Quest Diagnostics IncorporatedDGXNYSE
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Operator: Welcome to the Quest Diagnostics Third Quarter 2025 Conference Call. At the request of the company, this call is being recorded. The entire contents of this call, including the presentation and question-and-answer session that will follow, are copyrighted property of Quest Diagnostics with all rights reserved. Any redistribution, retransmission or rebroadcast of this call in any form without the written consent of Quest Diagnostics is strictly prohibited. Now I'd like to introduce Shawn Bevec, Vice President of Investor Relations for Quest Diagnostics. Please go ahead.
Shawn Bevec: Thank you, and good morning. I'm joined by Jim Davis, our Chairman, Chief Executive Officer and President; and Sam Samad, our Chief Financial Officer. During this call, we may make forward-looking statements and will discuss non-GAAP measures. We provide a reconciliation of non-GAAP measures to comparable GAAP measures in the tables to our earnings press release. Actual results may differ materially from those projected. Risks and uncertainties that may affect Quest Diagnostics' future results include, but are not limited to, those described in our most recent annual report on Form 10-K and subsequently filed quarterly reports on Form 10-Q and the current reports on Form 8-K. For this call, references to reported EPS refer to reported diluted EPS and references to adjusted EPS refer to adjusted diluted EPS. Growth rates associated with our long-term outlook projections, including consolidated revenue growth, revenue growth from acquisitions, organic revenue growth and adjusted earnings growth are compound annual growth rates. Now here is Jim Davis.
James Davis: Thanks, Shawn, and good morning, everyone. Our third quarter performance underscores strong demand for our clinical solutions, our diligent execution to meet customer needs and our commitment to advancing our strategy. We delivered robust top and bottom line growth, extended our presence in key markets, forged new collaborations with leaders across health care and expanded our broad portfolio of diagnostic innovations to advance better health. Revenues grew 13.1%, including 6.8% organic growth driven by broad-based adoption of our clinical innovations, contributions from acquisitions and growth in our consumer channel as we position Quest as the preferred lab engine inside top wellness brands. We also announced an agreement with Corewell Health to form a lab services joint venture serving the state of Michigan. In addition, we will deploy our comprehensive Co-Lab solutions across Corewell's nearly two dozen hospitals supporting quality, innovation, access and productivity. Given our strong performance year-to-date, we are again raising our full year 2025 guidance. I'd like to take a moment to comment on efforts to reform PAMA. In September, congressional leaders introduced bipartisan legislation called the Results Act. Results is a smart, pragmatic and fair reform that seeks to correct the flaws of the original PAMA implementation. It would deliver foundational payment reforms for clinical labs by dramatically improving the accuracy of data used to set reimbursement under the clinical lab fee schedule. If Congress does not reform or delay PAMA this year, American labs will be forced to absorb significant payment cuts next year, threatening the ability of American seniors to access critical lab testing. We are working in partnership with our trade association ACLA and with Congress to secure meaningful PAMA relief before the new year. Before turning to our third quarter results, I'll share some highlights on how our strategy is enabling growth. We are focused on delivering solutions that meet the evolving needs of our core clinical customers, physicians and hospitals as well as customers in the higher growth areas of consumer, life sciences and data analytics. We enable growth across our customer channels through faster-growing advanced diagnostics in five key clinical areas, which are advanced cardiometabolic, autoimmune, brain health, oncology and women's and reproductive health. In addition, acquisitions are a key growth driver, and our strategy emphasizes purchases of accretive hospital outreach and independent labs. Finally, we are focused on driving operational improvements across the business with the deployment of automation, AI and other advanced technologies for improved quality, productivity and customer and employee experiences. Here are some updates on the progress we have made in these areas during the third quarter. In the physician channel, we delivered approximately 17% revenue growth with organic revenue growth in the high single digits. We experienced broad-based demand across our clinical solutions supported by focused commercial execution and expanded health plan access in several states, including Colorado, Georgia, Nevada and Virginia. In addition, we continue to expand business and enterprise accounts, including functional medicine providers who utilize comprehensive laboratory testing to improve health and wellness. During the quarter, we completed our acquisition of select clinical testing assets