Quest Diagnostics Inc Q1 FY2026 Earnings Call

Welcome to the Quest Diagnostics First Quarter 2026 Conference Call. At the request of the company, this call is being recorded. The entire contents of this call, including the presentation and question-and-answer session that will follow, are the copyrighted property of Quest Diagnostics with all rights reserved. Any redistribution, retransmission, or rebroadcast of this call in any form without written consent of Quest Diagnostics is strictly prohibited. Now I'd like to turn the conference over to Dan Haemmerle, Interim Vice President of Investor Relations for Quest Diagnostics. Please go ahead.

Thank you, and good morning. I'm joined by Jim Davis, our Chairman, Chief Executive Officer and President; and Sam Samad, our Chief Financial Officer. During this call, we may make forward-looking statements and will discuss non-GAAP measures. We provide a reconciliation of non-GAAP measures to comparable GAAP measures in the tables to our earnings press release. Actual results may differ materially from those projected. Risks and uncertainties that may affect Quest Diagnostics' future results include, but are not limited to, those described in our most recent annual report on Form 10-K and subsequently quarterly filed reports on Form 10-Q and current reports on Form 8-K. For this call, references to reported EPS refer to reported diluted EPS and references to adjusted EPS refer to adjusted diluted EPS. Growth rates associated with our long-term outlook projections, including consolidated revenue growth, revenue growth from acquisitions, organic revenue growth, and adjusted earnings growth, are compound annual growth rates. Now here's Jim Davis.

