Quest Diagnostics Incorporated (NYSE: DGX)

Transcription

1 McIntire Investment Institute At the University of Virginia Quest Diagnostics Incorporated (NYSE: DGX) Prepared by Ting-Yu Hu 17 March

2 Company Overview Founded in 1969 Headquartered in Madison, NJ Clinical laboratory services 2,000 Patient Service Centers. 33+ regional laboratories 2

3 1-Year Stock Chart 3

4 Stock Summary Share Price: week range: Market capitalization: 9.26B Average volume: 1,866,140 P/E: Total Cash: M EPS: 4.05 Total Debt: 2.99B 4

5 DGX is a Long 1. Industry Leader/Brand Recognition 2. Significant Growth Opportunities 3. Strong Financial Position/Cash Flow to Fuel Growth 5

6 Quest is an Industry Leader Industry segment leader Competition is limited: LabCorp is main competitor Local clinical labs Local hospital outreach National brand recognition 6

7 Clinical Labs Comprise a Major Portion of the Market 7

8 Quest Diagnostics is a Clear Industry Segment Leader Company FY2010 FY2009 % Change QUEST DIAGNOSTICS INC 7.37B 7.46B LABORATORY CRP OF AMERICA 5.00B 4.69B 6.61 BIO-REFERENCE LABS INC M M MEDTOX SCIENTIFIC INC 97.11M M ENZO BIOCHEM INC M M 8.38 PSYCHEMEDICS CORP 13.02M M MYRIAD GENETICS INC M M ORCHID CELLMARK INC M M

9 So Why is Revenue Falling? Industry-wide decrease in testing due to recession/ external factors Decrease in workplace drugtesting Visits to physician offices decreased Increased competition 9

10 Significant Growth Opportunities Electronic health records (EHR) Specialized diagnostic tests 10

11 Quest s IT Services Account for a Minority of Revenue 11

12 EHR Usage is Government Incentivized Meaningful use clause in HITech Act 2009 $44,000 incentive per physician 2012 deadline 12

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14 Quest Stands out from its Competitors Existing national physician base Modular, integrated services Accessibility (Smartphone, ipad, computer) Differentiation Free trial offer Marketing User friendly UI EHRs don t really compete on technology but on sales force, service, a little on UI, but more on solutions and integrations. Most EHRs are local businesses and therefore compete in the same way as pizza shops and restaurants service. 14

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16 Their interface is exquisitely and brilliantly designed no learning curve at all. The programmers really understood what the doctors wanted; they really understood the work flow, the limitations of being in an exam room talking to a patient. 16 Keith Klein, MD, FACP, FASN Cedars-Sinai Medical Center David Geffen School of Medicine, UCLA

17 Growth Focused in Specialized Testing Needs Esoteric tests Anatomical pathology tests Gene-based tests Insurers support usage 17

18 Industry driven by inorganic growth Internal tests take time to develop FDA approval necessary for new test procedures Quest is making the right acquisitions to stay in the lead 18

19 Strong Financial Position/Cash on Hand Cash on hand to finance acquisitions Strong cash flow Easily collectible accounts receivable to Fuel Growth 19

20 Leftover Cash Flow Return Value to Consistent dividends $0.40/year Shareholders Significant stock repurchases by management 20

21 Comparables Analysis Shows DGX is Undervalued Company P/E QUEST DIAGNOSTICS INC LABORATORY CRP OF AMER BIO-REFERENCE LABS INC 21.2 PSYCHEMEDICS CORP MYRIAD GENETICS INC Average P/E without DGX: Implied Price for DGX:

22 Misperceptions Quest is just a clinical testing/reference laboratory Truth: Quest has a growing healthcare information technology business every Quest customer already has their EHR. All they have to do is flip the virtual switch and their current customers can start using their EHR. 22

23 Misperceptions Local hospital outreach programs will push Quest out Truth: Quest s economies of scale allow it to compete effectively Even if you have a smaller local lab, many of them will even use Quest because Quest's costs are so much lower for certain tests because they do them in a high volume...a small local lab might not have the volume and so the cost is too high to do just a small number. 23

24 Catalyst Catalysts Widespread physician adoption of EHR Diagnostic testing volume increases Quest wins contracts with new managed care clients 24

25 Risks Macro trend risk Physician patient volume remains flat Business Risk Hospital outreach programs gain market share LabCorp acquires Quest s managed care contracts Quest fails to promote Care360 Political Risk Medicare incentives eliminated 25

26 Recommendation: Initiate a 3% Position at Current Prices Growth Opportunity Cash for Acquisitions Compelling Long 26

27 McIntire Investment Institute At the University of Virginia Quest Diagnostics Incorporated (NYSE: DGX) Prepared by Ting-Yu Hu 17 March

28 VAR 28 John Lynn- editor of the nationally renowned blog EMRandHIPPA.com (over 800 articles viewed over 2.4 million times). Former EHR Manager for the University of Nevada's Health and Counseling Center. Shahid N. Shah- healthcare IT software analyst CTO for CareFusion, CTO of two Electronic Medical Records (EMR) companies, a Chief Systems Architect at American Red Cross John Zimmerman, MD