Quest Diagnostics Q4 2021 Earnings Call Transcript

Quartr
Provided by Quartr
February 2, 2022

Key Takeaways

  • Leadership transition: Jim Davis will become CEO on November 1, 2022, with Steve Ruszkowski moving to Executive Chairman, and CFO Mark Gunning retiring later this year as Quest begins its search for a successor.
  • Record FY2021 results: Revenues rose 14% to $10.8 billion, adjusted EPS climbed 27% to $14.24, and cash from operations grew 11% to $2.2 billion; Q4 revenue was $2.7 billion (down 9% YoY) and adjusted EPS was $3.33 (down 26%).
  • 2022 guidance: Total revenues of $9.0–$9.5 billion (–12% to –17%), base business up 3.5%–6% to $8.3–$8.5 billion, COVID-19 testing revenues of $0.7–$1.0 billion (–64% to –75%), and adjusted EPS of $8.65–$9.15.
  • Growth pillars: Core testing volumes rose 19% in 2021, health plan and hospital partnerships drove record PLS revenues, advanced diagnostics grew >25%, and direct-to-consumer QuestDirect nearly doubled to $70 million, targeting $250 million by 2025.
  • Operational excellence: The Invigorate program delivered >3% annual productivity improvements and supply/logistics optimization to offset inflation, fund growth investments and support margin expansion.
AI Generated. May Contain Errors.
Earnings Conference Call
Quest Diagnostics Q4 2021
00:00 / 00:00

There are 10 speakers on the call.

Operator

Welcome to the Quest Diagnostics 4th Quarter and Full Year 2021 Conference Call. At the request of this company, the call is being recorded. The entire contents of the call, including the presentation and the question and answer session that will follow our 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 introduce Sean Beavik, Vice President of Investor Relations for Quest Diagnostics.

Operator

Go ahead, please.

Speaker 1

Thank you and good morning.

Speaker 2

I'm joined by Steve Ruszkowski, our Chairman, Chief Executive Officer and President Mark Gunning, our Chief Financial Officer and Jim Davis, our Executive Vice President, General Diagnostics and Chief Executive Officer-elect. 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, including the impact of the COVID-nineteen pandemic that may affect Quest Diagnostics' future results include, but are not limited to, those described in our most recent annual report on Form 10 ks and subsequently file quarterly reports on Form 10 Q and current reports on Form 8 ks.

Speaker 2

The company continues to believe that the impact of COVID-nineteen pandemic on future operating results, cash flows and or its financial condition will be primarily driven by the pandemic's severity and duration, Healthcare insurer, government and client payer reimbursement rates for COVID-nineteen molecular tests the pandemic's impact on the U. S. Healthcare system and the U. S. Economy and the timing, scope and effectiveness of federal, state and local governmental responses to the pandemic, including the impact of vaccination efforts, which are drivers beyond the company's knowledge and control.

Speaker 2

For this call, references to reported EPS refer to reported diluted EPS and references to adjusted EPS refer to adjusted diluted EPS. Any references to base business, testing, revenues or volumes refer to the performance Our business excluding COVID-nineteen testing growth rates associated with our long term outlook projections, including total revenue growth, revenue growth from acquisitions, Organic revenue growth and adjusted earnings growth are compound annual growth rates. Finally, revenue growth rates from acquisitions will be measured against our base business. Now, here is Steve Rasowski.

Speaker 1

Thanks, Sean, and thanks, everyone, for joining us today. Over the past 2 years, our 50,000 Quest employees have risen to the challenge of COVID-nineteen, Innovating, persevering and remaining committed to the patients and customers we serve. While doing so, they also grew our base business by more than 19% in 2021, achieving record levels. I'm extremely proud of what we have accomplished as a team. So we have a lot of news to cover this I want to get into that so we can have your questions.

Speaker 1

So let's get started. So first, I'll start by sharing some color on the leadership transition we've announced this morning. Then we'll review our performance for the 4th And then finally, Mark will provide more detail on our financial results and talk about our A gradual leadership succession plan under which Jim Davis, Executive Vice President of Gerald Diagnostics, We will succeed me to become Chief Executive Officer on November 1, 2022. At that time, I will continue to serve on the Quest's Board of Directors as Executive Chairman. Quest Diagnostics is a great company that is well positioned to continue to deliver shareholder value.

Speaker 1

As I approached a decade in the role, the Board and I determined that now is the right time to begin to turn over the helm to a new leader. Jim Davis is extremely well qualified to be CEO, having managed a large part of this company's role as Executive Vice President. He has deep knowledge of Quest, the healthcare industry and the corporate world gained through more than 35 years of business experience. Jim is wisely respected and will be a strong CEO. When I took this role nearly 10 years ago, Quest was not growing nor realizing its potential.

Speaker 1

We launched a new strategy, our new Quest, to drive transformational change. To drive that change, we built a new leadership team And Jim has been a key member of that team. We built the business strategy to accelerate growth and drive operational excellence. To drive growth, we focused on improving relationships with health plans and hospital health systems and expanding fast growing businesses in advanced diagnostics and consumer testing. In addition, we've added about 2% revenue growth We have driven operational excellence and our Invigorate program has consistently improved quality and customer experience while generating 3% productivity each year.

Speaker 1

And we've made more inclusive Increasing the diversity on our Board and amongst our management ranks. Finally, we established Quest for Health Equity in 2020, Over $100,000,000 committed to reduce healthcare disparities among underserved in the United States, particularly in communities of color. I am very proud of what we have accomplished together. And if you consider the opportunities in front of us, In many ways, we're just getting started. We have a strong team and Jim Has been a key leader in our transformation.

Speaker 1

The runs are general diagnostics business,

Speaker 3

which accounts for more than 80%

Speaker 1

of revenues and threefour of our employees. He manages operations, including sales and marketing, patient services, logistics, laboratories, billing and customer services. He also oversees the DRiV operational excellence strategy, which includes our VIGORATE program. He has provided an enterprise oversight for our pandemic response. And if that wasn't enough, he's also led us to both an of Questi SG strategy.

Speaker 1

So Jim, congratulations. I look forward to working very closely with you through this transition.

Speaker 4

Hey, thanks, Steve. And I really look forward to working closely with you over the next 8 months and ensuring a very successful transition. It's a tremendous honor to have the opportunity to succeed you in Quest and lead Quest into the next phase of our growth. We have a very powerful vision in class of empowering better health and diagnostic insights. Our business strategy is straightforward and well understood.

Speaker 4

And our company has never been more central to patients and to the healthcare system as we've seen during this pandemic. I really look forward to working with the management team and all 50,000 employees to build on the strong foundation that Quest has put in place. Quest's future is really bright and we're extremely well positioned to continue to create value for our shareholders and all that we serve.

Speaker 1

Thanks, Jim. Now at the same time, Mark is planning to retire this year. Mark has been in this role for more than 8 years Now navigate us to the strong position we're in this today. We have begun a process in which I will be working closely with Jim to identify Quest's new CFO and Mark will participate in the selection process and will remain in the role through the transition. Mark, I want to thank you for your many contributions, your partnership and your friendship.

Speaker 1

You've been a key member of our leadership team And we have transformed Quest and accelerated its growth.

Speaker 3

Thanks, Steve. I appreciate the kind words. I just want to take a minute to say that I'm proud to be part of an important company that makes a positive contribution to the country, and I've enjoyed being part of it. Now it's time for me to step back and retire. I'm looking forward to participating in the process to identifying my successor who can support Steve and Jim in Quest's next phase of growth.

Speaker 1

Now turning to our results. We closed out 2021 with another record year of revenue, Earnings and cash from operations. Our base business recovered throughout the year and we experienced Strong demand for COVID-nineteen testing services. So for the full year of 2021, Total revenues grew by more than 14 percent to $10,800,000,000 Earnings per share increased by nearly 49 on a reported basis to $15.55 and more than 27% on an adjusted basis to $14.24 Cash provided by operations increased by more than 11% to $2,200,000,000 And for the Q4, total revenues were $2,700,000,000 a decrease of roughly 9% versus 2020 When COVID-nineteen volumes were surging, earnings per share were $3.12 on a reported basis and $3.33 On an adjusted basis, both down approximately 26% versus the prior year. So I'd like to share some perspective on the role of COVID-nineteen testing going forward.

