Overview
DGX remains a Best Idea Long as we expect the base business recovery to continue alongside sustained demand for COVID testing. After speaking with DGX last week, we developed some data points on demand in NYC, a key market for DGX, and otherwise made a number of small adjustments to our model. We have tightened up our near-term estimates to reflect total 3Q21 revenue of $2.546B versus consensus of $2.420B. We still see a substantial amount of pent-up demand and expect the receding Delta Variant will remove one of the last remaining obstacles to its release, although one of the consequences of Delta Variant will be sustained demand for COVID testing at least through the winter flu months of 2021-2022. The current flu season is already running substantially ahead of the last 10 seasons, and on a test volume per day basis has the potential to super-charge COVID volume and volume over all. Since we added DGX consensus estimates have risen with management guidance and inline with our outlook. We no longer have a substantial gap between our 2022 estimates and consensus, although there are multiple revenue drivers remaining, including additional COVID testing agreements, flu season upside, a more robust NYC recovery, and in-person care and pent- up demand release.
Key Points
COVID Reimbursement (PHE)
- $100 reimbursement ($75 base + $25 add on for results under 2 days) for COVID-19 PCR Test currently set to last until October; must be renewed every 90 days. Administration has said they will give at least 60 days’ notice, but CMS can do what it wants, realistically.
- If the public health emergency (PHE) were to end, rate would return to $51. Even so, new codes and gap-fill process would allow DGX to generate a higher average rate, closer to $75.
Progress of Surveillance Programs
- Originally seeing hesitance to commit to surveillance programs, but Delta has added to the need case. Has signed wins with Carnival (PR), individual employers, and state school contracts.
- Demand is starting to pick up, but the majority of the mix is still clinical demand. Contracts can vary in size, frequency of testing, and length.
Increase in US COVID Testing Share
- Share has “ticked up” from previous quarters; likely the result of smaller labs potentially exiting the industry and an increase in the number of tests requested by key relationships such as $CVS and $WMT.
- Shared skepticism around the ability for smaller labs, which helped to meet COVID demand early on in the pandemic, to repurpose equipment and win large health system contracts.
Conversion from COVID to Base
- COVID-19 testing is run 1/3rd, 1/3rd, 1/3rd on $HOLX Panther, $RHHBY Cobas, or laboratory- developed PCR tests (LDTs off the shelf).
- Panther: Primarily using for women’s health testing. Majority of machines were legacy Tigris with plans to replace. COVID pulled forward replacement cycle; can be switched back 100%.
- Cobas: Historically, only used for HCV/HIV viral load testing. Now, have them placed in all regional labs which will improve service and turnaround times when switched back.
- LDTs: All were before COVID and remain in in esoteric labs. Capacity can all be repurposed.
Base Business Recovery by Region
- All back to 2019 baseline, but Northeast. Lagging volume comes primarily from New York, specifically the 5 boroughs of NYC (previously down DD, but making monthly improvements).
- Remains furthest from being recovered despite full recovery in NJ, CT; expects impact could be resulting from incremental New Yorkers moving to the suburbs and working from home.
Apprehension and Pent-Up Demand
- Although surprised that NYC could still be scared (due to safety, mask adherence), has heard similar anecdotes from others. > Evidenced by our survey work on the subject.
- Believes pent-up demand will manifest in the form of more tests being ordered in 2H20 will drive revenue per requisition, but not as a bolus or spike in volume (as weather events do).
Overview of PLS Business & Update
- While contracts can take between 3-4 years to sign, they often take 2 quarters to implement once signed, and the volumes build over 6 quarters. > Key Recent Wins: Memorial Hermann (TX), Hackensack (NJ)
- All combined, the business has an annual run rate of $500MM which add between 50-100 bps to revenue growth; have a number of opportunities in the pipeline. Provide clients with lowering costs, raising efficiency, managing reimbursement.
Key Slides
All data available upon request. Please reach out to with any inquiries.
Thomas Tobin
Managing Director
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