from Fresenius Medical Care, which will enable us to offer lab testing used in dialysis delivery to independent dialysis clinics in the U.S. More significantly, under a separate enterprise agreement, we also began to roll out clinical lab testing to Fresenius Medical Care's dialysis centers which serve about 200,000 dialysis patients annually in the U.S. We expect to finish scaling these services in early 2026. We look forward to processing these tests during periods of the day when we have open capacity, enabling us to further optimize the productivity of our labs. In the hospital channel, revenues grew low single digits with collaborative lab solutions driving our growth in the quarter. We offer hospitals many flexible options for accessing our leading science, innovation and scale. These include reference testing, our Co-Lab solutions, outreach acquisitions and other business relationships, all of which provide meaningful improvements in quality, patient access and cost efficiencies. During the quarter, Quest and Corewell Health, a top health system announced plans to establish a laboratory services joint venture in Michigan with an advanced state-of-the-art lab serving the entire state. In our largest implementation of Co-Lab solutions to date, Corewell Health will utilize our comprehensive offering, including reference testing, lab analytics, supply chain management and blood management. Once we fully scale across Corewell's 21 hospital labs next year, we expect annual revenues from Co-Lab solutions to be approximately $1 billion. Turning to our consumer channel. We are excited by increasing momentum we saw in the third quarter as we strengthen Quest as the preferred lab engine of consumer health companies. We are delivering our extensive menu and technology inside top consumer health and wellness brands. For example, our collaborations with WHOOP, the human performance company and OURA Health, maker of the world's leading smart ring, enables seamless access to our lab testing services and results in their mobile apps. In the quarter, we also saw strong double-digit growth from our questhealth.com consumer-initiated test platform. In Advanced Diagnostics, we delivered double-digit revenue growth across several clinical areas of our portfolio. This includes advanced cardiometabolic and endocrine as well as autoimmune disease testing with our analyzer autoimmune solution. Analyzer experienced strong growth as primary care physicians increasingly utilize this solution to direct high-risk patients to specialty care. In brain health, demand for our Quest AD-Detect blood test for Alzheimer's disease accelerated and more than doubled in the third quarter. New guidelines introduced in July recognized the value of blood-based biomarker testing in assessing Alzheimer's disease pathology in patients with cognitive impairment. At the same time, we continue to publish evidence on our AD-Detect test, including a study published this month that found two of our innovative panels provide confirmatory accuracy for aiding Alzheimer's diagnosis. In oncology, during the quarter, we received breakthrough device designation from the FDA for our Haystack MRD test. This milestone reinforces the high caliber of our cancer monitoring innovation and opens avenues for developing companion diagnostics. We also commenced separate trials with Mass General Brigham and Rutgers Cancer Institute to further research Haystack MRD's clinical utility as a guide in making postoperative therapy decisions. We are also pleased that HPH, a major lab provider in Hamburg, recently introduced an in-house MRD test in Germany based on a license to our Haystack MRD technology. We are highly focused on delivering innovations that can identify risk of cancer and other diseases in early preventable stages. During the quarter, we announced collaborations that leverage Quest's national scale in phlebotomy and connectivity to broaden access to cancer screening liquid biopsy tests, including Guardant's Health Shield's test for colorectal cancer. Turning to operational excellence. We continue to target 3% annual cost savings and productivity improvements through our Invigorate program. We are deploying innovative automation and AI technologies, including digitizing processes to improve quality, productivity and customer and employee experiences. During the quarter, we announced Epic as our technology partner for Project Nova, our multiyear order-to-cash transformation. By deploying a suite of Epic solutions, including Beaker, MyChart and Care Everywhere, we will deliver deeper, more connected insights with easier, faster and more efficient experiences. Combining these leading technologies with our breadth and scale will help all patients and providers regardless of their EHR provider, get the information they need to make critical care decisions. We are in the early planning stages of this work and look forward to sharing more about the implementation on future calls. Our growth and productivity gains in the quarter demonstrate that we are executing our strategy and serving our customers and patients with both energy and purpose. And now Sam will provide more details on our performance and 2025 guidance. Sam?
