Quest Diagnostics Incorporated

Welcome to the Quest Diagnostics third quarter 2021 conference call. At the request of the company, this call is being recorded. The entire contents of the call, including the presentation and question and answer session that will follow, are the copyrighted property of Quest Diagnostics with all rights reserved. Any registration, retransmission, or rebroadcast of this call in any form without the written consent of Quest Diagnostics is strictly prohibited. Now I would like to introduce Sean Bevick, Vice President of Investor Relations for Quest Diagnostics. Go ahead, please.

Thank you, and good morning. I'm joined by Steve Roszkowski, our Chairman, CEO, and President, and Mark Guinan, our Chief Financial Officer. During this call, we may make forward-looking statements, and we'll 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-19 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-K and subsequently filed quarterly reports on Form 10-Q and current reports on Form 8-K. The company continues to believe that the impact of the COVID-19 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-19 molecular tests, the pandemic's impact on the US healthcare system and the US 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. 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 of our business excluding COVID-19 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 Ruskowski.

Thanks, Sean, and thanks, everyone, for joining us today. Well, we had a strong third quarter as COVID-19 molecular volumes increased throughout the summer. while our base business continued to deliver solid volume growth versus the prior year and 2019. In late summer, we experienced some softness in the base business across the country, but saw a rebound in September. Importantly, our base business continued to improve sequentially in the third quarter, which speaks to the ongoing recovery. We have raised our outlook for the remainder of the year based on higher than anticipated COVID-19 volumes, as well as continued progress we expect to see in our base business, despite rising labor costs and inflationary pressures. The momentum of our base business positions us to deliver the 2022 outlook we shared at our March Investor Day. So this morning, I'll discuss our performance for the third quarter of 2021 and update you on our base business. And then Mark will provide more detail on our financial results and talk about our updated outlook and underlying assumptions. But before turning to our results in the third quarter, I'd like to update you on our progress we've made in our Quest for Health Equity initiative. a more than $100 million initiative aimed at reducing healthcare disparities in underserved neighborhoods. Since we've established it just over a year ago, we have launched 18 programs across the United States and Puerto Rico, ranging from supporting COVID-19 testing and vaccination events to educating young students on healthy nutritional choices to providing funding support for a long-haul COVID-19 program clinic in Puerto Rico. Recently, we announced a collaboration with the American Heart Association that will expand research and mentorship opportunities for black and Hispanic scholars and drive hypertension management and COVID-19 relief. We're off to a good start and I look forward to updating you on our continued progress as quest for health equity enters its second year. Now turning to our results for the third quarter. Total revenue of $2.77 billion, down 40 basis points versus the prior year. Earnings per share were $4.02 on a reported basis, down approximately 3% versus the prior year, and $3.96 on an adjusted basis, down 8% versus the prior year. The revenue and earnings declines in the third quarter reflect lower COVID-19 testing in 2021 versus the prior year, partially offset by continued recovery in our base business. Cash provided by operations increased by nearly 20% year to date through September to approximately $1.75 billion. Now, starting with COVID-19 testing, our COVID-19 molecular volumes increased in the third quarter versus the second quarter due to the spread of the Delta variant over the course of the summer. Testing began to increase meaningfully in mid-July and peaked in early mid-September. Our observed positivity rate peaked in mid-August and has steadily been declining across much of the country in recent weeks. We performed an average of 83,000 COVID-19 molecular tests a day in the third quarter and maintained strong average turnaround times of approximately one day for most specimens throughout the surge. As clinical COVID-19 volumes declined, we are expanding our non-clinical COVID-19 testing to support the return to school, office, travel, and entertainment. We're making testing easy, fast, and affordable for school systems and other group settings across the country. We are currently performing K through 12 school testing in approximately 20 states with five additional states ready to come online. We're testing passengers on Cardinal Cruise Lines and Quest exclusively provided testing at the