Speaker 1

A lot of progress has been made in the battle against COVID-nineteen, But we believe there's a no way anytime soon. Our modular volumes began this year strong with volumes peaking in mid January. Testing will continue to play an important part of Managing COVID-nineteen, and we believe that molecular testing remains the gold standard. We continue to perform well throughout the surge, maintaining average turnaround times of 2 days or less for our COVID molecular testing. We will continue to maintain appropriate testing capacities and staffing levels to be prepared for any additional surges throughout this year if they emerge.

Speaker 1

We also continue to believe there will be a bigger role for serology testing and how we measure COVID-nineteen protection going forward. Ultimately, we expect COVID-nineteen testing to eventually be more And become a permanent part of our portfolio going forward. Now turning to our ACE business. We continue to make progress executing our 2 point strategy to accelerate growth and drive operational excellence. Well, we delivered 2% revenue growth on our base business from acquisitions again last year.

Speaker 1

In the Q4, we acquired the assets of Labtech Diagnostics, a regional independent laboratory serving physicians and patients, primarily in South and North Carolina, Georgia and Florida. This is the first full service laboratory owned by Quest in South Carolina. We also recently announced our acquisition of PAC Health, a patient engagement company that helps individuals Adopt healthier behaviors to improve outcomes. This acquisition will bolster our extended care capabilities. Since 2012, we have completed more than 40 acquisitions, including outreach laboratories, regional independent laboratories and capability enhancing deals.

Speaker 1

And over the last 4 years, we've achieved our target of greater than the average of 2% revenue growth on our base business each year from acquisitions. And then finally, our M and A total remains strong. In 2021, We took full advantage of our strong health plan access, which is approximately 90% of all commercial insured lives in this country. We also made good progress working together with Health Plans to help companies and their employees save money by reducing denials And out of network leakage. Health plans also recognize the value of working with us We have grown our health plan revenues faster than our overall revenues to the best level we've ever seen.

Speaker 1

Hospital health system revenues have grown more than 20% compared to 2019 levels, excluding COVID-nineteen testing, driven largely by the strength of our professional laboratory services contract. Our performance in 2021 benefited From our 2 largest PLS contracts to date, Hack and Tack Meridian Health and Memorial Hermann. Altogether, our POS business without COVID-nineteen exceeded a record $500,000,000 in annual revenue last year. Now hospitals have continuously faced pressure throughout the pandemic. Post pandemic, we believe the same will be true.

Speaker 1

We believe there will be a continued consolidation And ongoing challenges that Ford Quest an opportunity to implement our flexible solutions to help hospitals become more effective and productive. Advanced Diagnostics is critical to the future of healthcare. We're building strong momentum And our key growth drivers, which include consumer and hereditary genetics, oncology and pharma services. In 2021, these test categories accounted for several $100,000,000 of advanced diagnostics portfolio, and they're growing more than 25% versus 2020 and nearly 33% versus 2019. We are investing aggressively in areas with potential for future differentiation to grow our Avance Diagnostics value proposition, including automatic tests, next gen sequencing, bioinformatics, the sales force and customer service.

Speaker 1

We're leveraging our scale and expertise to give patients and providers greater access to important innovations such as liquid biopsy and digital pathology. Advanced diagnostics is one of the faster growing areas of our Our strategy and investments in this area will enable us to achieve high single digit revenue growth going forward. Now we're equally excited about the opportunities we see in our direct to consumer talking business. Revenues for QuestDirect Services nearly doubled to more than $70,000,000 in 2021, driven by both The basis is currently the COVID-nineteen testing. We expect the non COVID consumer diagnostic market will We experienced double digit growth over the next several years, and we're on track to build the $250,000,000 direct Our business by 2025.

Speaker 1

We're ramping up our investments in the business, launching a new and improved digital experience later this year, So we're off to a good start in 2022. We're building on our long term relationships with Walmart by recently launching a consumer initiated laboratory testing on walmart.com through our solution powered by QuestDirect. And the MyQuest platform now has nearly 23,000,000 users, up more than 3,000,000 in the past quarter. We're very excited about our longer term growth opportunities in advanced diagnostics And direct to consumer testing and our increasing investments we made in 2021 to strengthen our business and accelerate growth beyond These investments were made possible with the record cash and earnings we generated over the past 2 years. Now the summary part of our 2 Point strategy is to drive operational excellence.

Speaker 1

We remain laser focused on improving both operational quality and efficiency, which go hand in hand. During 2021, the Invigorate program exceeded our goal of 3% productivity improvement. We made good progress last year in procurement supply savings as well as reducing cuff plan denials and improving patient collections at the time of service. While we faced modest deflationary wage pressure in 2021, on the supply cost side, We have more than offset any increases with cost savings from our suppliers. Historically, our ZIGRATE productivity savings have been net of any inflationary increases.

Speaker 1

Beyond that, we continue to drive additional productivity improvements Excuse me. Now turning to our workforce. Quest employees are highly engaged based on results of our quarterly surveys. In a challenging labor market, we are focused and are still seeing improvement in engagement and retention. Our team has done a lot to create an inspiring workplace, and we continue to do everything we can to attract, Recruit and retain talent.

Speaker 1

We're entering 2022 in a strong position within the lab industry and more broadly throughout healthcare. Our base business is poised to build off the record revenues we achieved last year, and we're investing to accelerate growth. We expect to see continued demand for COVID-nineteen testing services, albeit at lower levels in the last 2 years. The delay of the 2022 PAMA cuts announced last year was a good outcome for our industry and Medicare beneficiaries. However, we'll continue to be hard at work in 2022 with our trade association and members of Congress with the goal of arriving at a permanent fix to PMA.

Speaker 1

We remain committed to our capital deployment strategy of returning the majority of our free cash flow to our shareholders. This morning, we raised our dividend for the 11th time since 2011. We expect So putting it all together, our 2022 guidance reflects strong momentum and investment in our base business, Balance with the inevitable but expected decline in COVID-nineteen testing revenues. Before turning it over to Mark, I'd like to recognize and thank once again all of our employees who really have been on the front lines of the pandemic and continue to serve The healthcare needs of patients who depend on Quest every day. Now Mark will provide more detail on our performance and our 2022 guidance.

Speaker 1

Mark?

Speaker 3

Thanks, Steve. In the 4th quarter, consolidated revenues were 2,740,000,000 down 8.6% versus the prior year. Revenues for Diagnostic Information Services declined 8.5 And compared to the prior year. The decline reflected lower revenue from COVID-nineteen testing services versus the Q4 of 2020, partially offset by continued growth in our base testing revenue. Compared to 2019, our base 6% in the 4th quarter and was up more than 1% excluding acquisitions.

Speaker 3

Volume, Measured by the number of requisitions increased 1.3% versus the prior year with acquisitions contributing 1.1%. Compared to our Q4 2019 baseline, total base testing volumes increased more than 10%. Excluding acquisitions, total base testing volumes grew approximately 5% versus 2019 and benefited from new PLS contracts that have ramped over the last year. The progress we made in our base business throughout 2021 continued in the Q4, and base testing volumes remain consistent with our prior outlook. As many of you know, COVID-nineteen testing volumes Moderated early in the Q4 following the peak of the delta wave in September, but then surged again in early December as the omicron variant spread Together with our JV partners in Quest, we resulted in approximately 7,900,000 molecular tests.

Speaker 3

Quest alone resulted in roughly 7,300,000 molecular tests and nearly 730,000 serology tests In January, our COVID-nineteen molecular volumes averaged approximately 120,000 tests per day and over 139,000 per day including Sonora Quest, with volumes peaking in the middle of the month. Revenue per acquisition declined 9.8% versus the prior year, driven primarily by lower COVID-nineteen molecular volume. In the Q4, increases in our base revenue per acquisition were more than offset by the impact of recent POS wins. Modest unit price headwinds remain consistent with our expectations. Reported operating income in the 4th quarter was $536,000,000 or 19.5 percent of revenues compared to $795,000,000 or 26.5 percent of revenues last year.