Sam Samad: Thanks, Jim. In the third quarter, consolidated revenues were $2.82 billion, up 13.1% versus the prior year. Consolidated organic revenues grew by 6.8%. Revenues for Diagnostic Information Services were up 13.5% compared to the prior year, reflecting organic growth in our physician, hospital and consumer channels, as well as recent acquisitions. Total volume measured by the number of requisitions, increased 12.5% versus the third quarter of 2024, with organic volume up 3.9%. Recall the impact of weather and the CrowdStrike global IT outage was a headwind on our volume in the third quarter last year. We estimate that our volume in the third quarter of 2025 experienced a benefit of approximately 50 basis points due to the impact from those disruptions in the same period last year. . Total revenue per requisition was up 0.8% versus the prior year as an increase in organic revenue per requisition was substantially offset by the impact of the LifeLabs acquisition which carries a lower revenue per requisition. On an organic basis, revenue per requisition was up 3% in the quarter versus last year driven primarily by an increase in the number of tests per requisition and test mix. Unit price reimbursement remained consistent with our expectations. Reported operating income in the third quarter was $386 million or 13.7% of revenues compared to $330 million or 13.3% of revenues last year. On an adjusted basis, operating income was $458 million or 16.3% of revenues compared to $385 million or 15.5% of revenues last year. The increase in adjusted operating income was due to recent acquisitions and organic revenue growth, partially offset by wage increases and higher-than-expected employee health care costs. Reported EPS was $2.16 in the quarter compared to $1.99 a year ago. Adjusted EPS was $2.60 versus $2.30 the prior year. EPS in the third quarter was impacted by higher net interest expense versus the prior year. Foreign exchange rates had no meaningful impact on our results. Cash from operations was $1.42 billion year-to-date through the third quarter versus $870 million in the prior year. This year-over-year increase of 63.1% was driven by higher operating income, favorable working capital due to timing of receipts and disbursements, a onetime CARES Act tax credit and the cash tax benefit related to recent tax legislation. Turning now to our updated full year 2025 guidance. Revenues are expected to be between $10.96 billion and $11 billion. Reported EPS is expected to be in a range of $8.58 to $8.66 and adjusted EPS in a range of $9.76 to $9.84. Cash from operations is now expected to be approximately $1.8 billion, and capital expenditures are expected to be approximately $500 million. Our 2025 guidance reflects the following considerations. Our updated revenue guidance assumes approximately 4.5% to 5% organic revenue growth, in addition to contributions from acquisitions completed in 2024 and announced to date. It does not assume any contribution from prospective M&A. We are making investments in 2025 related to Project Nova, which we expect will modernize our entire order-to-cash process. We expect these expenses to ramp in the fourth quarter. Operating margin is expected to expand versus the prior year. Our updated operating cash flow guidance reflects a cash tax benefit related to recent tax legislation as well as favorability in working capital. With that, I will now turn it back to Jim.
James Davis: Thanks, Sam. To summarize, our third quarter performance of robust top and bottom line growth underscores strong demand for our clinical solutions, our diligent execution to meet customer needs and our commitment to advancing our strategy. We formed collaborations to support future growth, including with Corewell Health in Michigan, top consumer health brands and Epic for Project Nova. Given our strong performance year-to-date, we are raising our full year 2025 guidance. Finally, I want to thank our more than 55,000 colleagues for their hard work this quarter. They are the force that delivers on our purpose to create a healthier world, one life at a time. Now we'd be happy to take your questions. Operator?
Operator: [Operator Instructions] Our first question comes from Patrick Donnelly with Citi.
Patrick Donnelly: Jim, maybe just on the backdrop, the utilization backdrop, it looks like it remains elevated. What are you guys seeing there and expectations into year-end? And then just a quick follow-up for Sam. Maybe on the PAMA side, latest expectations, what you're hearing there and the potential offsets you would have as we head into '26, maybe just the probability of how you're thinking about that.
James Davis: Yes. Thanks, Patrick. So on the utilization, as we said in the script, our raw req volume was up 3.9% and then organic rev per req up 3%. So let me comment on each one of those. On the req volume side, first, as you know, we're back in network with Elevance in some key states, Nevada, Colorado, and Virginia, and we're certainly picking up share and picking up momentum as we progress through the year. So you're just seeing a continuation of those volumes building in each of those states. In addition, Sentara is another health plan that we're back in network with in the Virginia area as well, actually goes down the coast a bit. And so all of that has helped our -- aided the 3.9% organic req growth. Now in addition to that, we mentioned the strong mix on the call, autoimmune testing way up, advanced cardiometabolic testing way up, our brain health volumes more than doubled in the quarter. So all of that helping both test per req plus test volume. And then the last thing I mentioned is our consumer business. The consumer health business, our own consumer -- our own direct channel has been incredibly strong, growing 30% to 40% on a year-to-date basis. And then our partnerships with companies like Function Health, also helping our growth on the consumer side. In the quarter, we announced partnerships. It didn't really impact our volume in the quarter, but your comment about how do we think about things going into the fourth quarter. Our partnerships with WHOOP and OURA, we definitely expect that to contribute volume on the consumer health side. So I would tell you, the expectations for Q4 is that the utilization levels will continue as we've seen them in Q3.
