Quest CEO: Company’s Helm Not Responding As Quickly as Hoped

Quest Diagnostics is the nation’s largest laboratory operator by a wide margin. It is also quite profitable. But when and whether it will extract itself from a cycle of flat revenues and earnings remains to be seen. For the third quarter, Quest reported net income of $413.9 million on revenues of $1.8 billion. That compares to net income of $171.6 million on revenues of $1.82 billion for the third quarter of 2012. However, Quest netted $300 million after taxes for the sale of its royalty rights to the cancer drug Ibrutinib to Royalty Pharma for $485 million. It also sold off its Enterix colon cancer screening line of business to an Australian firm for an undisclosed sum. The cash from those deals factored into the bottom line. Meanwhile, Quest’s revenues were nearly 3 percent below what had been the consensus of Wall Street analysts, while net income was 15 percent below estimates. The numbers prompted Quest to revise its guidance downward. The company now forecasts revenues to be 3.5 percent below 2012—compared to the prior 1 percent to 2 percent projected dip. Its earnings per share for the year are expected to be between $3.85 and $3.95, down from the prior guidance of $4.35 to $4.50 per share. Cash flow projections were cut to $850 million, down from the prior projection of $1 billion. A high-ranking Quest executive remarked at G2 Intelligence’s Lab Institute earlier this month that while the cost-cutting program initiated by Chief Executive Officer Steve Rusckowski has been effective, the forecasts of when its impact would take hold was overly optimistic. During an earnings call, Rusckowski noted that the numbers during the early part of the third quarter had met expectations but then softened. Testing volumes for the quarter were down about 2 percent compared to the third quarter of 2012. Revenue per requisition was down about 3.3 percent, attributed primarily to payment cuts from both Medicare and commercial payers, as well as continued denials for some molecular tests. “Clearly, our third-quarter performance was disappointing,” he told analysts. “We recognized that we have missed expectations this year and revised our guidance more than once. We understand it is extremely important to achieve expectations, and we are focused on improving our predictability.” Quest attempted to soften its missed number by previewing its third quarter on Oct. 10, a week before it announced earnings. Its stock dropped more than 6 percent in response, and another 1.5 percent after earnings were released. It has not rebounded. “Quest’s third quarter miss is disappointing, although not entirely surprising,” said Deutsche Bank analyst Darren Lerrich. He cited the company’s “somewhat aggressive” forecast for a recovery of volumes in the second half of 2013 and a weak utilization environment. Quest’s aggregate performance for the first nine months of 2013 has been reflective of its third quarter. Net income has been $1.2 billion on revenues of $5.4 billion. That compares to net income of $935.8 billion on revenues of $5.6 billion for the first nine months of 2012. However, revenues from continuing operations were down 3.9 percent, while adjusted income from continuing operations was down 14.8 percent. Growing Through Acquisitions With volumes and revenues in decline, Quest is attempting to grow through acquisitions focused specifically on laboratory operations. On Oct. 7, it purchased ConVerge Diagnostic Services LLC from the strategic investor firm Water Street Healthcare Partners for an undisclosed sum. It’s the fourth deal for lab services Quest has consummated this year. The prior transactions included the acquisition of Dignity Health’s lab outreach business, the acquisition of the University of Massachusetts’ health system’s outreach business, and the toxicology business of Concentra Health. Analysts expect ConVerge, which operates a lab in Peabody, Mass., to eventually be folded into the huge regional facility Quest is building in Marlborough, Mass., 40 miles to the east, part of its plan to consolidate the UMass operations. Rusckowski said the three deals outside of the ConVerge transaction have helped to propel revenue by a modest amount, about 2 percent so far this year. “We are encouraged by [Quest’s] acquisition activity this year, however we remain neutral given sluggish organic volume growth and reimbursement headwinds,” Piper Jaffray analysts Kevin Ellich and Bradley Maiers observed in a recent report. However, Rusckowski did note that the company’s extensive and ambitious reorganization—which included the consolidation of divisions and the elimination of 600 management-level jobs—has been completed. He projected it will save Quest $600 million by 2014 and $1 billion in the years beyond. “Restoring growth is a gradual process and it takes time,” he said. Takeway: It is taking longer than expected to get Quest Diagnostics back onto a path of continuing growth.