NEW YORK – Along with the rest of the clinical lab industry, Quest Diagnostics has begun operating in compliance with the US Food and Drug Administration's final rule on laboratory-developed tests (LDTs), Jim Davis, the company's chairman, president, and CEO, said during a Tuesday conference call following release of the firm's Q2 2024 earnings.
The final rule went into effect on May 6, meaning labs were under its requirements for a bit less than half of the second quarter.
Davis noted that Quest and other labs have through their trade organization, the American Clinical Laboratory Association, challenged the rule in court. However, he said, in the meantime, "the rule is in place," and "we are running the company and operating the company with the rule in place."
Under the rule, "there are certain requirements that we need to have in place by May of next year, including a complaint handling unit … as well as the ability to report adverse events," Davis said, adding that Quest already had some of these capabilities in house while it is still developing others.
Additionally, he said, Quest has begun training its R&D and product marketing teams around the design controls needed to comply with the rule.
"We're living with the rule and implementing things per the directive of the FDA," Davis said. He said that Quest does not expect these efforts to add material cost to its business this year.
Regarding the ACLA lawsuit, Davis noted the Supreme Court's recent decision overturning the principle of Chevron deference that provided regulatory agencies broad discretion to interpret unclear statutes and implement regulations based on those interpretations. Some legal observers have speculated that the decision to overturn Chevron could help ACLA in its suit.
"It certainly doesn't hurt," Davis said. "We believe that, yes, what has come out of the Supreme Court recently is favorable and clearly dictates what should occur within the four walls of regulatory bodies."
In other news on the federal government front, Davis said permanent reform of the Protecting Access to Medicare Act (PAMA) via the Saving Access to Laboratory Services Act (SALSA) is unlikely to pass this year given that it is an election year. He said that Quest is pushing for another one-year delay in PAMA implementation, noting that the Congressional Budget Office (CBO) recently scored such a delay as saving the government roughly $3 billion, which, he said, some legislators view as a potential way to pay for ongoing funding for telehealth benefits.
"We're confident that at a minimum there will be a one-year delay in PAMA," Davis said.
Quest reported total revenues of $2.40 billion, up from $2.34 billion a year ago and beating the consensus Wall Street estimate of $2.39 billion.
During Q2, Quest's revenues rose 3 percent year over year while its base business revenues increased nearly 4 percent. The company also beat analysts' expectations on the top and bottom lines.
For the three months ended June 30, the Secaucus, New Jersey-based lab company reported total revenues of $2.40 billion compared to $2.34 billion a year ago. On average, analysts had expected Q2 revenues of $2.39 billion.
Davis attributed the company's performance during the quarter to the "growth of new physician and hospital customers" as well as a "more favorable test mix that includes greater adoption of advanced diagnostics" and "continued strength in healthcare utilization." He also noted that the company "made progress improving our operational quality and efficiency through greater use of automation and AI."
Test volume as measured by requisitions was up 1 percent year over year, with organic volume down a fraction of a percent and revenue per requisition up 2 percent.
Davis highlighted Quest's recent $985 million acquisition of Canadian laboratory firm LifeLabs, noting that the company sees Canada's population growth rate — which is slightly higher than the US's — and what Davis said is a "steady" and "consistent" reimbursement model as attractive features of the company's market. He added that Quest believes there is opportunity to grow esoteric and advanced testing in the Canadian market.
Davis also noted Quest's recent deals to acquire select assets of Columbus, Ohio-based health system OhioHealth's outreach laboratory services business and to acquire select lab assets of Minneapolis-based Allina Health.
More generally, he said that factors including rising supply and wage costs, as well as a decision around the deployment of capital, continue to drive Quest's expansion plans, driving hospital systems to either sell portions of their lab businesses to the company or enter into lab services and management deals.
While Quest saw strong growth in its hospital and physician testing channels, which Davis said makes up around 90 percent of its business, its employer businesses, particularly employee health screening and workplace drug testing, declined. The company previously disclosed it is laying off 121 employees from its workforce drug testing facility in Norristown, Pennsylvania, as part of a move to consolidate such testing at its Lenexa, Kansas, facility.
Quest's SG&A expenses were flat during the quarter at $416 million.
The company reported Q2 net income of $229 million, or $2.03 per share, compared to $235 million, or $2.05 per share, a year ago. Adjusted EPS was $2.35, besting the consensus Wall Street estimate of $2.34.
Quest raised its full-year 2024 revenue guidance to a range of $9.50 billion to $9.58 billion from a prior range of $9.40 billion to $9.48 billion. It also raised its adjusted EPS guidance to a range of $8.80 to $9.00 from a previous range of $8.72 to $8.97.
Quest finished Q2 with $271 million in cash and cash equivalents.
In early morning trading on the New York Stock Exchange, shares of Quest were down about 1 percent at $146.11.