Sam Samad: Yes. On PAMA, so to kind of probabilize it here or put odds on it is difficult. I would tell you the Results Act has been proposed. We still think it's going to be not an easy one to pass, but there's also a likelihood of a PAMA delay, which we think has likely more probability than the Results Act actually passing. So we remain optimistic about a PAMA delay, although it's really hard to kind of put odds on it right now. In terms of the impact of the P&L, as we have indicated before, it's a $100 million impact next year if PAMA does come back. We will offset a portion of it. It will not be the majority of it. We will offset a portion of it that's -- portion of that $100 million. And remember, we control the pace of some of the investments that we have next year. So we can control and pace some of these investments if PAMA does come back, and we have to offset a portion of this hit.
Operator: Our next question comes from Michael Cherny with Leerink Partners.
Michael Cherny: Maybe if I can build a little bit more on the mix in the quarter and how you think about that relative to jump-off point into next year relative to the LRP. As you look back versus what you outlined in March, are some of these aspects of wellness testing and specialty testing performing above expectations, in line with? And how are you thinking about framing those in terms of the contribution rate they can provide relative to where you laid out the LRP for overall organic volume, organic revenue growth back in March?
James Davis: Yes. So versus expectations we set in March, I'd say the consumer channels of both our direct and our relationships with other partners are performing slightly above what we expected going into the year. Our own direct channel is performing very well. And in addition to wellness testing that we get through that channel, there's what I would call episodic testing. So these are things like STDs, tick testing, allergy testing that people just want and -- want privacy. For other reasons, they come to us directly. So our own direct channel performing better than expected. You can all see, I'm sure, on social media and things like that, what companies like Function Health and WHOOP and OURA are doing. And certainly, that is aiding our progress on the indirect channel as part of consumer health. Look, it's just huge momentum that is building across the country as individuals become CEOs of their own health. And with that, they turn to companies like Quest Diagnostics to get access to testing that otherwise they may not be able to get through their traditional health plans or some of the tests that these consumers want may not be acceptable through the fund. They could get denied. So that's why they turn to consumer health channels, okay? So again, as we go into the fourth quarter, and we're in the fourth quarter, as we go into the early part of next year, we expect these consumer channels to continue to gain momentum.
Sam Samad: Michael, if I take it back to your comment compared to March, or to compare to March, largely the assumptions are still intact versus what we shared during our Investor Day in March. The mid-single-digit revenue growth, including the contribution of 1% to 2% from M&A, high single-digit EPS growth, the margin expansion over the 3 years that we shared. All those, I would say, are pretty intact. I mean there are some definitely positive things that we're seeing around utilization, around the consumer business, around the wellness business, all the things that Jim shared. And also on the revenue side, the test per req and mix improvements that we're seeing that have a direct impact on contribution and operating margin. So all of those are really positive but not to change the long-term outlook that we provided.
Operator: Our next question comes from Elizabeth Anderson with Evercore ISI.
Elizabeth Anderson: I have a question about sort of how you're thinking about the 4Q margins. Obviously, I think, Sam, you highlighted the step-up in the Nova, Project Nova expenses, which you guys have obviously called out before. Can you talk about some of the other pluses and takes, because obviously, you've had very strong margin expansion over the last [indiscernible]. And I just want to make sure I understand all of the puts and takes as we think about the fourth quarter and then a jump point into '26, but like I understand that PAMA -- ex potential PAMA impact.
Sam Samad: Sure, Elizabeth. Yes, happy to talk about it. So starting with Q3 because that's the jump-off point to your question. Starting with Q3, we saw strong margins in Q3, 16.3% operating margins, healthy expansion versus same period prior year. And a lot of that is driven by utilization and driven by mix as well, both in terms of the revenue per req overall, but also the business mix, the test mix. Now we did see an offset to the strength in operating margins in Q3 related to group health expenses, our medical -- employee medical expenses. Those came in higher than we expected in Q3. And were a significant -- fairly significant headwind on margins in Q3. I would size it as roughly 40 to 50 basis points in terms of impact on operating margins. We do expect those to continue at this elevated level going into Q4. I won't talk about '26 yet. It's too early. We need to look at all of our group health plans for '26 before we can guide anything towards the impact of those in '26. But I can tell you, in Q4, our expectation is they'll continue somewhat elevated and have a negative impact on margins. In terms of Q4, the only other things I would call out is, yes, we did have -- we do expect a ramp in Nova investments in Q4. Those have largely due to the timing of signing with Epic have been pushed more into Q4. So we expect more of those in Q4 than we initially expected. And then in terms of seasonality, I mean, I'd remind you of a couple of things that we traditionally see, nothing that's different. One is that if you look pre-COVID seasonality Q3 to Q4, usually, the OM trend is to be about 50 to 100 basis points lower in Q4 versus Q3. So I think the seasonality trends are pretty similar in general to what we used to see pre-COVID.
