Quest Diagnostics Earnings Call Insights: Revenue Expectations, UMass Acquisition

On Wednesday, Quest Diagnostics Inc (NYSE:DGX) reported its third quarter earnings and discussed the following topics in its earnings conference call. Take a look.

Revenue Expectations

Tom Gallucci – Lazard Capital: Just a couple of questions on top line if I could. You lowered your revenue expectations last quarter and again this quarter, so we see some of the results, but what do you think is different versus what you expected six months ago as far as top line trend?

Robert A. Hagemann – SVP and Chief Financial Officer: First of all the market continues to be what we described as soft. Even though we see a pickup in physician office visits from some of the outside statistics, we’re just not seeing it yet in our volume. So utilization, we believe is somewhat mixed. Second is that even though we believe that the market is soft, the market has seen some indications that is growing in some pockets, but we’re not obviously seeing that growth. So, therefore we actually believe our execution is not quite where we expected it to be and specifically we talked about narrowing the networks with payors. We still believe there’s an opportunity there but we have not seen it yet and we’re still actively working inside here on getting that and also working with payors to make sure we eventually deliver it. So, that’s what’s changed, Tom.

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Tom Gallucci – Lazard Capital: Maybe just two follow-ups. On the networks, these plans that are in place and you’re just not capturing that incremental share as a result of the benefit design or are you expecting that you’re going to see changes that you haven’t seen yet in benefit design?

Stephen H. Rusckowski – President and CEO: These are plans in place. We just haven’t got what we expected out of those plans yet.

Tom Gallucci – Lazard Capital: Then overall market share, do you have great data on that? Can you get any good insight on what your share is doing relatively speaking and also maybe specifically relative to hospitals as well where my sense is, maybe they’ve been taking some more in-house as they’ve been hiring doctors?

Stephen H. Rusckowski – President and CEO: Well, first of all, we do believe that, that trend in the hospital market place is happening. So, they are picking up a larger piece of the market. It is hard for us to get visibility of market share and in our November 16, Investor Day, we’ll give you a lot more detail on specifically what’s happening in this market and what we think our performance has been in the past and what we think the opportunity is going forward, but at this point we don’t have specifics.

UMass Acquisition

Kevin Ellich – Piper Jaffray: Just wondering if you could provide any more color on the UMass acquisition, was evaluation paid in line with historical multiples? Then also, what are you seeing in the market? Are there other deals that you’re excited about, similar size or any color would be helpful?

Stephen H. Rusckowski – President and CEO: Let me ask Bob to take the question on specifics of the transaction. Bob?

Robert A. Hagemann – SVP and Chief Financial Officer: Yeah Kevin. As we indicated in the press release, we expect this to contribute about 1% to revenues next year for us and to give you some sense as the valuation was less than $100 million and we would expect that that sort of valuation is consistent with the types that we’d see for future fold-in acquisitions, this is one that we think is in the sweet spot that we’ve spoken about. Fold-in acquisition, we’ve got a good history of executing well against these and we’re very excited about the opportunity to work with UMass in the Massachusetts marketplace.

Kevin Ellich – Piper Jaffray: Then Bob, since I have you, with revenue per requisition I think down about 1%, I don’t know if you have missed it in your prepared remarks, what was the primary driver behind that? I know there was fewer days and whatnot, but…?

Robert A. Hagemann – SVP and Chief Financial Officer: Yeah, Kevin, it’s down about 1% from the prior year, although it’s relatively stable with the level that we had in Q2. As we’ve mentioned before, we continue to experience reimbursement pressure, but we’re effectively offsetting that with increases or improvements in test mix and increases in the number of tests per acquisition. What you saw driving most of the year-over-year change this quarter is really the business mix. We continue to see strong growth in drugs-of-abuse testing, which as you know has much lower reimbursement rates than average and unfortunately, we’re continuing to see pressure on anatomic pathology side which carries higher reimbursement rates. So, it’s really the business mix that’s driving the year-over-year change right now.

Kevin Ellich – Piper Jaffray: Then one last question for Steve. You’ve mentioned narrowing networks and then recently we’ve found out that Tennessee’s navigate program selected you guys as the exclusive testing provider, wondering if you are seeing anything else on the horizon with some of the other states or payors moving to the low-cost provider in the market?

Stephen H. Rusckowski – President and CEO: First of Kevin, thank you for that and we continue to work with all the payors and we believe having access to as many payors as possible and our business is supporting. As you know we don’t provide specifics on relationships with payors where we continue to be aggressively managing our approach to payors going forward. I spoke of my prepared remarks about new organizational structure and the key part of that structure is to pull together multiple sales forces within the Company, but part of that is to make sure that we emphasized the importance of our payor relationships and health plans going forward, to support part of we believe are continue to focus on approving how to go to market. They’re important part of our go to market plan and we need to a better job that we’ve done in the past.

A Closer Look: Quest Diagnostics Earnings Cheat Sheet>>