Thanks, Dan, and good morning, everyone. Our strong first quarter performance reflects a focused business, delivering innovative solutions that meet our customers' evolving needs for lab insights. During the first quarter, we grew revenues over 9%, almost entirely from organic revenue growth on broad-based demand for our clinical innovations, expansion into new clinical areas, and collaborations with elite health care and consumer health organizations. In addition, we grew adjusted diluted earnings per share by approximately 13%, supported by productivity gains from our deployment of automation and AI across our operations, both in and outside our labs. Given our strong first quarter momentum and continued strategic focus, we are raising our revenue and EPS guidance for the year. Now I'll provide more detail on how we executed our strategy across key customer channels and operations during the quarter. Quest operates at the center of health care, delivering solutions that make testing simpler and smarter for our core clinical customers, physicians and hospitals, as well as customers in higher-growth areas of consumer health, life sciences, and data analytics. In the physician channel, we delivered high single-digit revenue growth in the first quarter on strong demand for our clinical innovations, geographic expansion from greater health plan access, and increased volume from our growing business in enterprise accounts. We are also pleased with our growth during the quarter in end-stage renal disease, a new clinical area for us, focused on lab testing for dialysis patients. In addition to volume from serving thousands of dialysis clinics operated by Fresenius Medical Care nationwide, we also added independent dialysis clinics and other providers as clients of our lab and water purity testing. In the hospital channel, we grew revenues at a double-digit rate, with the majority of this growth coming from our collaborative lab solutions for Corewell Health, a leading health system in Michigan. Our Co-Lab solutions combine our scale, clinical depth, and operational excellence to improve quality and cost efficiencies. Our implementation with Corewell Health is proceeding smoothly. We are also advancing our joint venture with Corewell Health with plans to open a state-of-the-art lab in Southeast Michigan next year. Hospitals value our flexible solutions that enable them to free up capital while benefiting from our expertise and innovation. Our pipeline of potential Co-Lab collaborations, as well as potential outreach and independent acquisitions, remains strong. In the consumer channel, we deliver solutions that empower people to own their health. Similar to recent quarters, we generated significant revenue growth during the quarter, both from questhealth.com and from our portfolio of top consumer health collaborations. Growth from questhealth.com featured robust double-digit customer repeat rates and notable demand for new solutions, such as our Elite health profile and autoimmune and hormone tests. Quest is a trusted health care brand with broad reach, which enables us to drive efficient customer acquisition for questhealth.com. In addition, we are the preferred lab engine for top consumer health brands, and a key part of our growth this quarter was due to consumers accessing our lab insights within the apps and wearables of our collaborators. Our customer channels are also growing as we continue to deliver advanced diagnostics in 5 key clinical areas: advanced cardiometabolic and endocrine, autoimmune, brain health, oncology, and women's and reproductive health. We delivered double-digit revenue growth across several of these areas in the first quarter. I'll comment briefly on a couple of examples. In the areas of brain health, Alzheimer's disease is a progressive dementia that affects over 7 million people in the U.S. and is expected to affect nearly 13 million Americans by 2050. For several quarters, we've spoken about delivering double-digit revenue growth from our AD-Detect blood test for Alzheimer's disease, a trend that continued in the first quarter. To understand this growth, consider that until recently, clinicians typically diagnosed Alzheimer's using PET/CT scans, which are costly and inaccessible for many. While these scans are highly accurate at identifying mid- and late-stage disease, they are less sensitive at detecting Alzheimer's in early stages before major impairment has occurred. Years ago, we recognized the power of blood testing to reveal disease earlier and more affordably so more patients could benefit from the emerging therapies with potential to slow progression sooner. Today, Quest provides a range of tests under the AD-Detect brand, featuring sensitive mass spec tests for amyloid beta and ApoE, a genetic risk marker to complement p-tau217 and p-tau181. We also developed a proprietary algorithm that combines multiple biomarker results to establish Alzheimer's pathology with a sensitivity and specificity of 90% or greater. At the same time, we are seeing that physicians are becoming more confident using blood tests to aid diagnosis and guide pharmaceutical treatment decisions often in lieu of imaging. As blood tests are increasingly used both in primary and specialty care, we expect to remain a leading source of diagnostic innovation and insights for managing this disease. In other areas, we drove double-digit revenue growth across much of our cardiometabolic and endocrine portfolio, including for tests for Lp(a) and ApoB as well as for kidney, liver, and reproductive hormones. New guidelines from the American Heart Association recommend Lp(a) and ApoB testing for the first time, underscoring the clinical value of these important biomarkers. We are also encouraged that the guidelines now recommend screening for high cholesterol at young ages as new research has found dangerous cardiovascular events are increasingly occurring in young adults. In oncology, we recently announced a research collaboration with City of Hope, a cancer and research treatment organization, to study the use of our Haystack MRD test to aid recurrence monitoring and treatment decisions in clinical trial participants with solid tumor cancers across 14 U.S. sites. In addition to driving top-line growth through innovation and collaborations, our focus on operational excellence aims to improve productivity as well as quality and the patient experience. Through our Invigorate program, we expect to continue to deliver 3% in annual cost savings and productivity improvements. We have spoken in the past about our growing use of AI and automation in our labs. And while that continues to be a major focus in the first quarter, we stepped up our deployment of these technologies in several other areas. As one example, we boosted productivity by 40% in the first quarter among customer service agents that used AI to triage and route customer emails to speed responses. We are also deploying AI to make testing simpler and smarter for everyone, including our patients. Our new Quest AI Companion transforms complex biomarker data and reference ranges on test reports into clear plain language. By empowering patients with lab insights, our AI tool, which is powered by Google Gemini, can help shift the doctor-patient relationship to be focused on shared decision-making instead of data gathering, potentially improving care outcomes. Patients have engaged Quest AI Companion approximately 350,000 times since we rolled it out to users of our MyQuest app in the first quarter. Lastly, we are scaling the planning and design work for Project Nova, our multi-year initiative to transform our order-to-cash processes and systems, and are on track to implement our first wave of solutions in the fall of 2027. And now Sam will provide more details on our performance and 2026 guidance.

Thanks, Jim. As Jim mentioned, our solid first quarter results reflect the disciplined execution of our strategy. Consolidated revenues were $2.9 billion, up 9.2% versus the prior year, and consolidated organic revenues grew by 9% in the quarter. Revenues for Diagnostic Information Services were up 9.4% compared to the prior year, reflecting strong organic growth in our physician, hospital, and consumer channels. Our total volume, measured by the number of requisitions, increased 10.9% versus the first quarter of 2025, with organic volume up by 10.8%. Fresenius Medical Care and Corewell Health contributed approximately 7% to organic volume growth in the quarter. Our organic volume growth in the quarter was 3.8%, excluding the favorable impact from these 2 relationships. As expected, Fresenius Medical Care and Corewell Health's business mix impacted total revenue per requisition, which was down 1.3% compared to the prior year. As a reminder, the business mix from these 2 collaborations includes a greater proportion of routine tests than most of our clinical testing. Excluding this business mix impact, total revenue per requisition increased by approximately 2.5%. Unit price reimbursement was relatively flat, consistent with our expectations. Reported operating income in the first quarter was $399 million, or 13.8% of revenues, compared to $346 million, or 13% of revenues last year. On an adjusted basis, operating income was $447 million, or 15.4% of revenues, compared to $406 million, or 15.3% of revenues last year. This increase in operating income was primarily due to organic revenue growth and increased productivity, partially offset by the impact of wage increases and, to a lesser extent, weather. Reported EPS was $2.24 in the quarter compared to $1.94 a year ago. Adjusted EPS was $2.50 versus $2.21 a year ago. Adjusted EPS grew in the first quarter versus the prior year, largely due to organic revenue growth, increased productivity, and lower interest expense, partially offset by the impact of wage increases and weather. Cash from operations was $278 million in the first quarter versus $314 million in the prior year. Cash from operations was lower than a year ago due to the timing of operating receipts and disbursements and higher bonus payments in the current period versus a year ago, partially offset by an increase in operating income. Turning now to our updated full-year 2026 guidance. Given the solid performance in the first quarter, we are raising our full-year revenue and EPS estimates. We now expect revenues to be between $11.78 billion and $11.9 billion, a growth rate of 6.8% to 7.8%. Reported EPS to be in a range of $9.58 to $9.78 and adjusted EPS in a range of $10.63 to $10.83. Cash from operations to be approximately $1.75 billion, capital expenditures to be approximately $550 million, share count and interest expense to be consistent with 2025, and our 2026 guidance reflects the following considerations. Our revenue guide does not include any contribution from prospective M&A. Operating margin is expected to expand versus the prior year.