James Davis: Elizabeth, just to summarize, on a year-to-date basis, our OM rate is up 60 basis points. And so it really does point to our productivity efforts, our Invigorate program continues to pay dividends for us. There's no letup. There's never an end goal. The goal always moves forward, and we expect those productivity efforts to continue in the back half of the year and into next year.
Operator: Our next question comes from Kevin Caliendo with UBS.
Kevin Caliendo: Sam, I know you just said you don't want to talk about '26, but I have to ask a little bit just thinking about now that we sort of understand the jump-off point, we understand your LRP. PAMA aside, what other sort of headwinds and tailwinds should we be contemplating? I know there was some other investment spend that was planned. Corewell might be incremental. Is there anything sort of fundamentally or company-specific we should be thinking about when thinking about '26 relative to the LRP?
James Davis: Yes, Kevin, let me start, and then I'll turn it over to Sam here. So I think we've talked volume and utilization trends. We -- the test per req growth, the rev per req increases that come with that, we feel good about that continuing into next year. Our commitment to advanced diagnostics, the autoimmune testing, brain health, as I talked about, doubled in the quarter. All of those point to, again, increased volume and utilization trends. We've talked about earlier, and we mentioned in the script, we've just begun to take on the testing from Fresenius. So there were two parts to that. One is Fresenius is the testing that comes from over 200,000 dialysis patients across the 3,100-plus dialysis centers. We're in the very early innings of integrating that work into Quest Diagnostics, plus Fresenius provided lab testing for other third-party dialysis centers. That's the piece of the business that we bought, and we certainly expect to expand on that as we go into next year. Corewell, the Co-Lab portion of that just gets going here in the fourth quarter. That will expand as we -- across all 21 hospitals as we move into 2026. And then again, the strong consumer health channel. Now headwinds, we've talked about PAMA. Yes, there's the expiration of the health exchange, the subsidies for the health exchange, still don't know how that's going to come out. Obviously, that's one of the big concerns during the shutdown here. And then other headwinds -- look, hospital reimbursement remains a challenging environment. Pricing on the hospital side remains challenging. And then as Sam indicated, yes, there will be a ramp up of Nova investments as we move through next year.
Sam Samad: And from -- so Kevin, from an impact on margins perspective, if I take some of Jim's comments and just give you some color around margins, not to give a percentage right now or any numbers. But the utilization, the healthy environment is going to continue to drive margin expansion. Similar thing with the revenue per requisition, the test mix, the -- and also the test per req is going to drive improvements in margin I think you're going to see the Invigorate program continue to drive the 3% productivity and cost reduction next year as well. So that's a tailwind as well. PAMA is obviously an uncertain one, so I'll kind of set it off to the side for now as a potential headwind. The ramping Nova investments are going to generate more expenses next year, but that's in line with what we shared back in March when we first announced this program. There's nothing new there in terms of additional cost. And also generally, in terms of all the investments that we have next year, including Nova, depending on PAMA, we have the ability to sort of ramp those and basically time those and pace those accordingly to offset the impact of any negative pricing effect from PAMA.
Operator: Our next question comes from Jack Meehan with Nephron Research.
Jack Meehan: I wanted to talk about cash flow. So it's been really strong conversion so far this year, and you increased the guide here to $1.8 billion, up $250 million. Maybe for Sam, just are there any one-timers you would call out this year besides kind of the CARES Act payment? I'm just trying to think about the puts and takes on this line into 2026 and understanding what the right baseline might be to work off of.
Sam Samad: Yes. Thanks, Jack. So yes, cash flow has been strong. I mean we took up operating cash flow, as you indicated, to $1.8 billion as our guide so an increase of $250 million. I think we're seeing some increases and some positives related to the strength of the business, also the timing of receipts as well and collections. But there are one-timers in that you should not expect to necessarily continue. You called out the CARES Act payment of $46 million. That is a one-timer that we don't expect to repeat next year. And then there are onetime benefits related to the recent tax legislation, the One Big Beautiful Bill Act that help us in 2025 that don't necessarily produce the same magnitude of benefit in 2026. One is related to the acceleration of bonus depreciation and the ability to take deductions on that and gives you a cash tax benefit. And the other one is also related to R&D, accelerated R&D expenses or expensing R&D and being able to take a tax deduction on that as well, which helps you from a cash tax benefit, too. So those, in total, I would call out between sort of just over $100 million, $100 million to $130 million or so of benefits in addition to the $46 million of CARES Act.