Boston Marathon earlier this month. In the base business, we continue to make progress on our two-point strategy to accelerate growth and drive operational excellence. Now here are some highlights from the third quarter. Our M&A pipeline remains strong. In the third quarter, we completed a small tuck-in acquisition of an independent lab in Florida. We continue to build on our exceptional health plan access of approximately 90% of all commercially insured lives in the United States. At our investor day, we discussed how we have fundamentally changed our relationship with health plans, and we continue to see the promise of value-based relationships come to life. So here's a couple examples. We are working with national health plans to help their self-insured employers to employer customers improve quality, outcomes and lower the cost of care for both the employers and their employees. Also, effective October 1st, we gained access to 1 million Bandage Medicaid members in Florida as their coverage transitions to Centene's Sunshine Health Plan. We're getting good feedback from the provider community and are growing tested volumes through this expanded access opportunity. Our hospital health system revenue continues to track well above 2019 levels, driven largely by the strength of our professional laboratory services contracts. As we highlighted previously, 2021 performance is benefiting from two of our largest PLS contracts to date, Hackensack Meridian Health and Memorian Hurman. Altogether, our PLS business is expected to exceed $500 million in annual revenue this year. Trends in our hospital reference business also remain steady, with third quarter base testing volumes above 2019 levels. We also generated record consumer-initiated testing revenue through Quest Direct in the third quarter. While COVID testing has been strong contributor to growth, we expect our base direct-to-consumer testing revenue to more than double this year. Recently, we soft-launched a comprehensive health profile on QuestDirect, similar to our Blueprint for Wellness offering for employers. This expanded health panel offers a deep dive into consumers' health profile with a battery of tests and biometric measurements to provide a personalized health quotient score that can be used to track health progress over time. And then finally, our MyQuest app and patient portal now has almost 20 million users. In advanced diagnostics, we continue to ramp investments and see strong momentum and key growth drivers. We're seeing strong growth in non-invasive prenatal testing, significantly above 2019 levels and saw solid contribution in our specialty genetics portfolio from Blueprint Genetics. We continue to work closely with the CDC to sequence positive COVID specimens in an ongoing effort to track emerging variants, expanding of the work that we performed in the quarter. And then finally, we plan to introduce a test service based on a new FDA-approved companion diagnostic for Magellan for a therapy from Eli Lilly for a certain type of high-risk early breast cancer. Quest will be the first laboratory to offer it to physicians nationally at the end of the month. Turning to our second strategy, driving operational excellence, we made progress or remain on track to deliver at our targeted 3% annual efficiencies across the business. Last week we announced that we completed the integration and consolidation of our Northeast Regional Operations into our new 250,000 square foot next generation lab in Clifton, New Jersey. This state-of-the-art, highly automated facility services more than 40 million people across seven states. In patient services, we are seeing all-time high numbers of patients making appointments to visit our patient service centers. Now more than 50% of patient service center visits are now by appointment versus walk-ins. And this enables patients to be very satisfied and also improves our ability to drive productivity for our phlebotomists. Similar to our immunoassay platform consolidation, We recently procured a highly automated urinalysis platform that is expected to generate millions in annual savings once these new systems are standardized across our laboratory network. And then finally, I'd like to recognize and thank all of our nearly 50,000 employees who have worked tirelessly to provide critical COVID-19 testing to our country throughout the pandemic and continue to serve the healthcare needs of patients who depend on Quest every day. As a demonstration of our gratitude, we're assisting our employees with a one-time payment of up to $500 designed to reimburse costs that they incurred during the pandemic. Additionally, another year of pandemic pressures and travel restrictions have made it very difficult for many employees to take their hard-earned time off. Therefore, we're providing a payout of most unused paid time off for our hourly employees to ensure they don't forfeit their earned unused time at year end. Now I'd like to turn it over to Mark to provide more details on the third quarter financial performance and updated outlook for the remainder of 2021. Mark.