Thanks, Sam. We are very pleased with our start to the year. More than ever, people are turning to our lab insights to illuminate their path to better health. In summary, our first quarter results reflect a strong, focused business delivering innovative diagnostic solutions to meet our customers' evolving needs for lab insights. We grew the top line on broad-based demand for our clinical innovations, expansion into new clinical areas, and collaborations with elite health care and consumer health organizations. We also grew the bottom line with productivity benefits from automation and AI. Given our first quarter momentum, we are raising our guidance for the full year. I'd like to thank each of my nearly 57,000 Quest colleagues for living our purpose every day, working together to create a healthier world, one life at a time. Your passion and commitment are the engine that empowers Quest to deliver diagnostic insights that improve health and transform lives. Now we'd be happy to take your questions.

Our first question comes from Michael Cherny with Leerink Partners.

Congrats on a nice quarter. If it's possible to unpack the organic volume dynamics a bit, clearly, that was a standout, especially against a broader macro backdrop. How should we think about the impact of mix, the impact of commercial activities on your part? And if you can, can you just reaffirm the same expected contribution from Corewell and Fresenius relative to what was embedded in your guidance to start the year?

Yes. Sure, Michael. This is Sam. So let me just start with some of the facts about Q1 that we talked about in the prepared remarks. Organic volume growth was 10.8% in the quarter. Total volume growth was 10.9%. So the contribution to volume from Fresenius and Corewell was about 7%. And so if you exclude those from organic volume growth, the organic volume growth, excluding those 2, was 3.8%. The revenue per requisition in total was down 1.3%. If you exclude the impact of Corewell and Fresenius, it was actually up 2.5%. So a solid revenue per requisition. If you look at the impacts within that revenue per requisition, excluding Corewell and Fresenius impact, if you look at what's driving that 2.5%, which is a really strong revenue per req, I would say test per requisition was really the key driver. We continue to see a step-up in terms of the number of tests per requisition. This is being driven by a lot of the things that we have shared over the course of last year and this year, more advanced diagnostics testing, more early detection options and screening options, our consumer business contributing to it as well. So we continue to expect that that test per req continues to be solid and has benefited Q1 rev per req significantly. Now I think your other question was how should we think about the balance of the year. As we think about Q2 to Q4, we're looking at continued growth in terms of organic utilization. A continued impact, I would say, on revenues from Fresenius, we said it was about a $250 million impact for the year in terms of revenue growth impact from Corewell. So that's, I think, what you should be thinking about in terms of the impact of Corewell. And Fresenius would be an additional roughly, let's call it, between $80 million and $100 million on top of that. So between those 2, it's about a 3.3% increase to our revenue that's embedded in the guide. And we expect an impact on volume, I would say, somewhat consistent with what you saw in Q1, but still expect very strong utilization as we go forward and expect strong revenue per requisition, excluding the impact of those 2 businesses. And Jim had a couple of comments there.

Yes, Mike, the mix impact has really benefited our business from an organic revenue standpoint. And specifically, our commitment to consumer health and wellness and these partnerships in the wellness industry have really helped us nicely. There's really 2 things there. It's both the absolute test per req, which has a big impact, mixes us up from a test per req standpoint. And then the advanced types of tests that are being ordered on these panels, from advanced cardiovascular tests to autoimmune testing to hormone testing. And then the last thing, and this comes mostly from our physician channel, both neurologists and primary care physicians. As I mentioned in the script, our Alzheimer's book of testing more than doubled year-over-year. So we're really, really seeing nice lift from our Alzheimer's set of tests. All of those things together, Mike, is what's really driving this nice organic test mix.