James Davis: Yes. Jack, the other thing I'd point to is the beauty of the consumer channel, it's a direct cash business. You get payment at the time of order and there's no patient concessions or bad debt. So to the extent we continue to grow that consumer channel, it certainly helps bring in the cash, the timeliness of the cash and the certainty of the cash.
Operator: Our next question comes from Luke Sergott with Barclays.
Luke Sergott: I just wanted to dig in a little bit on the consumer health momentum that you guys have in light of kind of some of these like new partnerships you have with WHOOP and OURA. How to think about like the partnership here? And what kind of tests are what's being marketed -- and what kind of tests you guys are going to be driving through there? And any type of benefit that you could see to help the requisition volumes stay elevated within that business?
James Davis: Yes. So I can talk about each of those. First of all, let's start with WHOOP. They have somewhere between, I don't know, 1.5 million and 2 million WHOOP users in the country. WHOOP announced that there were roughly 350,000 people that had signed up for advanced labs. Now how quickly those people that signed up, how quickly they convert and actually get lab testing done, it's very hard to tell at this point. The faucet is open. People have come forward. So we are seeing demand from that. You've seen the pricing that WHOOP announced in the marketplace, $199 for a limited panel of roughly 65 biomarkers. And if you do that twice, it's twice in a year, it's a $350 charge. OURA, on the other hand, we're still in the final stages of the technical integration with OURA. OURA is much bigger in terms of users. They've got about 5.5 million globally. Not 100% how many are in the U.S., but probably 60-ish, 65% are probably U.S.-based. They've chosen a more limited panel, a $99 a panel that has roughly 50 biomarkers on it. And so we don't have an indication of a backlog yet or anything like that. And then obviously, again, our own direct channel has put up growth numbers that are really impressive on a year-to-date basis between 30% and 40%. And then obviously, Function Health continues to grow, and we are the sole lab that does all the testing for Function Health. So put all of those pieces together, and it really points to a segment that we're getting terrific growth.
Operator: Our next question comes from David Westenberg with Piper Sandler.
David Westenberg: Congrats on a good quarter. So on the consumer channel, we are seeing a lot of great growth in this channel. We're also seeing some ads for some of the home delivery blood testing kits. Do you believe that could be a key part of consumer health? And then are there any strategies to participate in that market?
James Davis: Yes. First of all, yes, there is strategies for us to participate. There are devices out there today for self-collect for both STDs as well as HPV. Today, those collections have to take place actually in one of our patient service centers. But in the future, we would expect consumers, patients to be able to do those collections in the home. We're working with a third-party provider on mobile -- on blood collection kits that go well beyond fingerprick and finger sticks. We don't actually think that is an optimal way to collect enough blood that can be used to run the test that we typically run here in Quest Diagnostics. But in time, those self-collect devices will improve. And as they do, we're going to participate in that game as well.
Operator: Next question comes from Erin Wright with Morgan Stanley.
Erin Wilson Wright: So in the 10-Q filing, you reiterated the expectation around the impact on the One Big Beautiful Bill and the expiration of ACA subsidies, I guess, in that 50, 60 bps range. I guess, how would you break the 2 of those out if we do get some sort of more favorable negotiation on the exchange subsidies? And then a completely separate question, but can you speak a little bit about the partnership with Epic a little bit more? I guess, can you talk a little bit about the genesis of that relationship and the nature of it and when we will hear more on that front, too?
Sam Samad: Yes. Thanks, Erin. This is Sam. So on the impact in 2028 that you call out that we disclosed in our 10-Q, the way I would think about it is the majority of that is really related to the health insurance exchanges and the potential expiration of those subsidies and not being renewed. So that roughly, let's call it, 60 basis points. I would say about at least 40 to 45 basis points of that is coming from the exchanges and the rest driven by Medicaid. Medicaid ramps over time to get to a certain impact by 2034. But the impact on '27, '28 is fairly minimal still. And Jim, talk about the other.
James Davis: Yes. On the Epic implementation, so the foundational element of this is the conversion and upgrading of all of our laboratory information systems to their LIS product, which is called Beaker. We're going to start that process. Obviously, a lot of planning is taking place right now. Planning will continue into 2026. We plan on starting those implementations more in our esoteric sites and then rolling it out across the regions over the next several years. We will also standardize. Today, we have the application called MyQuest, which allows patients to make appointments, view your test results, pay your bills. And that application will be upgraded to what most people know is MyChart in the Epic world that provides a lot of benefits, including patients will be able to see all of their information regardless if it's from Quest Diagnostics or a health system on one MyChart site, if you will. And so it provides the integration of lab work with other medical records that they may be getting from their physicians, their health systems. And so we believe that really has tremendous benefits as well. So as we've described in the past, it's a 5- to 7-year implementation timeline. And as Sam has said, we're going to pace that appropriately. It's a lot of change both internally for our own employees, a lot of change for our customers, and we're going to be very thoughtful and methodical as we embark on this change going forward.
