Leading diagnostics player, Quest Diagnostics (DGX) is scheduled to speak at the Morgan Stanley Global Healthcare Conference on September 13, 2011 in New York. The company is expected to talk about the various strategies it has adopted to strengthen itself over the long-term.
Quest Diagnostics is focusing on areas with high potential such as gene-based, esoteric testing for cancer, cardiovascular disease, infectious disease and neurological disorders. The company has experienced increasing demand for gene-based and esoteric tests compared to routine tests with robust growth in colorectal cancer bloods test, OVA1 ovarian cancer test and Leumeta blood cancer test.
The recent acquisitions of Athena and Celera are expected to strengthen the company’s foothold in gene-based and esoteric testing. To expand in the area of women’s health, Quest has launched SureSwab for gynecological infections and also Spinal Muscular Atrophy testing, which are witnessing increasing acceptance. Quest is also witnessing strong growth in the expanding market for pain management. Encouraged by these factors, we expect higher sales from esoteric testing in the forthcoming period.
After four quarters of declining revenue per requisition, Quest recorded a positive 1.6% growth during the most recent quarter. The improvement was driven by an increased mix of esoteric testing, mainly contributed by recently-acquired Athena and Celera. The acquisitions are however, under pressure from reduced Medicare fees effective since January 1 and contract extension in the first half of last year.
The company expects further stability in pricing going ahead with the completion of one year of price cuts associated with these renewals. The drop in volume however came as a disappointment after recording positive growth for the past couple of quarters. Volume in May was particularly weak, while April and June were modestly positive compared with the year-ago quarter. As a result, Quest now expects a more modest 1.5% growth in revenues in fiscal 2011 compared with its previous guidance of 2% growth.
Meanwhile, Quest has adopted the cost reduction plan to prepare for upcoming growth opportunities. The company aims to reduce its cost structure by $500 million over the next 3 years, targeting a 20% operating margin goal. However, revenues derived from anatomic pathology have been under pressure for the past few quarters due to in-sourcing of tests by physicians. Moreover, the company faces tough competition from Laboratory Corporation of America Holdings (LH).
We are currently Neutral on Quest, which also corresponds to a Zacks #3 Rank (hold) in the short-term.
