to the overall revenue decline. Importantly the core business grew 4.6% year-over-year. The company noted growth in its hospital, physician, and consumer channels.
Revenue per requisition decline by 7.2% year-over-year which was also driven by the decline in COVID-19 revenue. The company noted that base revenue per requisition declined by 0.4% due to growth in outreach testing. Total requisitions declined by 0.5% in the quarter with organic declines of 1%. Total base testing volumes grew a health 5.7% year-over-year.
Importantly, the company noted that it completed negotiations with all major payers this quarter, and consequently will have better pricing visibility looking ahead. The company noted that 50% of their payer contracts are now value-based plans which are growing at faster rates than traditional contracts. They noted initiatives to reduce leakage to higher cost out-of-network providers by both Quest and payers.
Quest also noted hospital outreach partnerships including recent deals with Northern Light Health, Lee Health and Tower Health as a source of future growth. Quest also is increasingly focused on its consumer business and noted strength in sexually transmitted infections, comprehensive health and tuberculosis blood testing. The company also highlighted their new Alzheimer’s offering, however, they have been criticized for this offering by clinicians concerned about the science supporting the test. The company also noted its increased expansion into advanced diagnostics including the recent acquisition of Haystack Oncology and plans to offer liquid biopsy services for oncology.
Quest also provided updated thoughts on the FDA’s recently posted draft laboratory developed test (LDT) guidance. Management stated that it believed the FDA did not have the statutory authority to regulate LDTs, however noted on the call that less than 10% of revenue was tied to LDTs. They also commented on the Patient Access to Medicare Act (PAMA) which could cut lab reimbursement but has recently been suspended by Congress every year. The company noted that Congressional disfunction is unlikely to lead to comprehensive reform, but that a delay in cuts went forward to the Congressional Budget Office highlighting a fourth PAMA delay as their expected outcome.
Adjusted diluted EPS also decreased by 5.9% year-over-year to $2.22 exceeding consensus estimates of $2.19. Adjusted operating margins also declined year-over-year to 16.6% from 17% last year. The company has an active program called Invigorate looking to drive 3% annual productivity improvements and recently cited real estate consolidation.
Quest raised its revenue guidance range for full-year 2023. The company now expects full-year revenues to be between $9.19 billion and $9.24 billion compared to previous guidance of $9.12 billion and $9.22. Base business revenues are expected to increase between 6.7% and 7.3%, which demonstrates the company’s continued focus on expanding its core services. However, COVID-19 testing revenues are anticipated to decrease by approximately 86.2% as the demand for such testing diminishes.