Quest Diagnostics Earnings: Pandemic Pullback, but Strength in Non-COVID Diagnostics Bodes Well

Narrow-moat Quest Diagnostics’ DGX first-quarter results displayed the balancing act that has challenged diagnostic competitors: Demand for COVID-19 testing declined dramatically (down 80% versus the year-ago period) while nonpandemic tests ramped up. With the quarter generally in line with our expectations, we’re leaving our fair value estimate unchanged. Quest enjoyed significant strength in its underlying base business, with quarterly base volume up 8% year over year, albeit compared with a weak prior-year period that was constrained by the omicron variant. Even after adjusting for the easy comparison, though, the estimated 4% base volume growth is nothing to sneeze at.

Quest’s quarterly performance is largely consistent with what we’ve seen from rival LabCorp as well as results from the publicly traded hospitals that suggest medical utilization is on the upswing. Management seems confident enough in this underlying demand to increase its full-year outlook, though our estimates still fall within the new guidance. The firm called out testing for sexually transmitted diseases as an area of strong growth, which echoes Centers for Disease Control data and recent results at Hologic that suggest STDs after COVID-19 have exceeded prepandemic levels.

We’re intrigued by Quest’s planned acquisition of Haystack Oncology for $300 million (and up to another $150 million in milestones). We take this as a positive sign that Quest is serious about participating in the emerging market of liquid biopsy for minimal residual disease among cancer survivors. Morningstar estimates the target market for monitoring and early detection of recurrence should reach $15 billion by 2032. Though we think this segment of the overall liquid biopsy market is relatively small compared with pan-cancer and colorectal cancer, it also may have a better path to widespread adoption, considering that Medicare reimbursement has already been established.