Thanks, Steve. In the third quarter, Consolidated revenues were 2.77 billion, down 0.4% versus the prior year. Revenues for diagnostic information services were essentially flat compared to the prior year, which is reflected by lower revenue from COVID-19 testing services versus the third quarter of last year, largely offset by the strong ongoing recovery in our base testing revenue. Compared to 2019, our base DIS revenue grew approximately 6 percent in the third quarter, and it was up nearly 2 percent, excluding acquisitions. Volume, measured by the number of requisitions, increased 5.3 percent versus the prior year, with acquisitions contributing approximately 2 percent. Compared to our third quarter 2019 baseline, total base testing volumes increased 9 percent. Excluding acquisitions, total base testing volumes grew approximately 4% and benefited from new PLS contracts that have ramped over the last year. We saw a rebound in our base business volumes in September, following a modest softening in August that we believe was at least partially caused by the rise of the Delta variant and the timing of summer vacations. Importantly, Our base business revenue and volume grew sequentially in the third quarter. This helps illustrate the ongoing recovery as historically total revenue and volume typically stepped down in Q3 versus Q2 due to summer seasonality. As most of you know, COVID-19 testing volumes grew in the third quarter versus Q2, which was in line with broader COVID-19 testing trends across the country. We resulted approximately 7.6 million molecular tests and nearly 700,000 serology tests in the third quarter. So far in October, average COVID-19 molecular volumes have declined approximately 10% from where we exited Q3, but are still above the levels we expected prior to the surge of the Delta variant, while the base business continues to improve since September. Revenue per acquisition declined 5.4 percent versus the prior year, driven primarily by lower COVID-19 molecular volume, and to a lesser extent, recent PLS wins. Unit price headwinds remained modest and in line with our expectations. Supported operating income in the third quarter was 652 million, or 23.5 percent of revenues, compared to 718 million, or 25.8 percent of revenues last year. On an adjusted basis, operating income in Q3 was $694 million or 25% of revenues compared to $831 million or 29.8% of revenues last year. The year-over-year decline in operating margin was driven by lower COVID-19 testing revenue partially offset by the recovery in our base business. Reported EPS was $4.02 in the quarter compared to $4.14 a year ago. Adjusted EPS was $3.96 compared to $4.31 last year. Cash provided by operations was 1.75 billion through September year to date versus 1.46 billion in the same period last year. Turning to guidance, we have raised our full year 2021 outlook as follows. Revenue is expected to be between 10.45 and 10.6 billion an increase of approximately 11 to 12 percent versus the prior year. Reported EPS expected to be in a range of $4.69 and $15.09, and adjusted EPS to be in a range of $13.50 and $13.90. Cash provided by operations is expected to be approximately $2.2 billion, and capital expenditures are expected to be approximately $400 million. Before concluding, I'll touch on some assumptions embedded in our updated outlook. We expect COVID-19 molecular volumes to continue to decline from Q3 levels throughout the remainder of the year. At the low end of our outlook, we assume approximately 50,000 molecular tests per day in Q4 and serology volumes to hold relatively steady at approximately 5,000 tests per day. As you may know, late last week the public health emergency was again extended another 90 days through late January. We expect reimbursement for clinical COVID-19 molecular testing to hold relatively steady through the remainder of the year. However, we continue to assume average reimbursement to trend lower in Q4 as our mix of COVID-19 molecular volumes potentially shift from clinical diagnostic testing to more return-to-life surveillance testing. Finally, we continue to assume low single-digit revenue growth in our base business in Q4 versus 2019. Getting to the midpoint or higher end of our outlook ranges assumes stronger COVID-19 molecular testing volumes and or stronger growth in our base business. I will now turn it back to Steve.

Thanks, Mark. Well, to summarize, we had a strong third quarter. We have raised our outlook for the remainder of the year based on higher than anticipated COVID-19 volumes, as well as our continued progress we expect to see in our base business. And finally, the momentum of our base business positions us to deliver the 2022 outlook we shared at our March Investor Day. So now we'd be happy to take any of 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 in the queue. To be placed in the queue, please press star one from your phone. To withdraw, please press star two. Again, to ask a question, please press star one. Our first question comes from Kevin Calendo, UBS. Your line is now open.

Good morning, Kevin. Thank you. Good morning, everybody. Thanks for all the details and the guidance for 21. I really want to talk about into 2022 and sort of You reiterated your guidance from March, which I believe was at the higher end of the $740 to $8 range. And I'm just wondering at this point, what are the assumptions baked in for COVID testing into next year? Do you anticipate that it's going to continue? Do you anticipate there's going to be a meaningful decline? Any color around how you think COVID testing will proceed into next year? Mark, why don't you start and then I'll follow up.

