Fitch Ratings has affirmed
The Rating Outlook remains Positive.
The ratings and Outlook are supported by the largely inelastic demand for clinical testing, DGX's strong market position, and Fitch's expectation that leverage can remain at or below 2.5x on a gross basis as a result of moderating pricing pressures and continued delivery of operational excellence while continuing to engage in M&A and shareholder returns.
The affirmation further considers potential uncertainties associated with impending regulations such as Protecting Access to Medicare Act (PAMA) cuts and the
Whether the current momentum translates into an upgrade will depend on the company's ability to sustain margins at or above pre-pandemic levels and observations as to how the management team applies its long-term financial policies and capital deployment strategies.
Key Rating Drivers
Leading Position in Large, Fragmented Market: Quest is one of the two largest independent participants as measured by segment revenue in the relatively fragmented and highly competitive
These advantages should allow Quest to improve its cost position, which is a competitive advantage, given the prominence that pricing plays in customer decisions. Quest's relative cost position creates alignment with payors in that testing services Quest provides may be at the expense of higher-cost in-network competitors.
Strong Base Recovery: Base business revenue in Quest's Diagnostic Information Services (DIS), which represents over 95% of Quest's consolidated net revenue, grew 7.3% in 2023, driven by 6.5% in base testing volume growth and 1.1% in revenue per requisition growth in the base business. Management acknowledges that a portion of the substantial volume growth experienced in 2023 can be attributed to a resurgence in demand as patients returned to care. Fitch expects base volume growth to persist, albeit at a more moderate pace.
EBITDA margins are expected to normalize at around 20%, close to pre-pandemic level. Fitch assumes modest margin expansions of roughly 25bps annually, driven by continued realization of economies of scale, fueled by organic growth; the Invigorate program; early materialization of investments in areas such as CIT; better pricing supported by a delay in PAMA cuts with ongoing efforts for a permanent fix; and a more favorable test and payor mix.
Leverage Normalizing: Although Fitch expects the company to generally maintain EBITDA leverage in the mid-2x range from 2023 and onward, sizable debt-funded transactions, shareholder returns or profitability deterioration could cause leverage to fluctuate. The pandemic benefitted some health care companies, including Quest. Whether this translates to a ratings upgrade will depend on the company's ability to sustain margins at or above pre-pandemic levels and observations as to how current management team applies its long-term financial policies and capital deployment strategies.
Increasing Focus in
Additionally, DGX's collaboration with Ultima Genomics, a company that aims to reduce whole-genome sequencing costs to
While the financial impact of these initiatives is anticipated to be dilutive to modest in the short term due to their currently low volume, their value could increase significantly upon generating clinical evidence that affirms their reliability and establishes them as a standard of care.
Regulation-related Uncertainties:
Separately, the
Derivation Summary
Quest's 'BBB' rating reflects the issuer's leading position and scale in the competitive
Fitch views Quest's position within the clinical laboratory industry as competitive with
Key Assumptions
Revenue of nearly
EBITDA margin expansion of roughly 100bps over the rating horizon assuming PAMA cuts return in 2025;
Effective interest rate to increase to over 4.0% over the forecast period as a result of issuing and refinancing debt at higher rates;
Over
RATING SENSITIVITIES
Factors that could, individually or collectively, lead to positive rating action/upgrade:
Fitch's expectation of EBITDA leverage sustaining at or below 2.5x;
An outlook of positive organic growth and margin stability.
Factors that could, individually or collectively, lead to negative rating action/downgrade:
EBITDA leverage sustained around or above 3.0x;
Reversion to negative top-line results and margin trends, coupled with an inability to drive cost savings under the Invigorate program.
Liquidity and Debt Structure
Ample Liquidity: Quest's next bond maturity is a
Issuer Profile
Summary of Financial Adjustments
EBITDA adjustment made for stock-based compensation and asset impairments.
REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING
The principal sources of information used in the analysis are described in the Applicable Criteria.
ESG Considerations
The highest level of ESG credit relevance is a score of '3', unless otherwise disclosed in this section. A score of '3' means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. Fitch's ESG Relevance Scores are not inputs in the rating process; they are an observation on the relevance and materiality of ESG factors in the rating decision. For more information on Fitch's ESG Relevance Scores, visit https://www.fitchratings.com/topics/esg/products#esg-relevance-scores.
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