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Quest Diagnostics Q3 Revenues Rise 2 Percent, Miss Analyst Estimates

NEW YORK (360Dx) – Quest Diagnostics today reported 2 percent year-over-year revenue growth for the third quarter missing analyst expectations.

Revenue was $1.89 billion for the three- month period ended Sept. 30, 2018, up from $1.86 billion in the third quarter last year. The consensus Wall Street estimate was $1.95 billion.

Ross Muken, analyst with investment bank Evercore ISI called the quarter "mediocre to modestly disappointing," in a note to investors. He cited the missed revenues, and the continuation of headwinds that the company faced last quarter as some of the reasons for his modest disappointment.

Revenue growth was primarily due to acquisitions, Quest Executive Vice President and Chief Financial Officer Mark Guinan said during its earnings call. Quest announced acquisitions of anatomic pathology firm Phenopath, the US lab business of Oxford Immunotec and fertility diagnostics company ReproSource in the quarter.Subsequent to the end of Q3, the company acquired certain assets of Hurley Medical Center's outreach lab operations, which Quest Chairman, President, and CEO Steve Rusckowski attributed to the Protecting Access to Medicare Act, which many say is putting pressure on smaller labs.

"In this case, the seller indicated reimbursement pressure was a factor in [Hurley] deciding to exit the business," Rusckowski said. Quest expects the pressures of PAMA to be a factor in driving further consolidation of the industry, which gives Quest "an opportunity to accelerate growth" through acquisition, he said.

Outside of acquisition growth, Quest faced pricing pressures in other areas. Revenue per requisition fell by 80 basis points in the third quarter, Guinan said. He noted revenue per requisition includes several factors in addition to price, such as unit price variation, test mix, and other variables.

Unit price headwinds were consistent with expectations, Guinan said, with a headwind of 50 basis points due to PAMA and 100 basis points from other factors. The company cited headwinds in hepatitis C testing, prescription drug monitoring, and vitamin D testing in the second quarter, which have continued but started to lessen in the third quarter, Guinan and Rusckowski said.

Guinan noted several trends for 2019 that the company anticipates, including a "significant opportunity to grow" with its new UnitedHeathcare contract. Quest, however, anticipates that moving in network will come with lower reimbursements than the out-of-network services that the company provides to some UnitedHealthcare customers today.

The company is already on track to deliver 1 percent to 2 percent revenue growth through acquisitions next year but expects PAMA headwinds to grow from 50 basis points this year to more than 100 basis points in 2019, Guinan said.

In addition, Quest expects an additional 150 basis points of reimbursement pressure beyond PAMA from third-party payors that includes the impact of moving in network with UnitedHealthcare, as well as certain pricing pressures from billing hospitals and physicians rather than billing payors directly.

Separately, Quest plans to continue to expand retail locations through partnerships with Walmart and Safeway, Rusckowski said.

For Q3, net income attributable to Quest was $213 million, or $1.53 per share, up from $161 million, or $1.15 per share, for the same quarter in 2017.

Adjusted EPS was $1.68 per share for the quarter, compared to $1.35 per share in 2Q 2017, and matched the consensus analyst estimate.

During the quarter, Quest spent $354 million on SG&A, up 2 percent from $348 million in the same quarter last year. The company ended Q3 2018 with $263 million in cash and cash equivalents.

Quest revised its guidance for the full year to reflect lower than expected revenue performance. Reported revenues are now expected to be approximately $7.62 billion, compared to previous guidance of between $7.70 billion and $7.74 billion.

EPS is expected to be in the range of $5.57 to $5.64 compared to a previous guidance of $5.50 to $5.64. Adjusted EPS is now expected to be between $6.53 and $6.60 compared to previous guidance of between $6.53 and $6.67.

In afternoon trading on the New York Stock Exchange Quest's shares shrank about 5 percent to $96.58.