Our next question comes from Elizabeth Anderson with Evercore ISI.

I guess on just a couple of things on a short-term basis. Can you talk about sort of any embedded weather and sort of flu expectations for the short term in the quarter? And then if we think about going forward for the rest of the year, can you talk about sort of any other expectations in terms of puts or takes on timing for the quarter, particularly in regards to margins on that second part of the question?

Yes, Liz, regarding the weather, I'll address that first, and Sam can discuss the second part. Looking at it year-over-year, we experienced a revenue impact of approximately $9 million and an operating income reduction of $7 million. In January, we had a challenging month and faced some adverse weather in February. However, in March, we observed that around 70% of the patients who canceled appointments due to the bad weather rescheduled and returned to Quest. The strong recovery from canceled appointments was due to our proactive communication with patients through emails and texts, encouraging them to come back for their missed visits.

Yes, regarding the weather, as Jim mentioned, we experienced some negative impact this quarter compared to last year, but we saw a good recovery in the last month. As for your second question about future expectations, we anticipate some negative weather conditions in the second half of the year, which typically occurs during hurricane season in the summer. This is part of our guidance. For context, last summer was relatively mild with very few hurricanes. Therefore, we are expecting more adverse weather this summer compared to last year. In terms of revenue cadence over the next three quarters, you can expect a similar pattern to last year, with a potentially stronger contribution in the first half. Approximately 49% of our revenue and EPS are expected in the first half, and just over 50% in the second half. This information should help clarify how to approach our revenue and EPS expectations.

Our next question comes from Patrick Donnelly with Citi.

Maybe similar, Sam, on some of the moving pieces on the cost. Can you just talk about the Project Nova piece, how the investments are progressing there? Wondering if potentially higher expenses tied to some of the macro conflicts caused you to move those investments around at all. I think it was $0.25 dilution. Is that still the right way to think about it? And again, where those investments are kind of heading and when we see the fruit of those would be helpful.

Yes. Thanks, Patrick. So let me break down some of the impacts that you mentioned. Yes, Nova expectations are still $0.25 for the year, as we shared last quarter. In terms of the cadence of those expenses, slightly changed from my comments on the Q4 call. I think we're expecting now more of those expenses to happen in the second half of the year than in the first half of the year. We had some expenses in Q1. That's going to ramp in Q2. And I'd say we're going to see probably more than 60% of those expenses be in the second half of the year. So that's one portion in terms of just thinking about the cadence of the year. I think it goes back to also the question that Elizabeth asked. And then if you think about the macro, I mean, listen, we're impacted by, obviously, fuel costs. We have a fleet of transportation vehicles. We have a fleet of planes. We have some fuel expenses that were going to be impacted by the higher fuel costs. That, I will size it for you as somewhere in the $7 million to $10 million range, and it's embedded in our guidance. Our expectation is that fuel costs will continue to be elevated to somewhere at the $4 per gallon and above. And that embedded in guidance is somewhere in the $7 million to $10 million of fuel cost that, again, will impact the next 3 quarters. So we've sized it. We've included it. It's not that significant, but it's still somewhere between $0.05 to $0.07 of EPS.

Our next question comes from Ann Hynes with Mizuho Securities.

Just on the organic volume front, was there anything that came in better or worse than your expectations? And maybe just on the ACA, I know the subsidies ran out in December. Did you see any meaningful impact versus what's embedded in your guidance in Q1?

We didn't, Ann, on the ACA subsidies. I think it's too early to tell. As we've said in the past as well, we can't tell 100% with every requisition, is it an ACA req or not. Not all the commercial plans code the reqs that way. But we think about 60% of our reqs we know discrete are ACA. And so based on that, we're not seeing any impact to date. On the organic growth, it was strong across the board. I mean our hospital reference business had up 3%. It was very strong. Our Co-Lab business, obviously, with Corewell was up significantly double-digit growth. Our physician business organically was high single digits, as we indicated on the call. So it's broad-based. And then obviously, the contribution from all the consumer health in both our direct channel plus our partnerships was strong, strong double-digit growth in that area. So it was pretty broad-based and across all segments that we serve.