Speaker 3

On an adjusted basis, operating income in Q4 was $579,000,000 or 21.1 percent of revenues compared to $860,000,000 or 28.6 percent of revenues last year. As you may recall, The updated 2021 guidance we shared in October contemplated a lower adjusted operating margin both year over year and versus 3Q. The year over year decline was primarily driven by lower COVID-nineteen testing revenue and higher COVID-nineteen testing costs, headcount and wage increases and ramping strategic growth investments. It's important to note that over time, A growing portion of our COVID-nineteen molecular testing volumes have come from nontraditional channels, which carry additional expenses and logistics costs. Also, spiking COVID-nineteen positivity rates across the country in December eliminated our pooling capability, which further increased COVID-nineteen testing costs late in the quarter.

Speaker 3

In addition, we also experienced higher than anticipated employee health care costs in Q4 primarily related to COVID-nineteen. Reported EPS was $3.12 in the quarter compared to $4.21 a year ago. Adjusted EPS was $3.33 compared to $4.48 last year. Cash provided by operations was $2,230,000,000 in 2021 versus $2,010,000,000 in the prior year. We completed our $1,500,000,000 ASR in November and repurchased an additional $310,000,000 in stock in the 4th quarter.

Speaker 3

This brings total share repurchases to more than $2,200,000,000 in 2021, and we ended the year with $872,000,000 on the balance Before turning to guidance, I'd like to comment on recent trends we've seen in our labor costs. As Steve noted, we've been managing through a challenging labor environment. While wage inflation, including our annual merit increase, is expected to be between 3% to 4% this year, The increase in our total salaries, wages and benefits is expected to be below 3% in 2022, Given the reset of our annual performance compensation and lower expected overtime, as a reminder, All of our employees are eligible for annual performance comp. Now turning to guidance. We estimate full year 2022 results as follows: Revenue is expected to be between $9,000,000,000 $9,500,000,000 a decline of approximately 12% to 17% versus the prior year.

Speaker 3

Base business revenues are expected to be between $8,300,000,000 $8,500,000,000 an increase of approximately 3.5% to 6%. COVID-nineteen testing revenues are expected to be between $700,000,000 $1,000,000,000 a decline of approximately 64% to 75%. Reported EPS expected to be in a range of $7.63 8.33 and adjusted EPS to be in a range of $8.65 to 9 point Before concluding, I'll touch on some assumptions embedded in our 2022 guidance. As Steve said, we're entering 2022 in a strong position. Our guidance assumes COVID-nineteen molecular volumes to average between 65,000 to 80,000 tests per day in Q1, representing a decline from January levels and approximately 20000 to 35000 tests per day for the full year.

Speaker 3

For COVID-nineteen serology volumes, the guidance assumes approximately 3,000 tests per day for the full year. While our guidance does not currently anticipate another COVID wave, we'll remain ready from an operational standpoint to handle any future surges. Last month, the public health emergency was again extended another 90 days to an April. We assume average reimbursement for COVID-nineteen molecular testing to hold relatively steady through this period. While the public health emergency could continue to get renewed beyond April, Additional extensions are not captured in our guidance.

Speaker 3

The earnings we've generated from COVID-nineteen testing have afforded us an opportunity to continue to increase investment in our business. As Steve noted earlier, we continue to ramp investment in our growth pillars, particularly the advanced diagnostics and direct to consumer testing opportunities. We are planning to invest approximately $160,000,000 in our growth initiatives This year, which represents an additional $90,000,000 in investments in 2022 versus 2021. We also continue to incur hard costs to manage our business through the pandemic, including expenses to comply with CDC guidelines, Address ongoing supply chain challenges and maintain adequate staffing levels. We currently forecast these expenses Approximately $50,000,000 in 2022.

Speaker 3

As a reminder, we originally expected PAMA cuts of approximately $80,000,000 in 2022. These cuts were delayed 1 year until 2023. Finally, we ended 2021 and only enough share repurchases to offset our employee equity programs and to meet our commitment of the majority of our free cash flow to our shareholders. I will now turn it back to Steve.

Speaker 1

Thanks, Mark. Well, to summarize, we had another record year providing critical COVID-nineteen testing to our country and delivered record revenues, earnings and cash from operations. We also grew our base business to a record level, up 19% versus the prior year. Quest is well positioned in 2022 to deliver on its commitments. I'm proud of the incredible accomplishments of our 50,000 Quest employees throughout the pandemic.

Speaker 1

And finally, our team is strong. The business has good momentum and Quest's future is bright as we begin A gradual transition to new leadership. Thank you. We'll be happy to take your questions.

Operator

Thank you. We will now open It up to questions. At the request of the company, we ask that you please limit yourself to one question. If you have additional questions, we ask that you please fall back into the queue. And the first question is coming from Jack Lehan, Nephron Research.

Operator

Your line is open.

Speaker 1

Hey, Jeff. Good morning, Jeff.

Speaker 5

Hey, good morning. First, I know this isn't the end, but congrats Steve and Mark on the retirement and Jim congrats So First question, there's been a lot of anxiety around pressures on the lab industry, which I personally find very interesting because historically that's actually been the bull case for Quest. So it would just be great to get your thoughts on What you're hearing from hospitals around outsourcing? Have you picked up any new contracts? And potential for share gain versus some of these regional and independent labs?

Speaker 1

Yes. Thanks, Jeff, for the question. There is a lot more pressure in our industry and particularly at And so we are seeing continued interest in our working with hospital systems and Helping them become more efficient and productive with their professional lab services business. So that continues to be a big opportunity. You saw in our Prepared remarks grew nicely over the last couple of years.

Speaker 1

We have a $500,000,000 business and therefore as that moves, it moves our Enterprise a significant level. So that's number 1. Number 2 is we are very strong and we continue to Drive operational excellence. As you all know, this is not new. It's institutionalized in Quest.

Speaker 1

We believe we have the cadence and the capabilities to We continue to offset any inflationary pressure we have, and we've done that. We did it last year, and we'll continue to do that going forward. And as I said in my introductory remarks, are we included in Invigorate when we talk about inflationary pressures on our Cost of sales, when we provide our Invigorate savings, it's a net number. So any increase is offset by the savings and it's Always been positive for us. We're getting more savings than cost increases.

Speaker 1

And so despite some pressures that we see because of the current times, We're offsetting that. And going forward, we do see that smaller laboratories We'll have a tougher time keeping up with some of these pressures. And therefore, we do have an advantage. And you saw the acquisition we just did with last half In South Carolina, we are achieving that 2% growth from acquisitions. So therefore, we believe our strategy has Positioned us nicely going forward to take advantage of the changes in front of us given this different time than we've ever seen.

Speaker 1

So, Mark, do you want to add to that?

Speaker 3

Yes. I think the other thing that's evolving, Jack, that you didn't mention, I'm sure it's on your radar, is Moves towards transparency on pricing, whether it's surprise billing. Now certainly it's complicated. So even for us, it's not simple. And if you've got commercial insurance, it depends on who your carrier is and so on.

Speaker 3

So it's not simple to tell people exactly what their cost is. However, it's absolutely an advantage for the national excellence, specifically for Quest. So we're encouraged by some of this. It's Kind of one of those secrets that a lot of people aren't aware how much better our value is compared to others. And so we really see that together Some of the things he mentioned as another reason that we're going to continue to pick up share and really return to those growth rates we were having before the pandemic With freighter assets and then all the tools and value that we bring well beyond our price, including our real time estimation tools, including our MyClass app and all the other things that really enhance the patient experience.

Speaker 5

Great. And as a follow-up, on the disclosures around the 4th quarter detection testing, so $7,900,000 total, 7.3 resulted by Quest or 600,000 through the referral network.

Speaker 1

Can

Speaker 5

you talk about just the profitability on The tests that go through the referral network versus those resulted by Quest, because I think people are just trying to figure out the relative margin upside Versus revenue, I'm wondering if maybe that was a factor we weren't considering.

Speaker 3

Yes. So to be clear, it's not for referral network. We have a JV with Sonora Quest. And so we wanted to make sure that people were aware if they were Some math around RevPAREC on the testing volumes that we don't actually record that revenue because we have a minority ownership stake. So we get a proportional share of the earnings from Sonora Quest as we do with our other minority holdings as we do with our majority holdings through equity earnings.

