Quest maps out base business boost despite COVID test crunch, high worker turnover

Free-falling demand for COVID-19 tests may still be a headwind on Quest Diagnostics’ overall earnings, but with that removed from the equation, it’s much smoother sailing for the testmaker.

For the second quarter of this year, coronavirus testing revenues fell nearly 90% year over year—from $355 million last year to just $41 million this time around. That helped drag down Quest’s net revenues almost 5%, to around $2.3 billion. But, according to a second-quarter earnings report published Wednesday, with COVID earnings set aside, the company’s base business revenues grew by nearly 10%.

That vote of confidence led Quest to bump up its expectations for the rest of the year. It’s now expecting to rake in between $8.9 billion and $9 billion from the base business, adding about $200 million to the previous forecast. That would represent year-over-year growth of up to 7% in the base business—compared to the approximate 7% decline that’ll hit Quest’s overall revenues, thanks to a predicted total of just $200 million from COVID testing.

Along with the still-plummeting COVID test sales, another major obstacle in Quest’s path to second-half success is that of high employee turnover. Though the company’s attrition rate has dropped “modestly” from the 23% it reported in December, CEO Jim Davis said on a Wednesday call with investors, it’s still well above the pre-pandemic rate of 14%.

“Frontline employee turnover improved marginally earlier this year, but the pace of improvement has not met our expectations, and it remains well above historical levels,” Sam Samad, Quest’s chief financial officer, said on the call. “We continue to feel the effects of the tight labor market, which has had an impact on productivity and wages. Turnover continues to be a drag on productivity despite the strong base business growth.”

In contrast to those setbacks, Samad also highlighted a handful of sunnier factors contributing to the base business boost. For one, after five years, the company’s QuestDirect consumer-initiated testing business became profitable in the second quarter of this year, “and it’s going to be accretive through the second half of the year,” Samad said.

Meanwhile, pricing is already taking “a step up from the first half,” per the CFO, and Quest is also planning to uphold the goals of its longstanding “Invigorate” cost-saving program, which was established over a decade ago with an aim of cutting costs by about 3% per year and is on track to ramp up in the latter half of this year.

On top of that, Quest is also beginning to reap the benefits of another cost-saving program it initiated earlier this year, and which saw the company lay off about 1.5% of its workforce on the way toward cutting $100 million from its expenses. Those savings started to roll in during the second quarter, Samad reported, with the rest expected to come in during the remaining months of the year.

“As you look at all of these factors, we are very confident about the ability to achieve the outlook that we’ve given,” Samad said.

Also on the call with investors, Davis discussed where the rewards of those improved revenues and slimmed-down expenses will go. There’s M&A, where Quest recently doled out $450 million to pick up cancer blood test maker Haystack Oncology—though the CEO noted that the Haystack buy is something of an outlier.

“Our focus in M&A continues to be on traditional hospital outreach purchases and tuck-in lab deals that are accretive to earnings in the first year,” he said, adding, “Our M&A pipeline is robust, as hospital systems face continued margin pressures due to labor challenges and a shift from inpatient to outpatient care.”

But Quest will also be looking inward for other investment opportunities.

“We’ve made strong investments in [consumer-initiated testing], and it’s paid off for us—we got really nice growth out of that, it’s now turned profitable. The Alzheimer’s tests that we’ve brought to market—that requires investment, and we’re going to continue to invest in that space. We’re going to continue to invest in molecular genomics and oncology because we’re getting growth in that space,” Davis said. “And with the Haystack acquisition, we’re going to continue to invest there to try to get that test to market as quickly as possible and build a stronger presence.”

“We’re investing in this business for the future,” he concluded.