And just one clarification, Ann, on the ACA to add to Jim's comments, we have built in, in our guide still the expectation that we do see a 30 basis point impact to revenues as a result of ACA disenrollments or higher subsidies. The enrollments have been good in Q1. We just need to validate that actually the enrollments lead to utilization and some people don't drop off. So we kept the assumption in our guide of a 30 basis point impact. But to Jim's comment, we haven't seen really that negative impact in Q1.

Our next question comes from Jack Meehan with Nephron.

I wanted to ask you about PAMA. So the survey kicks off in 10 days or so. How is your prep work in terms of participating in that? And then just your latest thoughts on how you think the Medicare rates for 2027 will shake out that whole process?

Yes, we are prepared. We submitted last time and will submit again, as required by law. We will provide the data after May 1 of this year, which will be accepted until the end of July. Medicare has provided guidance indicating that labs generating over $25,000 a year from Medicare requisitions need to submit data, which affects over 2,600 hospital labs. It's uncertain whether they will comply, and we will have to wait for results. Moreover, CMS has indicated that failure to submit could result in fines of up to $10,000 per day, although these fines were not enforced last time. Meanwhile, we are pushing forward with the RESULTS Act as quickly as possible. There are a few requirements left to fulfill for the bill to pass this year, including a technical assessment from CMS, which is currently in progress, and the CBO scoring, which we believe is also underway. The bill has over 80 cosponsors, and there has already been a positive hearing this year in the health subcommittee of Energy and Commerce. However, we are aware that with summer vacations and elections approaching, there is a lot to accomplish before the year's end. Regarding rates for 2027, it is too early to make predictions. If the RESULTS Act is enacted, rates will remain stable for 2027. If it does not, we hope that with comprehensive data submissions, the rates could increase. Historically, during the last data submission, only a couple of companies submitted over 80% of the data, and we, along with our closest competitor, hold a share of about 17% to 20% of the Medicare market. This underrepresentation skews the data since only two providers delivered the majority of it. We are hopeful that the remaining providers will submit, as they are usually compensated at two to three times the Medicare rates by most health plans, which could potentially indicate a price increase.

Our next question comes from Luke Sergott with Barclays.

This is Anna Kruszenski on for Luke. We were hoping to hear more about the consumer business and how that momentum has been building with your recent partnerships. And we saw that Function Health acquired a mobile lab testing company during the quarter. So just any color on how you're thinking about that potentially impacting volumes to Quest?

Our consumer business is divided into two segments: our direct-to-consumer operation at questhealth.com, which saw impressive growth in the quarter, likely in the high 20s range, and our partnerships with value-added resellers providing lab testing. This includes two wearable companies we've mentioned before. The growth in these combined partnerships outpaced our direct channel this quarter. Function Health's acquisition of Getlabs is a positive development, as there are areas in the country, particularly in the upper Midwest and the Great Plains, where we lack adequate coverage despite having 2,000 patient service centers for blood draws and urine collections. Additionally, we recognize that some customers prefer home draws. With Getlabs now part of Function, they will collect specimens and deliver them to our Quest PSC or transport them directly, allowing us to continue our lab testing services. We view this as a beneficial step forward.

And the one addition I'd make to Jim's comments is the growth that we're seeing from some of the collaborations that we have, the wellness companies that we're partnering with is broad-based. We're seeing a lot of growth from different players and a broad ecosystem that we're very encouraged about.

Our next question comes from Eric Coldwell with Baird.

A couple of weeks ago, we had this odd day in the market where labs were getting hit on a Friday afternoon, I think it was. And apparently, there were rumblings or rumors going around about some impact from the CMS' CRUSH RFI. I don't think that's a big deal, but I'd love you to put that in perspective and maybe talk through what you see happening in the government in terms of various fraud, waste, and abuse initiatives and then your exposure to any tests that are in question and what potential impacts, positive or negative, may come out of this in the future?