Speaker 3

So we just wanted to provide that transparency. But in terms of the pricing and so on and so forth, I won't comment specifically on Sonora Quest, It's not dissimilar. It's not a totally different profit structure than the things that we do ourselves.

Speaker 4

Yes. And Jack, during the surge, Less than 5% of our total volume is sent out to a referral lab. And at this point in time, it's

Speaker 1

Yes. What I did refer

Speaker 3

to, Jack, and maybe that's what you were asking about was nontraditional channels. And so that's not where we're It's actually how we're getting the specimens. So a lot of the work, especially early, was through our traditional channels, our Costco Partners where we were going anyways to collect specimen and we would leverage all of the Quest logistics All in cases where we had people going to our ACE and TRUST Centers, we're leveraging that. In this case, we're actually getting it from other Providers, CVS is the most notable one. And as we do that, we have to have incremental logistics structure, we have to have And then we do pay a fee.

Speaker 3

You kind of should think about it kind of like phlebotomy. But while the work they do to collect the specimen, to Engage in the administrative cost of the patient to give them the results. And so there is a cost that maybe people weren't aware of when we're not getting that specimen to our traditional infrastructure.

Speaker 5

Great. Thanks for clearing that up.

Speaker 2

Operator, next question.

Operator

And the next question is coming from Ann Hynes, Mizuho Securities. Your line is open.

Speaker 1

Good morning, Ann.

Speaker 6

Good morning and congratulations to Steve, Mark and Jen.

Speaker 3

Thank you. Good morning, Ann.

Speaker 6

So I just want to ask about margins because obviously the stocks down are underperforming year to date versus some peers. And I think there's a debate On The Street about the margin profile for Quest ex COVID. I know you guys assumed margin pressure in Q4. It was worse than expected? And a follow-up to that is, again, you just had a 2022, people are really What your margin profile will be in 2023?

Speaker 6

And in your prepared remarks, Mark, you did talk about Growth initiatives that are in 2022, the $160,000,000 and I think you said $50,000,000 for incremental costs. But I guess like There are so many moving parts with extra labor costs, extra supply costs. You have these growth investments. I guess if we look out to 2023, not giving guidance, like what do you think is repeatable and what is not? And Maybe if you can just comment on just the health of how you view your base margins in the base business, that would be great.

Speaker 3

Yes. So thanks for the question, Ann. I think it's an important one. So first off, we're not deviating from our long term outlook. So we shared a long term outlook in March of 2021.

Speaker 3

And while the CAGRs Are going to change because we're going to have a stronger year in 2022 and the CAGRs I quoted at that time were putting 2022 forward. The absolute numbers, we're not deviating from because they're largely the base business. So we still assume that COVID will materially decline, Time will tell. And at that point, it's really all around our base business. So when people are looking at the Current profitability based business and I can understand how this happens.

Speaker 3

One of the flaws in that is that you can't really do the 2 in So let me give some examples. Because we've had such a surprising strong year this year relative to what we expected Driven by COVID, we're paying a significantly higher incentive performance bonus and that's across the whole employee base. And right now, that would not be expected to be repeated next year. So that inflated our cost. And so to assign all of that Cost against the base business, which is what implicitly is done when you do COVID revenues times a certain margin drop through and then you assume backing into the base business.

Speaker 3

That's just not accurate. The other thing is we have significant incremental costs related to the pandemic, which I mentioned in the prepared remarks, Around $50,000,000 of costs. If COVID really goes away, we would expect those costs will largely go away. And those costs are really be assigned to COVID, not to the biggest business. We had quite a bit of overtime later in the year, and that was related to employee absences, driven by the COVID surge.

Speaker 3

And we spent about $25,000,000 more in And we historically spent an overtime and we would expect that would go away as well as COVID starts to step back. And so again, that is implicitly put against the base business when you do the high level math that I've seen a lot of people do. And so the way to think about the base business is obviously from our guidance, we are 100 of 1,000,000 of dollars above where we were in 2019. We expect to be back to the growth that we were experiencing pre pandemic. I know it seems like a long time, but if you look at the 1st 2 months, And we mentioned this several times, 2020 before the pandemic started, even after a full year of the network access gains we had in 2019, We're still growing mid single digits.

Speaker 1

We're going to get back to that growth, okay,

Speaker 3

on the base business. And the profitability of the base business is going to be similar to what it was before 2019. So hopefully, that puts all the pieces together for you. Obviously, if there's anything I didn't Clarify, I'd

Speaker 4

be happy to take a follow-up.

Speaker 6

No, that's very helpful. And just as a follow-up, Your growth initiatives like the $90,000,000 incremental in 2022, how should we view that for 2023?

Speaker 3

Right. So some of those will ramp down because there are discrete investments to get us Where we need to get to. So for instance, a big piece of that is building what we need for our consumer initiated testing. And to move from where we were to a more Amazon like, and not that we'll get completely there, but experience For patients who want to fine test and order it, pay their bill, etcetera, is expensive. It takes a lot of work.

Speaker 3

The marketing analytics To do the appropriate marketing and understanding of customer preferences and respond to customers in an appropriate way, There's a lot of IT investment in the near term to get us to that future state. Now as we're growing that business to $250,000,000 which What we said we would get to by 2025, there are going to be some ongoing costs because we're adding people to support that business. It is an incremental business and There are going to be some variable costs with that. However, as we grow those businesses, we're going to grow faster. And so some of those ongoing costs are going to get paid For that Factor Growth.

Speaker 3

And then I would say similarly on Advanced Diagnostics, as we accelerate that growth, some of the resources we're adding today and that we're calling out pre that growth Are going to be in the run rate and profitability going forward. So the costs don't go away completely, but they will ramp down because some of this is kind of startup expenses. And then that revenue, obviously, and the margin is going to pay for those incremental costs over the next several years.

Speaker 1

Let me just add to that. Remember, When we talk about this year, these investments really started in the

Speaker 2

back half

Speaker 1

of twenty twenty. Yes, we talked about an exceptional year in 2020. We talked about an exceptional year in 2021. And therefore, we took We answered you the opportunity invested in accelerated growth, entirely consistent with what we shared with you is our growth portfolio. And what you're seeing in our results already is the benefits of those investments.

Speaker 1

You're seeing great growth in our Focused areas of advanced diagnostics are highlighting those areas of our portfolio that we're focused on. And these are not insignificant portions of our portfolio. I shared my introductory remarks. These are several 100,000,000 of dollars of focus for us that are growing strong double digits versus last year versus 2019. And then secondly, our consumer initiated testing business It's growing considerably.

Speaker 1

We talked about $70,000,000 out of the past $250,000,000 And so therefore, we're already starting to see the benefit. So As with any investment, we expect a business return. We're getting some of that business return already. 'twenty one, we'll expect more of it than 'twenty two. And so when you get into 'twenty three, you got to track that we're what started in the beginning.

Speaker 1

What we're putting our eyes on is exactly what we laid out at Investor Day. That is, we have a

Speaker 2

baseline coming out of 'twenty two that we

Speaker 1

believe in and what we just shared in our 'twenty two guidance is entirely consistent with that And that we will continue to grow our earnings, the high secular growth, we

Speaker 2

highlighted 7% to 9%, And

Speaker 1

that will continue into 'twenty three and then 'twenty four. So we feel what we've done so far and what we've delivered is entirely consistent With what we believe the prospects and we do believe the opportunities in front of us are even more attractive than before because we have proceeds For the benefits of COVID to accelerate the program, we believe it's real.

Speaker 3

Yes. Just one clarification. So the 7% to 9% was when we thought we would do $7.40 to $8 in 2022 and we said we'd be at the upper end of that. So you can pick your number between $7.48 Carry forward, dollars 7 to $8 to $23 and $24 and that dollar level of EPS is what we're saying we can still do. Obviously, since 2022 is turning out based on our guidance a lot higher than we said in March.

Speaker 3

The CAGR is going to be lower, but the absolute numbers we're still committed to at

Speaker 2

this point. Operator, we're going to go to the next question. I just want to let everyone know we will go past the bottom of the hour. We have a lot of folks in queue, but we want to get to all your questions. Operator?

