Quest Diagnostics Inc. Morgan Stanley 24th Annual Global Healthcare Conference

Sure. Thank you for having us, Erin, first of all. I'm accompanied here by Damini Chokshi, who's our new head of investor relations, so I don't know if you've met her. She came to us from Merck. Now it's been, what, 2 months? Welcome. Let's talk about 2026 and the guidance increase and the take-up that we had. Listen, first I'd say very strong start or first half of the year. We're seeing some really broad-based strength across utilization, across revenue per requisition. We have these new partnerships that we established towards the end of last year with Corewell Health, which is a large health system in Michigan, as well as Fresenius around performing clinical testing for their dialysis business. All of those things are giving us lift, in addition to our consumer business, which is really performing also very well.

Almost 30% growth year-on-year. All of those things, I would say, have given us confidence about the year, especially the strong utilization environment that we're in. That I do believe, by the way, is durable. As we think about the remainder of the year, I'd say we expect that strength to continue. In the first half of the year, we didn't see any material impact from the healthcare exchanges, the subsidies expiration. We were expecting with the disenrollments for that to start to have a bearing on revenue and volume growth. We haven't really seen it. We have seen disenrollments, but not really materially felt that impact. We do expect that to be felt in the second half of the year, whether that's the right assumption to be determined, but that's what we have baked into guidance.

That's really one thing that we expect to have an impact in the second half of the year, if you're looking at growth rates second half versus first half. There's always the uncertainties or variable items like weather. So far, weather has been good. We haven't seen much in terms of hurricanes, but that always has an impact on our business in terms of disruption. Usually what we do see in the latter part of, well, in the summer months, et cetera, is we do see some more weather activity, but we haven't felt it yet. Those I think are the key ingredients. But I'd leave you with very strong first half and confidence about the year.

Yes. Okay. That is really most of the impact.

Right. Exactly. Yep. Okay. The other one is the lapping of those Corewell and Fresenius partnerships, which helps our margin rate, but has an impact on revenue growth because those started in October of last year, and we are going to lap them in October of this year.

We are expecting operating margin expansion for 2026. I will repeat that. We talked about it on our Q2 call. We still expect it. We are making really good progress on margin rate, this whole period post-COVID, where we have been working very actively on improving our productivity in the labs, margin rates, et cetera, and we are expecting margin rates to be up in 2026. If you are looking at Q2, for instance. Q2, we had a 40-basis point reduction in operating margin rate versus same period last year. It had a few things in it. What I would call not necessarily just one-timers, but things that impacted it. The Corewell, Fresenius mix impacted margin rates by about 30 basis points. Those are profitable relationships, but they are, at least at this stage of the partnership, dilutive to operating margin rate.

Nova expenses, which is our multi-year transformation of order to cash, was about a 20-basis point impact in Q2. Then you have this thing we call supplemental deferred compensation impact, which is a net neutral EPS impact, but it impacts operating margin rate because it is really based on market performance across our deferred compensation plan. As we think about the full year, Erin, here are some things that improve, especially as we look at the next six months or the second half. For the same reasons that I mentioned about Corewell and Fresenius, lapping those partnerships will improve the margin rate because they are dilutive to our overall margin rate at this point. But as of October, we lap them, so they are not a dilutive impact anymore. Then those partnerships themselves, both Corewell and Fresenius, we are improving the profitability.

We have some initial expenses, initial integration costs, especially with Fresenius. With Corewell, as is typical with core lab relationships in our business, they always start out less profitable, and as we go further, we start to improve the productivity of those relationships. So as we exit the year, Corewell will be approaching double digits or at double digits in terms of. When I say double digits, I am referring to approximately 10% margin rate. And Fresenius, it is definitely improving in terms of margin as well. So not only do we lap them, but we also are improving the margin rates of those relationships.

The underlying rates are very strong, you are right. We have had underlying volume growth excluding those two partnerships of about 4%. And we have had the revenue per requisition in Q2 approaching 3%. It was 2.9% excluding those partnerships, and I am talking, the volume growth that I mentioned was organic volume growth excluding those partnerships. I think there are a few key things, Erin, that factor into it. When I think about our physician channel, where we call on physicians and they order tests for their patients in the physician office. Expanding guidelines favoring early screening. And it is not just cancer screening, it is brain health, it is cardiometabolic screening. We are definitely seeing a shift from acute treatment care to preventive care. So we are seeing high single-digit growth or utilization on the physician channel.