Yes. Thanks, Eric. And we're glad you don't think it has an impact because we don't think it does either. But just for those who may not have heard of CRUSH, it stands for Comprehensive Regulations to Uncover Suspicious Health Care. And first of all, I want to say we applaud the government's efforts to crack down on any fraud waste or abuse. So certainly applaud those efforts. The second thing I'd say is if you look at the test, first of all, it came out of an OIG report, right? There was an OIG report that looked at 2024 Medicare lab spending, and the report noted that lab spending was up 5%. And as you know, Medicare enrollees are probably flat to down. So why would it be going up 5% if pricing stayed flat across the industry? And what the report noted is that there were 10 tests that drove the majority of the increase, okay? Now 7 of those 10 tests were PLA codes, meaning they're very proprietary tests to individual laboratories, okay? We had nothing in those categories, okay? The other 3 categories were genetic or molecular-based tests. And when we look at our billing or our revenue from those tests, it was de minimis, okay? So it really, really wasn't a factor at all. So we don't put Quest in the bucket of driving that 5% increase in Medicare spend. Now the last thing I'd say about the report, and we all ought to be concerned about this. If you looked at that report, it did show that routine and wellness tests that are critical to preventative health and wellness, critical to making the country healthy again, those test categories were actually down. And what I'm talking about is basic CBC panels, CMP panels, those panels and information that really illuminate chronic care conditions, progress towards those conditions or people that aren't making progress. And those are absolutely the kinds of tests that we want to see growing across the Medicare population in order to make sure that people's chronic conditions aren't worsening and become a bigger cost and health burden to the country. So in summary, Eric, we don't think it's an issue, and thank you for asking the question.

Our next question comes from Erin Wright with Morgan Stanley.

On the topic of consumers, I have a follow-up question. I realize there are various types of partnerships you are involved in and the financial implications might differ. Can you discuss the overall margin profile excluding the Quest Direct business? Additionally, what should we consider regarding the future pipeline of partnerships? Are you currently in discussions with different platforms related to wellness or wearables? To follow up, you shared some intriguing statistics on AI and automation. How should we approach your targets or goals in that area concerning efficiency gains and the potential applications of AI?

So this is Sam. I'll take the first question around the margin profile, and then I'll hand it over to Jim, who'll talk about the pipeline and AI. I'll keep it simple. I mean the margin on these deals, both in terms of the deals and collaborations that we have, whether they're wearables collaborations, whether they're wellness companies, but also the margin profile on the questhealth.com business is on par, if not slightly better than our overall enterprise average. These are tests that are out of pocket, at least on questhealth.com. And then it's a client bill business with the wellness companies that we engage with. It's all cash pay. So there's no denials. There's no patient concessions. So it's clean business in terms of just at least the complexity or the lack thereof. And it provides a really good margin profile for us.

Yes. So Erin, yes, we continue to pursue other partnerships. It's part of our goal. As we've said before, we're trying to empower people to own their own health. We want people to be the CEO of their own health care. And if we find other partnerships out there that meet our brand criteria that are in line with the mission of our company, then we'll certainly support it. And there's others out there that we continue to talk to. So we're encouraged by the growth in both our direct channel as well as the growth that we're getting through these partnerships. In terms of AI and automation, certainly, we continue, I would say 60%, 70% of our efforts are in the 4 walls of our laboratory because that's where still opportunity exists. Anytime we see somebody looking through a microscope, we ask the question, is what you're looking at? Can we digitize that image? If you can digitize an image, you can apply algorithms to that image. And if you can apply algorithms to that image, it can assist whoever is reading that image and make a higher quality diagnosis as well as improve productivity. So there are still plenty of areas in our laboratory where we have laboratory technicians or MDs looking at data or looking at slides or looking at pathology, and we know there's ways to automate that. We've made tremendous progress in cytology. We've made great progress in microbiology, hematology, and there's still other areas for us to go. Outside of the laboratory, as I mentioned in the script, we've deployed some tools in our call centers. Our call centers are a big part of our operations. So anything we can do to improve the productivity of the call centers as well as emails and text messages that come into the company, we're certainly going to drive that. The last thing I mentioned is we did put that Quest AI assistant out on our MyQuest application. This empowers people to now ask questions about the lab results that we've just provided to you. And we were pleasantly surprised by the use of that AI tool for people trying to decipher what all of these 40, 50, 60 analytes could possibly mean. We think it's a great way to educate patients so that patients can have more proactive discussions with their clinicians, and we think it's a win-win for the industry.

Our next question comes from Kevin Caliendo with UBS.

Sam, if I understand your comments correctly, it seems the mention of more than 49% for the first half of the year aligns with your previous statements. However, you also indicated that some Project Nova expenses may be shifted to the second half, along with higher fuel costs that will affect that period. Within your guidance, what adjustments will improve the second half? Additionally, regarding Eric's question on CRUSH, there was a proposal concerning prior authorizations. Can you elaborate on that aspect, not just in relation to the molecular tests, but more generally on how prior authorizations might be managed and if there are any considerations we should keep in mind about this part of the proposal?