Operator: Our next question comes from Andrew Brackmann with William Blair.
Andrew Brackmann: Jim, you highlighted some of the work that you're doing, expanding partnerships with some of the cancer screening players that are out there. Can you maybe just sort of talk about those opportunities broadly what they mean for Quest? But I guess more importantly, how do you balance those types of distribution partnerships with potentially doing some of this testing yourselves in the future?
James Davis: Yes. Well, the first decision we look at is do we have a test for that segment of the market. Now when it comes to some of these early-stage cancer screening tests, the answer is it's not an area where we've made significant investments. So as we've discussed in the past, you can order the GRAIL test through Quest Diagnostics. It's on our menu and we make it available to over 100,000 primary care physicians that's integrated from an IT standpoint. We announced with colo -- with Guardant. Their new blood-based colon cancer test. Again, we don't have a test in that segment. We were seeing -- we were getting questions from our physicians. And so it's on our menu. Physicians will be able to access that. There's complete IT integration. We do the collections and the test gets sent to the Guardant lab to be done. We have collection agreements with other players in the industry. But those two tests are actually on our menu and we enable physician offices to order through Quest Diagnostics.
Operator: Our next question comes from Michael Ryskin with Bank of America.
Michael Ryskin: You kind of just touched on it there on the advanced diagnostics side and just a follow-up specific to Haystack. If you could just provide an update on the integration and how that's going, just reaffirm some of the comments you made in terms of how it's going to flow into the model in 2026?
James Davis: Yes. So look, I'll talk about the integration, Sam can touch on some of the financial aspects. So it's totally integrated into the company. So there's -- it's part of the inner fabric of Quest Diagnostics. We've created with -- the test is run at our Center of Excellence in Texas, in our Cancer Center of Excellence. And the volumes are building. We feel good about that. We mentioned on the call, we continue to do new and innovative research with -- we mentioned Mass General Brigham -- Mass Brigham in Boston, Rutgers Cancer Institute here in New Jersey and numerous other cancer studies to continue to build evidence. From a reimbursement standpoint, we are getting paid by Medicare today. And we expect this November that you'll see final reimbursement decisions in the final clinical lab fee schedule that gets published just before Thanksgiving of this year. So continued progress, continue to build volume and completely integrated into Quest Diagnostics.
Sam Samad: Yes, I'll talk a little bit about the financials or at least in terms of what we expect the projections to be without giving a number because we're still working through our annual planning now for 2026. But listen, Mike, we're really excited about this test. It's definitely one that I think has the potential to be a leading MRD test in the market. We have had some learnings around the actual commercial presence that we need to have the number of reps that we need to put behind it. The EMR investment that we need to make in terms of the Epic, OURA, investment that we're making this year. So this year, we're expecting it to be relatively on pace in terms of dilution versus last year. And we do expect in 2026 to be -- for it to be a tailwind in terms of less dilution in 2026 versus 2025. But very pleased with the market response to this test.
Operator: This question comes from Pito Chickering with Deutsche Bank.
Pito Chickering: Nice job in the quarter. As we roll forward, the organic growth for next year, if I focus on the number of tests per requisition. Can you refresh us how that grew year-to-date, how we should think about the durability of that growth going forward?
Sam Samad: Yes. In terms of test per req, Pito, we have said that it's definitely elevated versus what we were seeing pre-COVID, okay? So without getting too specific and too many -- provide too many details and numbers, which we don't necessarily share. But definitely, it has continued to improve quarter after quarter since 2019. So right now, we are north of, I would say, 4.2 in terms of test per req. And prior to 2019 in the pre-COVID time frame, we were somewhere between 3.5 and 4, okay, maybe on the high end of that. But this constant evolution of test per req, we're seeing improved test per req and also improved mix. On the test per req, it's a number of things. I mean it's clinical guidelines that physicians over time have been gradually adhering to. It's our clinical franchise strategy. It's the availability of a broader test menu that we have. It's the default to more screening tests like advanced -- like AD-Detect, for instance, which is a blood-based Alzheimer's, dementia screening test that we didn't -- wasn't available before, that's now producing lift. And then on top of that, there's also the wellness portion of our business that's driving also an improvement in terms of test per req. So all of these things that I mentioned are helping with test per req and also on top of that revenue per requisition. If you take that into 2026, do I expect continued improvement in terms of revenue per requisition and test per req? Potentially, but it's going to get to a point where it slows down. We're not going to continue to see the same pace of improvement that we've seen traditionally. So yes, I think the direction is positive for next year, but I think at some point, we're going to see a slowing down of that improvement.