Operator

And the next question is coming from A. J. Rice of Credit Suisse. Your line is open.

Speaker 1

Hello, everybody. Best wishes on the transition to all. And maybe just

Speaker 3

to ask about M and A pipeline.

Speaker 1

A, any update on what you're seeing out there and what the opportunity set looks like? B, does the Management transition caused you in any way to pull back or to pivot in a different direction in Inorganic growth prospects? And then just maybe finally on the PacHealth deal, that was obviously not a huge deal, but an Interesting one. Does that suggest a pivot? And what's sort of the opportunity there with that acquisition?

Speaker 1

A. J, thanks. We continue to believe that we can continue to deliver that 2% growth Of our base business going forward, we've delivered that in the past, and we have every reason to believe that will continue going forward. As I mentioned earlier, we continue to see hospitals looking at what we've done with other hospitals, an opportunity for them to rely on us for the testing. And that It continues to build and we continue to look at some outreach purchases with hospitals.

Speaker 1

And then As I mentioned, Labtech was a good example of regional laboratory and a good piece of the United States that we picked up as well. And We continue to look at acquisitions that build on our portfolio. Remember, we have this lens of focusing on General Diagnostics and Jim Davis runs that business. In addition to that, Advanced Diagnostics, but the third piece is that are those services I take the information that we generate and we provide services and we do this employer population health and we built on that business To work with health plans and helping them manage their risk with the data and providing services that help them with that. So PACCARES fits into that direction for the company and we've done some other acquisitions that help us with that direction as well.

Speaker 1

And you're going to hear more about Our continued investment in that space going forward. And also in your question, does the management change slow as done in any way And here what we might do with acquisition, I would say to the contrary, Jim has been part of the management team for over 8 years. He's Highly engaged in all acquisitions. He's been instrumental in executing a lot of our acquisitions. And all the businesses that he participated is So Jim, any remarks about the 40 acquisitions we've done and your team to find more opportunities?

Speaker 4

No, A. J, as Steve said, I've been part of all 40 of those acquisitions and it's not going to

Speaker 2

slow down. We're not going to do we're going

Speaker 4

to do smart deals. We're going to be selective, but we're going to continue to build our base business. We're going to continue to find niche applications to build out our advanced diagnostics portfolio. And we're going to continue to focus on the hospital outreach deals. Those that are willing to get out of the business, we're right there ready to help them.

Speaker 3

Okay, great. Thanks so much.

Operator

The next question is coming from Patrick Donnelly of Citi, your line is open.

Speaker 1

Hey, Patrick.

Speaker 2

Taking the questions. Maybe just one on some recent Payer negotiations, obviously, you guys have talked a lot about inflationary pressures and supply chain things. How much does that come up in kind of the negotiations with payers? Are you able I know you guys are in a pretty good place with payers relative to historic levels. So maybe just talk through some of those conversations and ability to pass price along and price

Speaker 5

Increases in those payer contracts.

Speaker 1

Yes. Thanks, Patrick. Well, so there's a lot of attention these days on inflationary pressures, and we think we've

Speaker 2

To handle those questions, we think

Speaker 1

it's all very manageable for us in terms of our operational excellence programs and finding the productivity we need to offset it. So That's one piece of

Speaker 2

the equation. The other piece

Speaker 1

is what you're bringing up is around pricing, and we feel good about what we have delivered in that regard. Matter of fact, if you look at the results for 'twenty one, what you find is that there are unit price changes, and this is freezing everything from volume and mix Just looking at even price trends, it is below that 100 basis points that we typically have guiding you to dial into expectations going forward. Yes, that's not just for our commercial insurance contract. It's all our business. It's our hospital business.

Speaker 1

It's our client business, Independent of what Blue's clients might be physicians or some other organization we work with. So we continue to make progress And we're particularly encouraged by the discussions we're having with health plans. We've shared in the past that actually in the past Several negotiations, we've actually introduced price increases and it is actually helping us That, in fact, there is inflationary pressure across all of healthcare. So therefore, we're not alone, since we're a labor based business to pass along some of those costs to them. So We're making good progress.

Speaker 1

And I'd say the other piece of this, Patrick, is we continue to deliver great value. Our quality gets better, our service gets better, And we do that at a very competitive price already. And many of these plans believe that's in the best interest of them and their membership Our growth share is to make sure they're relying on a handful of top flight laboratories. In the case of UnitedHealthcare, they call that For lab network, and we had applied to that and we had to demonstrate with evidence that, in fact, we have great quality, we have great service, and we're doing that at very competitive prices. So that trend will continue.

Speaker 1

When you talk about value, we're going to eventually keep pushing that to deliver more and more value, which helps you In terms of managing your network, we in many cases are going to start looking at some price increases going forward. So good progress there. Thanks for asking the question. Mark, is there anything you'd like to add?

Speaker 3

Yes. I just want to remind people of what we've talked about over our tenure. We have this Invigorate program, drives about 3% productivity. And we call it productivity because some of it is top line enhancing. It's not all around cost.

Speaker 3

And we've mentioned the fact that we have these pay fors, and one of them has been price reduction. One of them has been annual labor inflation. And then we talked about the fact that as we got priced in a better place that actually it was helping with margin expansion. So we had enough productivity to do more than the pay fors. So now when you look at where we are today, and as Steve mentioned, a much better position.

Speaker 3

And I can't specifically say it's related to inflation, but I can assure you that, that is part of the conversation in addition to PAMA And the value that we bring and so on. So we've really moved the conversation dramatically from when we started here to more about value. And fortunately for us, I can share that in the last three national payer contracts, all three of them, we got an increase. That was modest. But you compare that to where we said historically, great news.

Speaker 3

And that also means that even if we have a little more inflation, and I think we've talked about this quite a bit, We've got plenty of Invigorate and that Invigorate now doesn't need to cover as much of the price erosion that we historically. And that price erosion that Steve shared is really heavily in the client bill. And as we've talked over the last number of earnings calls, That comes from both our hospital clients who are under tremendous pressure, and we've shared the reasons for that. And also in some states where physicians can do client bill markup, We have that pressure as well. But really with the commercial payers, we're in a really good place on price lately.

Speaker 2

That's really helpful. I appreciate it. And then just a quick follow-up on COVID, maybe pricing and volume. You mentioned No expectation for the PHE to continue to be extended in the second half or at least it's not baked in, sorry. How do you think about the pricing piece, both commercial?

Speaker 2

Will they follow And wait for the PHE. And then the volume side, are you expecting it to be endemic? A lot of the diagnostic players have obviously talked about Multiple years of COVID revenues going out, just curious on your take there.

Speaker 1

Thank you. Yes. So what we're assuming in our guidance We gave them some ranges of what we think COVID testing will be.

Speaker 2

And obviously, it's going to start higher in

Speaker 1

the Q1. It's going to go down We are hopeful that this current surge will decline throughout the spring and into the summer. And as you mentioned, we did get the 90 day extension. And then we're not planning in the guidance that, that will be extended, but we just don't know. So Therefore, we're always assuming on the worst case.

Speaker 1

If that were to come down, yes, we do believe there'll be some price changes, if you will, with Some of our partners, but again, what we've implied in the guidance is decline in volumes and So the decline in pricing and also the assumption that we're not going to get a renewal of the emergency order, but again, we don't know that. So, Park, anything

Speaker 3

Yes. Just a reminder, not that I need to remind you all, but the rate that CMS determined is $51 And so while we don't assume post PHE that everything falls immediately there, there's a pretty steep ramp down. And then so for The volume that is in our guidance beyond the PHE in late April, we're assuming a significantly lower reimbursement than we've

Operator

The next question is coming from Ricky Goldswasser, Morgan Stanley. Your line is open. Good morning and best wishes To all of you, Jamie is going to be my 4th Quest CEO I'll

Speaker 6

be working with, so very excited.

Speaker 1

Thank you.

Operator

Dating all the way back to Ken Freeman's days. So I just wanted to go back to sort of what the 2022 baseline is. It seems that this has got really the bulk of the questions we're getting from investors. Sort of How should we think about the 2022 normalized baselines that we can build off for 2023? I know that you kind of said in response to one of the questions that in terms of absolute EPS, you are where you expected to be last year, but if maybe you can give us a range.