Yes. Thanks, Kevin. So let me start with the second half, first half comment. I would say some of the fuel costs that I mentioned, I mean they basically start now, right? So it's not like just the second half that you have to phase those across. And again, I don't want to make too much of them because it's $7 million to $10 million of additional fuel costs. It's not that significant, but I was just giving it for completeness and to give a full view as to EPS. But they do start now, and they impact Q2 and they impact the second half. Nova steps up in the second quarter. But obviously, the first half, because Q1 was lower in terms of Nova spend, the second half is going to be over 60% of the Nova expenses, but it does step up in the second quarter. In terms of why we see the contribution being over 50% in the second half, I mean, I think it's really primarily the margin profile across, again, those 2 partnerships, those 2 important partnerships that we have, Corewell and Fresenius, that margin profile improves in the second half, notably for Fresenius as that business ramps. I've said before that, that business a year in starts to approach the average enterprise margin. It's just the ramp up. There's some ramp-up costs that initially impact us. So I think you start to see some improvement in the margin profile of those businesses and then just the normal seasonality of the business with the strength of utilization. So that's really what I'd point to.

Yes. And then, Kevin, in terms of your questions on CRUSH, again, I'll remind you that there were 10 tests that contributed to the vast majority of the growth in the spend. 7 of those 10 tests, we have no participation in and 3 of those 10 tests, it's de minimis. So it really Quest was not a driver of those increased costs. In terms of pre-authorization, CMS did put out a request for information, a response. They asked people to comment on the CRUSH initiative. Our trade association did that. I can tell you that pre-authorization is not something we would ask for. But rather, I think what's appropriate is CMS ought to require some type of certificate of accreditation for the labs that are performing these higher complexity tests. That's a way to ensure that those labs that are producing these tests and some of these tests are absolutely necessary in health care today that you know they're being done by certified labs with good quality and a commitment to science, technology, and excellence.

Our next question comes from Andrew Brackmann with William Blair.

Jim, I want to ask on the advanced diagnostics strength and all the color that you gave on that business. Can you maybe just sort of talk about any specific investments that are going to those areas in 2026 or in 2027? Just sort of anything to call out with respect to maybe specific clinical trials in some of those areas or sales team increases. I really just sort of want to get a sense of the opportunities that might exist there to maybe further accelerate that growth.

Yes. Thanks, Andrew. Yes, again, some of these advanced diagnostics tests were certainly a strong contributor to the mix that we saw in the quarter in the organic rev per req increase of 2.5% that Sam cited. But the biggest area again is brain health. As I indicated, the business more than doubled from Q1 of last year to Q1 of this year. We are committed to the space. There are other biomarkers that we are investing in and doing research on in addition to the AB 42/40, in addition to the ApoE, NFL. And then commercially, we procure the p-tau181 and 217 assays. But there's other biomarkers we're working on. We're in constant discussions with the therapy makers who are collaborating with us on looking at different biomarkers that help identify the disease at the earliest possible point. We continue to invest in advanced cardiometabolic testing in various biomarkers, one specifically in the HDL arena that goes beyond just the basic HDL test. And then obviously, I'd be remiss if I didn't talk about Haystack; we continue to invest in the space. We've made progress quarter-over-quarter. As we discussed in the script, we have a great partnership now with City of Hope, which is a leading cancer treatment detection and treatment center on the West Coast. And there's all types of clinical partnerships that we have there. We've discussed a few in the past, Rutgers and MGH. So we continue to invest in that area and continue to make progress.

Yes. To add to Jim's comments, a significant portion of our $550 million capital investment is directed towards our esoteric labs to enhance capacity, reflecting the growth we are experiencing in that sector, particularly in advanced diagnostics. It's important to highlight that, alongside the business-side investments mentioned by Jim, we are also allocating a substantial amount of capital towards those tests.

Our next question comes from Tycho Peterson with Jefferies.

This is Noah on for Tycho. I wanted to ask a few on oncology. I believe the partnership with Guardant for Shield went live 1 month ago. If you could speak to early adoption there. And then just on Haystack, what should we be expecting in terms of the phasing of EPS contribution throughout the year and kind of getting to breakeven?

Yes, we announced a partnership for blood collections for the Guardant colon cancer test, which started in the quarter. We are adding this test to our menu so that Quest physicians can order it, and patients can take their requisition to a Quest PSC for blood collection, regardless of their physician. It's still early, as we only began in the middle of the quarter, so I can't comment on volumes yet, but we are starting to see some traction. Sam, could you provide insights on the Haystack margin profile?

