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Quest Adds to Cancer Portfolio With $450M Buy of Haystack Oncology; Q1 Revenues Down 11 Percent


NEW YORK – Quest Diagnostics said Thursday that its acquisition of liquid biopsy startup Haystack Oncology would facilitate its entry into a market flush with opportunities while also filling out its cancer testing portfolio.

In the midst of announcing its 2023 first quarter financial results, Quest also said it is buying Haystack for $300 million in cash, net of cash acquired, and up to an additional $150 million on achieving future performance milestones.

On a conference call following release of the company's Q1 2023 earnings results, Quest Chairman, President, and CEO Jim Davis said the acquisition would allow the company to move into the "fast growing" minimal residual disease testing category, rounding out its existing offerings in cancer screening, pathology, and sequencing.

Haystack has developed a ctDNA-based technology specifically for MRD detection developed by a team at Johns Hopkins led by cancer genomics pioneer Bert Vogelstein.

Davis said Quest plans to begin offering MRD testing using Haystack's technology at the beginning of 2024 and that it will initially focus on testing for colorectal, breast, and lung cancer.

He noted that Quest's oncology business currently books around $1 billion in revenues per year, around 12 percent of the company's overall annual revenue, excluding COVID-19 testing. He said that roughly half of those oncology revenues come from routine cancer screening, with the other half coming from anatomical pathology work, and added that the Haystack acquisition would allow the company to capture MRD testing business from those anatomic pathology customers.

"We will own the specimen, and doing the testing on it for both treatment monitoring as well as treatment selection, we think is just a natural," he said.

Davis said Quest plans to take the Haystack tests through Palmetto's MolDx program as it pursues reimbursement. He noted that Medicare and Medicare Advantage currently provide limited coverage for MRD testing as do several Blue Cross Blue Shield plans.

He noted the current state of reimbursement as analogous to the early days of non-invasive prenatal testing (NIPT). "We as well as some other industry members drove that throughout the commercial payors, and [NIPT] is wide open to women today," he said. "We think we can scale it, we think we can drive further commercial reimbursement."

Davis said Quest decided to purchase Haystack after determining that suitable MRD options from in vitro diagnostic firms it deals with were not likely to come to market in the near term.

"When we are looking to close a capability gap in our portfolio, the first thing we do is we reach out to our IVD partners," he said. "Over the last several years we have had deep discussions, we know what the roadmaps are, and we didn't think that was a pathway to follow to get into this space, at least in the next several years."

The acquisition will add to Quest's advanced diagnostics business, which Davis said showed strong performance in Q1.

Quest on Thursday also reported that revenues for its first quarter were down 11 percent year over year.

For the three months ended March 31, total revenues fell to $2.33 billion from $2.61 billion, beating the consensus Wall Street estimate of $2.20 billion.

Revenue from the company's Diagnostic Information Services business was $2.26 billion in Q1, down 11 percent from $2.54 billion in Q1 2022. Revenue from its base testing business was $2.21 billion, up 10 percent from $2.01 billion in the year ago period, while COVID-19 testing revenue was $119 million, down 80 percent from $599 million in Q1 2022.

Test volume as measured by requisitions was down 4 percent in the quarter, with organic volume also down 4 percent and revenue per requisition down 8 percent.

The Secaucus, New Jersey-based lab company posted a profit of $202 million, or $1.78 per share, compared to a profit of $355 million, or $2.92 per share, a year ago. Adjusted EPS for the recently completed quarter was $2.04, above the consensus Wall Street estimate of $1.97 per share.

In Q1, Quest's SG&A spending rose 3 percent year over year to $439 million from $425 million.

Quest updated its outlook for full year 2023, projecting net revenues of between $8.93 billion and $9.08 billion and adjusted EPS of between $8.45 and $8.95. Previously the company projected net revenues of between $8.83 billion and $9.03 billion and adjusted EPS of between $8.40 and $9.00.

Quest finished the quarter with $175 million in cash and cash equivalents.

In Thursday afternoon trading on Nasdaq, Quest shares were down 7 percent to $136.88