Operator

We're getting to somewhere between kind of like 760 to 780 is a normalized baseline for Is it starting point? Just wanted to kind of like see if we're in the ballpark. And then off of that, maybe just Qualitatively, what are the headwinds and tailwinds that we should think about as we think about modeling out to 2023?

Speaker 3

Go ahead, Mark. Yes. So I'm sure you understand, Rick, even if I was willing, I can't really give you an EPS number on the base business. So I think the best thing I could do is point you to pre pandemic revenue and earnings and tell you that If you look at the growth in the base business based on what we're keeping in guidance, the profitability is not dissimilar. So you can kind of directionally place where that business might be.

Speaker 3

And the reason I can't really give it's back to what I talked about earlier. So where do I sign the $50,000,000 of pandemic expense? Arguably, if we didn't have COVID testing, we would still have that Cost and you say, okay, we'll let you go about your base business. And the truth is that we also have the COVID testing in revenue. So we should go against COVID revenue should have grown into the base business.

Speaker 3

And then importantly, when you talk about headwinds and tailwinds, we would expect that cost to go away. It should be temporary Because it is specifically tied to CDC guidelines and other things. We talked about some of the other some things included in there like supply disruptions. I don't know how long that's going to last. I mean, we all know it's not just in our business.

Speaker 3

It's across all aspects of life today. And is it going away tomorrow? Is it going away in 12 months? Not sure. That's certainly something.

Speaker 3

We want to absolutely make sure that we have What we need and so we are paying premium costs right now relative to what we did pre pandemic to make sure our supplies get to our patient service centers, Our laboratories have everything they need, and that's really kind of our insurance, which fortunately we can afford to do right now because we also do have that COVID revenue and COVID margin. So really, I think that's the best color I could give you, which is the base business is in good shape. We exited Q4 organically back to where we were in 2019. We've done significant M and A over the last couple of years. We've built the PLS business.

Speaker 3

So beyond the organic clinical business, we're 100 of 1,000,000 of dollars higher. While the profitability and all that may not be precisely the same, directionally, people would feel confident that the profitability has moved

Speaker 1

quite dramatically grow. So to remind you, our base business in 'twenty one was larger than what we had in 2019, so it has grown. So this recovered and we're going to grow on top of that and that's implied in our guidance for base business. And we intentionally broke out Base business from COVID assumptions for 2022, so you can kind of dissect, if you will, what's going on with that business. And I keep on reminding you that these investments that we're making are part of our base business and we've started those investments in 2021.

Speaker 1

They continued in 'twenty two, and therefore, that's going to help us accelerate growth. And as Mark said, We feel very confident about the possibility of our base business. And by the way, what I said in my introductory remarks We do not believe COVID is going to entirely go away. It's going to be part of a permanent part of our portfolio. So you should assume There's some COVID testing in 'twenty three as well.

Speaker 1

We will continue to play a role with our PCR testing, Yes, we believe there's a growing role for serology, particularly related to our ability to be able to provide some insight around the protection that individuals have In their bodies and we're going to have more on that to come, but you put it together and we believe the prospects For 'twenty three and beyond are quite bright. So thank you.

Speaker 4

Ricky, I would add one other thing, and that's Despite Mark saying that the base business has recovered in 2019 levels, there's still evidence to suggest in terms of a headwind that there's still pent up demand for routine clinical care. If Look at the studies around HIV infection rates, hepatitis C infection rates, the data still indicates that there was a lack of

Operator

And the next question is coming from Brian Tanquilut of Jefferies. Your line is open.

Speaker 7

Hey, good morning guys and congratulations all around. I guess I'll follow-up to that And last answer that you gave, so as we think about COVID becoming more endemic rather than what it is today, is it probably more correct to think of this Opportunity or this part of your business is something like say the flu test where some of it's or most of it's point of care and then A big a small chunk of it is sent over to you guys. And then how should we be thinking about the economics if that was the case?

Speaker 1

Yes. Well, let me start and then Pavel will round it out, I'm sure. So this hasn't gone away anytime soon. I think All of us believe that we're going to have COVID in 2023 and we're going to provide testing around that. And as you know, You're living with it every day like the rest of us.

Speaker 1

When somebody has some symptoms, sir, you're ruling out COVID. And in many cases, that is a PCR test. And that will continue. And so therefore, you don't think about it just being flow, but it's any type of respiratory illness and it could be a common cold or another So there will be continuation of that going forward. And also, we keep on highlighting the value of serology.

Speaker 1

We think there is It will be increased role for us to provide insight about how much protection people have from vaccines or from natural immunity. And as we know that's changing over time and people want to have that insight to manage the risk and work with their physician on that. So we think there There's going to be increased value in that. So we do believe in 'twenty three, this is going to be a permanent part of our portfolio. It's hard right now to scale that, and we'll learn more as we get into 'twenty two.

Speaker 1

But when we think about it, we actually There's an additional portion of our product line that we didn't have before the pandemic. So we actually find it as helpful to achieve the value we think we have. And then As Jim said, base business continues to be in really strong shape. We crossed the growth of 'nineteen sooner in 'twenty 1, we're entering 'twenty two with great momentum. Our growth prospects there continue to be ones that we So that should continue to be a good opportunity for us.

Speaker 1

So we're feeling it fits together well and COVID is going to probably provide more fuel for us to make these investments in our base business that help us in 'twenty three. So yes, we're focused on

Speaker 3

What the costs are,

Speaker 1

but we only make these investments if in fact we expect to get the returns. And you'll see those returns both in 'twenty two, but also in 'twenty three and beyond. So So, Arvind, do you have any thoughts to that?

Speaker 3

Yes. Thanks, guys. This is Brian. This is a great question, and we can't predict with any uncertainty what's going to happen. I think the 2 unknowns are how comfortable will physicians be with Taking the specimen sample themselves in the office going forward and maybe they'll be very comfortable like they're with the flu where maybe they'll be like, no, I'd rather not handle that.

Speaker 3

I'd rather not do that point of care test and all the risks that come with that. I'd rather just send it to a lab. But then the other one, really importantly, is the economics. So the payers are going to have a lot of influence on whether this is done. Now, yes, Point of care testing, arguably, some people do it for faster turnaround times, but a lot of it is done because they make money off of it.

Speaker 3

So depending on what the payers decide around point of care reimbursement, that will have a large influence on how much of this work comes to us and how much Ladies and gentlemen, let

Speaker 1

me just add. I'm going to ask Jim to comment on this is if you look at our volumes, they're impressive. We've had a challenge this year because of the infection rate and therefore our ability not to be able to We'll be able to deliver on cooling, which is more capacity and lower cost, but I will come back to the infectious rate rates drop. But as we go forward with this and we start to see this becoming more of an epidemic or less of a pandemic, then there's a lot of players in this marketplace And Jim and his team are entirely focused on what do we have for share today and what we could do going forward to gain some share going forward. So When you think about the opportunity among COVID, if you look at that market, you think about Quest Diagnostics, you think about the dynamics of the short run, Where there's been some opportunistic players, we're not opportunistic.

Speaker 1

This is going to be part of our permanent part of our portfolio. And therefore, we also are Pushing hard and making sure that we get what we believe we should have for share in the short term, but also in the long term, we think there might be an opportunity as well to pick up some share. Jake, like that? Yes.

Speaker 4

What we did find during this last purge is we had a series of 10 to 12 partners that we referred work out to when we couldn't handle the Especially during peak, thanks during the work. And at least 50% of those partners had gotten out of the business and decided they just didn't want to re ramp their So while there may be the physical capacity out there, some of that physical capacity, especially on the TCR side, have Return to the clinical kinds of work that those firms were doing, other molecular work. So that is, I think, advantages us

Operator

And the next question is coming from Pito Chickering of Deutsche Bank. Your line is open.

Speaker 3

Hey, good morning guys. Thanks for

Speaker 2

taking my questions. Steve and Mark, it's been a pleasure With

Speaker 8

you over the years and congrats to you, Jim, on this promotion.

Speaker 1

Thank you.