Yes. Thanks, Noah. We are making significant progress on the Haystack test, particularly in the order experience and commercial aspects, with increased resources and a rise in tests ordered. Oncologists are starting to appreciate the impressive profile of the test, especially its low limits of detection. We are also advancing on the reimbursement front; we have submitted a technical assessment to MolDX for Medicare Advantage reimbursement. We now have PLA codes priced at a baseline of $3,900 and an $800 reimbursement for monitoring. While it's too early to comment on the EPS ramp in terms of dilution or improvement throughout the year, we will provide updates as we progress. It is important to note that this is just one test among many in our portfolio, both in advanced diagnostics and routine tests. However, it is a crucial aspect of our business, and we are seeing good progress.

Our next question comes from Lisa Gill with JPMorgan.

I just was wondering about the current M&A environment. I appreciate that there's nothing in your guidance for '26. But are you seeing anything different? Are you seeing any incremental opportunities in the market? I heard your comments earlier around hospitals and their need to submit their rates. Is that changing any of their views around the potential for reimbursement cuts for Medicare going forward? So just anything on an update on the M&A side would be helpful.

Yes. Thanks, Lisa. The M&A funnel is good. We have a mix of various health system outreach types of deals that are there. And there's not a ton, as you know, of remaining independent labs across the country, but there's still some out there, and we still take a look and sometimes they proactively come to us. I don't think that the Medicare reimbursement changes are affecting a hospital's view of their outreach business. You got to remember, in general, Medicare is our best payer here at Quest Diagnostics. And in general, it's the worst payer for a health system. So if the worst payer goes down a little bit in pricing, I don't think that affects your viewpoint on outreach. What I do think affects their viewpoint on outreach is the commercial view of the lab market in the lab industry. And I think you got a lot of really smart health plans that are starting to wake up and say, "Hey, why am I paying these health system labs 200% to 300% of what we pay 2 of the leading independents across the country?" And furthermore, that 200% to 300% price premium that they get, affects patients, affects co-pays, affects co-deductibles, affects employers who are paying for this health care. And so there's nothing easier to get a quick hit, a quick win from an employer standpoint, from a patient standpoint, is to normalize these rates. And we strongly advocate that health plans ought to pay all labs the same amount of money for outreach work. It doesn't do anyone any good to penalize patients and penalize employers who are paying for the majority of the health care cost in this country to reimburse some labs 200% to 300% of what the 2 leading independents are getting paid.

And our last question comes from David Westenberg with Piper Sandler.

So I wanted to talk about the convergence of multiple factors, AI, wearables, consumer-initiated testing. Just given the fact that these AI wearables, et cetera, and consumer-initiated testing gamify longitudinal testing, it seems like there would be an increase in longitudinal testing. So am I thinking about this the right way? And how should we think about test per patient right now and where it could go in the next 5 to 10 years? Are you monitoring test per patient right now? And is it trending indeed the right way? And maybe one of the things that I might want to look at is something like are the Function Health people, for example, also doing their annual labs? And is that increasing? I mean where is the momentum going with this?

That's a great question, David. We believe that the integration of consumer health, wellness, wearables, and AI will significantly influence how individuals approach their healthcare in the future. The traditional process of visiting a doctor for a physical exam, ordering labs afterwards, and then receiving feedback is evolving. In the future, we envision that patients will be able to collect their wearable data and complete lab work before their doctor’s appointment. This information will be analyzed by an AI system, generating reports for both the patient and the physician. When they meet, the physical exam will be guided by this comprehensive data, transforming it into a conversation focused on key biometric factors such as sleep, diet, heart rate variability, blood pressure, and stress, which are crucial for improving health markers. The connection between biomarkers and biometrics is increasingly vital. Recently, a notable study published in Nature by Google Health and Fitbit demonstrated how AI can link these factors effectively. We are witnessing a shift where individuals monitor their biomarkers combined with wearable data and AI, enhancing awareness of their internal health. Consequently, we expect more consumers to regularly test certain biomarkers to track their progress toward health goals. Thank you all for joining today’s call. We appreciate your continued support and wish everyone good health.

Thank you for participating in the Quest Diagnostics First Quarter 2026 Conference Call. A transcript of prepared remarks on this call will be posted later today on Quest Diagnostics website at www.questdiagnostics.com. A replay of the call may be accessed online at www.questdiagnostics.com/investor or by phone at (866) 388-5361 for domestic callers or (203) 369-0416 for international callers. Telephone replays will be available from approximately 10:30 a.m. Eastern Time on April 21, 2026, until midnight Eastern Time, May 5, 2026. Goodbye.