Sure. Kevin, just to be clear up front, we haven't provided guidance yet for 2022. We provided an outlook and we did, you know, confirm that today and, you know, things have largely played out where we, you know, saw them for 2022 back in March. The base, you know, volumes have recovered. We thought we were ahead, you know, in June when it was close to being flat to 2019 and potentially saw some upside. Obviously with Delta, it took a little bit of a step back, but we still expect to enter 2022 with a base volume utilization level similar to pre-pandemic. So that's good. The second thing is we did assume that COVID will continue at a much lower level than we saw in 20 and 21, but still to be significant and certainly much larger than our current flu testing. And we've referenced you know, in the past that at some point COVID testing will still be here, but maybe more on the level of flu testing. At this point, you know, we felt comfortable with what we had assumed back in March around, you know, continued need for COVID testing for PCR. And, you know, we envision a stronger role for serology going into 2022 and think that's a potential. So we feel good about that. And then we did reference inflationary pressures. We certainly have longer term contracts on a lot of our purchases. But, you know, things like fuel certainly were subject to inflation in the near term and going into 2022. And then most notably, as many people have talked, there's certainly inflation in wages and benefits and especially in wages. And as we look at that, we gave a range and we still feel very comfortable that when you put all those pieces together, that the $8.5 billion baseline for revenue and the $748 is certainly still deliverable, maybe in a slightly different way, but still very comfortable that that's likely where we're going to land when we do finally provide guidance for 2022.

This is a quick follow-up. Can you in any way quantify the higher inflationary pressures, you know, supply chain, any of that? Is there any way to put numbers around that?

Yeah, so I'm sure you're most interested in 2022. So, you know, we'll see what we can provide when we come out with guidance in, you know, early next year to provide clarity. Certainly at this point, while we're experiencing some of that, given the performance of the business, you know, it hasn't, prevented us from significantly over delivering our previous guidance. So, you know, we'll take that into consideration, Kevin. We appreciate the question. We'll see what we can do when we talk more about next year.

Thank you.

Operator, next question.

Yes, our next question comes from Brian Tranquillit. Jeffrey, your line is now open.

Hey, good morning, guys. Congrats on the quarter. So just to follow up, just as I think about costs and all the moving pieces, obviously the Clifton Lab just opened. So how are we thinking about the flow through of the benefits from that and how it would potentially offset some of the inflationary pressures that you're seeing on the cost side?

Yeah, so thanks, Brian, for the question. So as you know and what I reiterated in our prepared remarks, we've been marching with our two-point strategy for some time. And the second strategy is to drive operational excellence. And we have maintained and just reiterated that we do believe we can continue to deliver 3% efficiency or productivity gains going forward. And you know, that 3% comes from a variety of programs across Quest Diagnostics, and one of which is what we did in Clifton, and I actually also reiterated a couple other programs on the prepared remarks are working with our suppliers with new integrated platforms, what we've done around immunoassay, what we're doing around our immunourine analysis is are two good examples of more work we can get the benefits from. And there's others. So there's a lot more efficiencies and productivity we can continue to get. And as I said before, this isn't cost-cutting. This is improvement. And so every time we make an improvement in our operation, we expect our quality improves and our service performance improves, and it has. So we continue to make progress. You see it in our numbers this year, and you'll continue to see it in our 22 numbers as well, and that's always been used to offset headwinds, and we do have headwinds. We've had headwinds from wage bill increases in the past, albeit maybe it could be a little bit higher going forward given what we see in the labor market. And then second is we have seen headwinds from price consequences as well, which we've been able to offset, and we'll have some of those in 22 as we've outlined before. And then also any additional inflationary pressures, we will be able to offset most of that, if not all of that, to be able to hit the outlook. And we just reiterated our confidence, our ability to do that. So hopefully that's helpful.

Yeah, I just wanted to add a reference that The Clifton Lab and its increased productivity efficiency is really part of our invigorate work that we talk about 3% productivity every year. It's not over and above or separate. What I will comment is that what we've done there, like we did up in Massachusetts, we have added more automation. Obviously, as you add automation, you insulate yourself a little bit from labor inflation. So, you know, certainly we have that going as we operate that lab, but it is, you know, built in and part of what my assumptions I had putting together that outlook for 2022 that we would achieve that ongoing 3% efficiency, not something special.

Awesome. Thank you.

Our next question comes from Ricky Goldwasser, Morgan Stanley. Your line is now open.

Good morning, Ricky.

Hi, good morning. So one thought question on the cost. I mean, clearly we're all interested in the magnitude of the potential impact of labor and inflation. So maybe you can help us by reminding us what percent of your cost structure today is labor and how should we think about it to break down between cost of goods and SG&E?