Operator: This question comes from Tycho Peterson with Jefferies.
Tycho Peterson: I wanted to just probe a little more on the oncology initiatives. I appreciate the color you provided. But I know evidence generation, you're working with some of the academic medical centers for Haystack, I think on head and neck, breast, lung. I guess how do we think about additional indications being introduced for Haystack? And then any thoughts on just guideline inclusion for NCCN? And then separately on Guardant, I think Shield is going to cross $100 million or so in revenues next year. So at what point could that partnership start to get more meaningful? And is that just for colorectal or use an option for multi-cancer with Guardant as well?
James Davis: Yes. Let me just take the last question first. So first, on Guardant, right now, it is just colorectal. That's what we've agreed to do. That's what we've put up on our test menu. And we expect growth out of that next year. With respect to evidence generation on the Haystack MRD test. So first indications are obviously colon, and we're going after that hard. And I think hopefully, we'll see favorable reimbursement in the fee schedule that comes out in November for that indication. As you mentioned, head and neck are important, and we're doing that research, doing those studies with Mass General. We've got several funded studies on breast and lung as well. We have over 25 studies ongoing right this moment. So the studies get completed. We do the publications. So we expect to continue to get broader and broader based coverage on multiple cancer indications with this test. Look, we're really, really pleased with the uptake of this test by some of the more academic sites that really value precision. They value the sensitivity of the test. They value the specificity of the test. And we're seeing nice uptake from thought leaders in the industry that value these characteristics.
Operator: Our final question comes from Eric Coldwell with Baird.
Eric Coldwell: A lot of moving pieces on the margin profile in 3Q and 4Q. You called out the employee health benefits as one of the short-term headwinds. I'm curious about Project Nova and other investments around that. You mentioned some slippage from 3Q to 4Q, an increase in 4Q. Is it possible to size if there's some way to frame these investments relative to last year or relative to original expectations? I'm just trying to get a sense of what the order of magnitude of the impact in 4Q is? And then how that might play out in 2026 in terms of a year-over-year investment comparison?
Sam Samad: Yes. Thanks, Eric. So I'll give you portion of what you asked for, but I won't give you everything that you asked for in terms of the numbers. But listen, we started the year, we said we had investment spend this year of roughly $30 million. We said there was about $10 million related to the LDT regs and there was about $20 million related to Project Nova investments. So the QARA, the quality and regulatory, and we didn't -- the LDT regs obviously didn't go through, but we still have to make some investments to really improve that organization and our reporting capabilities. So I would say roughly of that $10 million that we had earmarked, we spent most of that. The $20 million for Nova, we have not spent a big portion of it. And so some of it went into Q4, and we're going to spend a portion in Q4, and that was largely due to timing. . Now there's not going to be a bleed over effect into 2026, if kind of if you're trying to read into that. I wouldn't consider it as something that's going to impact 2026 negatively. It was really more of a timing thing within 2025. We just didn't spend it earlier and it just went into Q4. So that's how I'd look at it. In terms of just Nova spend overall. As we have called out over the next 3 years -- or sorry, over the next 6 or 7 years through the implementation, we're expecting about a $310 million investment -- somewhere between $250 million and $310 million investment in Nova. And that's going to be a combination of OpEx and CapEx. And a portion of that is going to impact 2026, but it's consistent with our expectations when we shared that range back in Investor Day. Nothing has changed. And as I said earlier, depending on PAMA, depending on the headwinds of the business, the macro environment, potential any challenges that we see, we control the pace of those investments and we will flex and pace accordingly. So just want to make sure that's clear.
Operator: At this time, I'm showing no further questions.
James Davis: Okay. Thank you again for joining in. And again, strong performance for Quest Diagnostics. We again thank our 55,000 employees who made this happen in the quarter, and we'll continue to make it happen. Have a great day. Thank you.
Operator: Thank you for participating in the Quest Diagnostics Third Quarter 2025 Conference Call. A transcript of prepared remarks on this call will be posted later today on Quest Diagnostics' website at www.questdiagnostics.com. A replay of the call may be accessed online at www.questdiagnostics.com/investor or by phone at (866) 388-5361 for domestic callers or (203) 369-0416 for international callers. Telephone replays will be available from approximately 10:30 a.m. Eastern Time on October 21, 2025, until midnight Eastern Time, November 4, 2025. Goodbye.