Speaker 4

A lot of questions, sir, around the space So

Speaker 2

let me ask this

Speaker 8

a different way. I believe you have generally blessed sort of an $8.50 EPS range for 2023 with sort of limited COVID earnings. Can Can you talk about EBIT margins in 2023 versus the 17% range seen in 2019 without COVID? I sort of believe sort of within that guidance range, you're implying potentially flat margins with Invigorate offsetting the inflationary pressures. Is that just the right takeaway that we should be leading

Speaker 1

Yes. So

Speaker 3

we intentionally don't really target or comment on margins because We believe value creation can come at different levels of margin. And we've talked about specifically our PLS, where it's great growth, great return on invested Capital and those are the 2 biggest correlators to shareholder value creation, but they come at a lower margin. So we don't worry about margin per se, So but I understand others do. And so to answer your question, there's a pretty broad range, obviously, 1 year less Over multiple years, when you put a CAGR with a couple of 100 basis points differential on the top line and bottom line, so there's a lot of different combination. So what I would say is your EPS number that you mentioned is not unreasonable and you can figure out the revenue based on what We said at Investor Day and then what we're guiding to this year in terms of the base business.

Speaker 3

And yes, at this point, we're not counting on COVID to be significantly larger Maybe a flu business or something like that, but certainly we don't know. And there's a chance that it could be larger than that and that will be determined over over the next 12 months or so. So that's about the strongest color I can give you right now is back to what we said. We feel really good About our base business going forward, we're going to get back to that growth level. And I want to remind everybody that when we grow organically, The drop down is much higher than that 17% or the 19.5% that we delivered in Q4 And so on, it drops down at a level 50% or more depending if it's an existing customer where we're expanding the menu It's a new customer where we do have to invest a little maybe in logistics and in IT for the interfaces.

Speaker 3

But growth brings with it margin expansion in addition to Invigorate. That's why we're confident we can grow earnings faster than top line from that period forward.

Speaker 8

Okay. So just to sort of ask the question Just a different way, not on the margin side. That means as you start thinking about 2023 EBIT versus 2019 sort of cleaner To non COVID numbers, we should be modeling sort of a low teens EBIT increase in 23 relative to 2019.

Speaker 3

Yes. I mean, you can do the math. Yes. I mean,

Speaker 1

back to what we said about Our earnings per share, okay, because what we Mark just said, what we're saying is we've always provided our outlook and guidance for our earnings Because we do have a mix of business and we do have some lower margin business that might be

Speaker 2

It's a good value creating opportunity

Speaker 1

for us, so we're going to go after it like a PLS business. So I think the best guidance when

Speaker 3

we look

Speaker 1

at EPS, would it be expansion of EPS Over time, rebasing it, if you will, for these changes that we've seen for the last 2 years. And Mark As reiterated our belief that our base business will fuel good opportunities for us to continue to deliver against that. By the way, as we continue to gain share, the variable gross margin is quite good. And as I said, we also believe there's going to be some COVID in 'twenty And it's hard to size it right now, but it's not going to go away, I assume.

Speaker 3

Yes. And then the other thing is, I mean, you know, I'm not in any position to provide guidance in 2023. So that's why we're focusing everyone on the base business. However, when you think about what could happen, COVID could be larger. We don't know.

Speaker 3

We're not counting at this point. And then we did mention we've got we expect to have $1,000,000,000 Cash this year, so between opportunity to do quite a bit of M and A and we'll see or do share repurchases, Those also aren't specifically contemplated. So that's why like locking down to a specific number is really difficult and probably not productive. So I would point you to what we said at Investor Day and kind of assuming that that's reasonable if these things don't play out significantly differently from our current

Operator

And the next question is coming from Matt Larew of William Blair. Your line is

Speaker 4

Hi, good morning. The 3% rig rate target has been aided in recent years as you've consolidated The volume on to your 2 new labs and consolidated into 1 immunoasset platform. I'm curious what are the keys going forward here Keep driving those gains. And then maybe the second piece on costs would be separate from some of the extra costs you've called out today related to COVID. Clearly, you've built up some infrastructure, both personnel and instrumentation for COVID.

Speaker 4

I'm just curious how much of that do you think goes away as COVID moves to an endemic and perhaps you need less extra capacity?

Speaker 2

Great. Thanks for the question. I'm sorry. I'm going to turn

Speaker 1

it to Jim to We've been working on operational excellence for over a decade, and It has become institutionalized in our company culture. It embeds in how we do things. And it It is a platform for how we're going to continue to grow. So your comment is around cost, and we don't talk about cost, we talk about productivity, Because there's a lot of aspects of what we do around Invigorate and some actually helps the top line, some actually helps getting More output with less labor and yes, some helps us become more efficient by less input from So we look at it in aggregate, and we continue to be bullish on our We believe that it is the ingredients for us to continue to deliver brand value. That is when we do this, we improve our quality, our service gets better.

Speaker 1

By the way, we've become more and more productive To be able to make the investments to fuel the growth, it all fits together. And then when we talk about this and we've talked about it at Investor Day, We see an enormous opportunity for us to continue to digitize and innovate in operational excellence. And so some of you have had the opportunity to tour through our latest Lab of the Future, and that's our new facilities facility in Clifton, New Jersey. And sometime if you come in, you'll see what we've done. We've taken Some of the learning out of our Marlborough facility up in the Boston area, we brought that down to Clifton and we built on it.

Speaker 1

And that also uses There's some consolidation with some of our new platforms, but Jim and team are now taking that and thinking about, okay, what's next, Okay. So we think about innovation in our space. Yes, there's innovation in terms of testing and as far as diagnostic information and services. But we equally think there's a lot of innovation and opportunity for us to move forward. So we continue to invest.

Speaker 1

And when we talk about investments, we talk about the use of cash. As you noticed, we've been putting about $400,000,000 a year into our capital budget, which is investments in, frankly, a lot of our innovation That will allow us to fuel this productivity gain. So, Jim, add to that, please.

Speaker 4

Yes. I think Steve touched on the 3 key themes, automation, Use of artificial intelligence and the continued digitization of so many of the main processes. So Marlborough and Clifton Our terrific examples

Speaker 2

of that. But as you

Speaker 4

know, they're all brand new laboratories. We've got 20 plus other laboratories in our network. And there's opportunities in every one of those laboratories without building new greenfield sites to continue that automation journey. In particular, in our specimen processing area and in what we call our fluid handling system, handling of blood and urine. On the artificial intelligence side, you're going to see us move in pathology, psychology, microbiology.

Speaker 4

We've got some Great examples in each of those departments today. We're deploying artificial intelligence systems that help with the readouts And then as Steve mentioned, just to continue digitization. Now beyond the immunoassay platform We consolidated around the Etellica. There are still other opportunities like that in our laboratories. We recently ran a competition in urinalysis, So like the new vendor to Sysmex for that platform and ruling out those new platforms across all 23 plus Laboratories is going to generate a lot of productivity year over year.

Speaker 4

So as long as we have healthy third party vendors that continue to innovate,

Speaker 1

So we're bullish on the prospects of continuing to drive productivity. I Always react to this is a cost cutting goal. And this is not about cost cutting goal. This is about working smarter. This has been a key part of our strategy and it fuels growth.

Speaker 1

And Jim mentioned some of the areas, iFIX and Manager And also digital pathology, which will revolutionize our ability to diagnose and treat and to do that more productively. And that's not this week. Jim is going out to another laboratory to take a look at where we're going to Make our next investment this year. So we're going to continue to invest in this space and we think there's a lot more opportunity in front of us. So it's exciting.

Speaker 3

Yes. I just want to add that, remember, this is not just in the lab. So there's a lot of productivity that's driven outside. And specifically, I'll give you an example of logistics. So we really have an incredible ability to be efficient with logistics And it's continuing to improve.

Speaker 3

So we have some cases where we have empty pickups, where we have some customers that don't give us specimens all the time. It's periodic. Now we have the ability and technology to not do that empty pickup. So that's an efficiency. We also get requests for what we call stack pickups, Where if somebody needs something quick turnaround, etcetera, and so the ability to most efficiently get one of our vehicles there Has been enhanced for our technology.

