McIntire Investment Institute At the University of Virginia Quest Diagnostics Incorporated (NYSE: DGX) Prepared by Ting-Yu Hu 17 March 2011 1
Company Overview Founded in 1969 Headquartered in Madison, NJ Clinical laboratory services 2,000 Patient Service Centers. 33+ regional laboratories 2
1-Year Stock Chart 3
Stock Summary Share Price: 54.09 52-week range: 40.80-60.28 Market capitalization: 9.26B Average volume: 1,866,140 P/E: 13.36 Total Cash: 449.30M EPS: 4.05 Total Debt: 2.99B 4
DGX is a Long 1. Industry Leader/Brand Recognition 2. Significant Growth Opportunities 3. Strong Financial Position/Cash Flow to Fuel Growth 5
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
Clinical Labs Comprise a Major Portion of the Market 7
Quest Diagnostics is a Clear Industry Segment Leader Company FY2010 FY2009 % Change QUEST DIAGNOSTICS INC 7.37B 7.46B -1.21 LABORATORY CRP OF AMERICA 5.00B 4.69B 6.61 BIO-REFERENCE LABS INC 458.02M 362.65M 26.29 MEDTOX SCIENTIFIC INC 97.11M 84.108M 15.46 ENZO BIOCHEM INC 97.082M 89.572M 8.38 PSYCHEMEDICS CORP 13.02M 16.955M -23.21 MYRIAD GENETICS INC 362.648M 326.527M 11.06 ORCHID CELLMARK INC 59.062M 57.595M 2.55 8
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
Significant Growth Opportunities Electronic health records (EHR) Specialized diagnostic tests 10
Quest s IT Services Account for a Minority of Revenue 11
EHR Usage is Government Incentivized Meaningful use clause in HITech Act 2009 $44,000 incentive per physician 2012 deadline 12
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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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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
Growth Focused in Specialized Testing Needs Esoteric tests Anatomical pathology tests Gene-based tests Insurers support usage 17
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
Strong Financial Position/Cash on Hand Cash on hand to finance acquisitions Strong cash flow Easily collectible accounts receivable to Fuel Growth 19
Leftover Cash Flow Return Value to Consistent dividends $0.40/year Shareholders Significant stock repurchases by management 20
Comparables Analysis Shows DGX is Undervalued Company P/E QUEST DIAGNOSTICS INC 13.36 LABORATORY CRP OF AMER 16.71 BIO-REFERENCE LABS INC 21.2 PSYCHEMEDICS CORP 17.65 MYRIAD GENETICS INC 13.45 Average P/E without DGX: 17.25 Implied Price for DGX: 69.87 21
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
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
Catalyst Catalysts Widespread physician adoption of EHR Diagnostic testing volume increases Quest wins contracts with new managed care clients 24
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
Recommendation: Initiate a 3% Position at Current Prices Growth Opportunity Cash for Acquisitions Compelling Long 26
McIntire Investment Institute At the University of Virginia Quest Diagnostics Incorporated (NYSE: DGX) Prepared by Ting-Yu Hu 17 March 2011 27
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