Speaker 3

The other one is in our patient draw centers. We really can increasingly move the administrative burdens off the phlebotomist, allow them to do phlebotomy by getting people to go to our website, put in their insurance information, everything. And so if our phlebotomist can spend a couple Less minutes with each patient doing administrative work, doing phlebotomy, we drive up the productivity in our draw center. So probably just a couple of examples of And the next Operator,

Speaker 2

next question please.

Operator

And the next question is coming from Tycho Peterson of JPMorgan. Your line is open.

Speaker 4

Hi, guys. This is Kate Santiago. Congratulations to all.

Speaker 3

Good morning.

Speaker 4

Can you maybe talk towards The percentage of COVID testing that was consumer initiated in 4Q, whether through My QuestDirect or other non traditional avenues, and how do you see that trending in 2022? You mentioned that there are different costs associated with non traditional avenues of testing. So maybe can you quantify the difference in margin profiles between Traditional and non traditional?

Speaker 3

Yes. So what I can share is, I'll go back to what we said in the prepared remarks. Our consumer business was about $70,000,000 last year between the base and COVID. We did $2,700,000,000 of COVID revenue. The consumer initiated COVID testing was very small at this point.

Speaker 3

And it's Strengthening and again, as I said, we continue to enhance our website when people go for that order rate and testing and so on. But there's still more to come in terms of enhancing that experience for consumers and driving awareness for people. As you know, we're competing with a lot of people who see these stand up operations in parking lots and so on and so forth, Which draw their attention. So we're working on making sure that they know we can do this, if they initiate themselves as opposed to going to a doctor or hospital for this. And we expect to get stronger and stronger moving forward as we enhance our overall consumer business through these investments we just mentioned.

Speaker 3

In terms of the margin profile, it's really not it's not all that different between the consumer. And consumer can have it in different ways. They can come to our patient trial center and have it done there. We do have home collection kits where they can be sent to their home. So a little different structure, but not materially different in profitability.

Speaker 3

Operator,

Speaker 2

next question.

Operator

And the next question is coming from Derik De Bruin of Bank of America. Your line is open.

Speaker 7

Hey, great. Thank you for squeezing me in. I'll just make this quick.

Speaker 3

Can we talk a little

Speaker 7

bit about sort of like the real PAMA outlook? So you would assume $80,000,000 hit again and comes back from 2023. I mean, what are the chances that this actually does get resolved And that the lobbying efforts pay off, I mean, is the current administration a little bit more and Congress a little

Speaker 5

bit more willing to sort

Speaker 7

of listen to this and sort of do it. I mean, there's a chance that it gets That there's actually some reversion just given what happened? Thanks.

Speaker 3

Yes. Before Steve addresses that, I just want to remind everybody that, That $80,000,000 was built into our long term outlook. We just assumed it would happen this year. So again, although it would be a year on year hit to us Incrementally in comparison in the long term outlook, it was assumed that we would get that in 2022. So it's already built

Speaker 1

Thanks for the question. And as we said, we were thankful that it was delayed Again, the 1 year offset, as Mark indicated, to 'twenty three. We think that's good for us because it will It gave us some time this year to keep on working on a permanent fix with Congress. And we have been Very active working with Congress last year. And as you know, Congress was very busy with the infrastructure bill And other business and therefore we are fortunate enough to get in the postponement of PAMA, But it allows us time this year to keep on working on this to get a permanent fix.

Speaker 1

And we're encouraged by the level of support. Good news about the pandemic is the broad front. It's not really the importance of testing, the importance of having a strong industry. We're getting strong bipartisan support, Both from the House and from the Senate, we made a proposal of what we think should be changed to We've improved the data collection process, the sampling of market based data. We continue to support the notion Yes, the philosophy of PAMA, that is we should be paid a commercial rate, but we believe that CMS got it wrong.

Speaker 1

And in parallel with the work Congress, we continue to have our losses against CMS as a trade association. The judge has heard the arguments. So we'll see if we get some indication of a decision on that. Hard to call that, but that's still in the works as well. So our work right This year is to push for permanent fix of Tama and we're better positioned now because of the pandemic than before the pandemic Because of the strength of this industry and full awareness and appreciation of what we've done and the need for a strong laboratory industry going forward.

Speaker 2

Operator, last question please.

Operator

And our last question is coming from Eric Coldwell of Baird. Your line is open.

Speaker 9

Hey, good morning. Thank you. Masterful job clearing up some of the Overriding concerns on core markets today. So thank you. When you went through your list Of things that don't repeat or go down significantly as COVID incremental cost over time staffing challenges, etcetera, go away.

Speaker 9

You mentioned bonuses, and I think it was the one number in the list of callouts that I didn't hear you quantify. I'm curious if we could get the incremental bonus due to the COVID upside profitability in 2021, How you think that bonus will normalize, whether it's 'twenty two or 'twenty three? And then my follow-up, I'll just throw it in here. I was hoping we You get average weighted reimbursement in the 4th quarter. I know you said it would be relatively similar through the PHE, but

Speaker 1

Sure. So let me start with that

Speaker 3

one because I think there were some questions around maybe whether turnaround time suffered and we didn't get the $25 A fee that comes with some of the government payers, couple of the commercial payers. And actually, not really. AWR in Q4 It was absolutely similar to what it has been in the previous quarters and our turnaround time performance was outstanding. We did in January when the search came, We did have a little bit of a hit to our turnaround time, but obviously that's all contemplated with guidance that we just It wasn't a huge amount. When you back to the early question Final bonuses, when you look at the bonuses, most of it is really our 50,000 employees.

Speaker 3

So people think about bonuses must be senior management, but most of the cost is really we pay 3% bonus to Even our wage workers and then obviously we have other staff members that have higher targets. And every year we budget for what we call 1x, Whatever that target is. So for most of the people, it'd be 3%. And based on performance and we feel we've had Reasonably stretched performance is when you look historically, we have not paid significantly above 1x and we've had a number of years where it's been low 1x. But the COVID unpredictability and the surge in revenues enabled us to pay our employees significant bonuses In 2020 and again in 2021.

Speaker 3

And so if you look at we're not going to be too specific, we've shared a number in the past, the $3,000,000,000 wage That's gone up in the last couple of years as we've grown the company. So you can kind of, as a floor, say 3%, obviously, a little higher because there's people who want a higher bonus. That's about 1x. And then we're paying a bonus that's substantially higher than that in 2021 like we did in 2020. The other thing is we did pay out a $500 payment to majority of our employees to compensate them for COVID expenses.

Speaker 3

In 2020, we adjusted it out of our adjusted earnings because we were seeing COVID as temporal and extraordinary. But once you get to your 2nd time doing it, even though I think still think it's extraordinary, we just decided not to adjust it out. So we did have over $20,000,000 Payments late in the year, dollars 500 to our wage employees and some of our lower compensated professionals as well. So those are a couple of things that would go away and not be repeated unless somehow we had another surprising COVID year in 2020 2 like we had in 2021.

Speaker 9

Great response. I'm not sure I'm smart enough to do 1x 3% plus and then significant increase. Is there any chance you could frame that as incremental $50,000,000 incremental $100,000,000 Directionally, can we get a little closer?

Speaker 3

Yes. Let's say it's less than 100, but substantially more than 50.

Speaker 7

Okay. That's about what I thought. Okay.

Speaker 9

Thank you very much, guys. Congrats to everyone.

Speaker 1

Hey, guys. Thank you. We've done very good. Well, thanks. It's been a good session with you all.

Speaker 1

Thanks for all the great questions. And again, thanks for joining the call today, and we appreciate your support. You guys have a great day.

Operator

Thank you for participating in the Quest Diagnostics 4th Quarter and Full Year 2021 Conference Call. A transcript of our prepared remarks on this call will be posted later today on the Quest Diagnostics website at www. Questdiagnostics.com. A replay of the call may be accessed online at www.questdiagnostics dotcom/investororbyphone@one-eight hundred-eight thirty nine 9,317 for domestic callers or 203-369 3,605 for international callers. Telephone replays will be available for approximately 10:30 am Eastern Time on February 3 until midnight Eastern Time, February 17, 2022.

Operator

Goodbye.

Powered by Quartr