Mark? Yeah, so, Ricky, we've shared in the past, pre-pandemic, you know, that about $3 billion of our cost was related to salary and benefits. Obviously, with COVID moving around, you know, it's hard to cite the precise number with including the COVID testing. So I think that should give you a pretty good idea of what proportion of our costs, you know, a six plus billion cost base we had prior to the pandemic is made up of labor. It's somewhere in the 50% range. And then, as we said, as we continue to automate, that certainly offsets some of that. But also, we are seeing an increased amount of demand for phlebotomy. So, you know, that is going the other direction. We obviously consider it a net benefit because You know, giving access, you know, helps us grow our business. It certainly makes us more attractive, especially in a world of consumerism. And it's a good thing, but it certainly will, you know, drive costs, the labor costs as a percentage of all costs in the other direction.

And then just to follow up on the direct-to-consumer point, Steve, you mentioned the soft launch of a comprehensive health panel that's directed in consumer. Can you just share with us what has been the response to date and maybe some data points about pricing?

Sure. As I said in my introductory remarks, we have a product that we sold for years to employers called Blueprint for Wellness. We offer it to our Quest employees as well. It's a fabulous dipstick reading on an annual basis for people to get an indication of what's going on with their health and If you do it year upon year, you've got a good, nice trending capability that I found beneficial since I've been here at Quest, and I know many of our employees have as well, and many of our customers have. So we're now using that as the product to introduce that through our direct-to-consumer channel through Quest Direct. We're very optimistic about the possibility that this has. We believe that it has a unique capability that few others provide. And we also believe it's hitting the market at the right time where many people have not gone to their primary health care providers. And we believe that there's a lot of opportunities now for people to directly engage with us as a consumer to buy this directly from us. As far as pricing, Mark, can you share what we're thinking about in terms of pricing, even though this is a soft launch?

Yeah, so it's going to be a couple hundred dollars. And when you look at the individual elements that are contained in here, it's a reasonable price for everything that you get. And I can also tell you that we've gotten a lot of feedback that this score that we give people, which really simplifies how to interpret the results, is a huge consumer positive. So a lot of reason to believe that this could get some additional momentum for our consumer business. And we think the pricing is reasonable, and we feel that the product we're delivering is something that consumers really find interesting and valuable.

And just to follow up on the price, we actually did some market research to understand that the value that this provides to consumers justifies the price that we're pricing it for initially. So we feel good about value delivered and price charged.

Operator, next question.

Our next question comes from Jack Meehan, not friend, riser. Your line is now open.

Good morning, Jack. Good morning, Steve. Good morning, Mark and Sean. I wanted to continue on the inflation topic, but looked at it a different way. If operating costs were to remain elevated, do you think there's an appreciation by payers that the cost of doing business is moving higher? How do you feel about your ability to get price increases? Maybe just talk about recent negotiations.

Yeah, but let me start, and Mark, please add. Yeah, we've been on this march, as I said in my remarks, to continue to demonstrate to our health plan partners that we continue to deliver value. And I believe we're making tremendous progress. One is that we're picking up access in the number of lives. I mentioned 90% of injured lives we're a network with within the United States, and we're happy about the progress of picking some more up this coming year. So that's moving along. Second, as far as pricing is concerned, we continue to march through our contracts as they are up for renewal, and we have said in earlier calls that we're now very fairly polarized. As a matter of fact, we believe we offer a very affordable price offering to the health plans and their memberships with great quality, great service, and and very competitive pricing, so much so that we're part of these preferred lab networks. So we're justified. We are getting some modest price increases, and we do believe going forward that we can continue to pound that drum. And we are using what other people are using across the United States that, in fact, Now that we're entering a new inflationary period, our costs are going up just like yours, and therefore we need to start talking about modest price increases going forward. So, Mark, would you like to add anything to that?

Yeah, so, Jack, I think you appreciate, I'm sure a lot of people do as well, that our health plan contracts typically are three to five years. So it's not as if every health plan contract is up for renegotiation in any window of time. But so we've been socializing, you know, PAMA and how that is changing, you know, the dynamics and, you know, how they can look at the, you know, NLA rates and be confident that they have competitive rate because they know what the, that's the market for the independent labs, which we've said is lower than the market, but the market for the independent labs. So this whole notion of a price below, Robert V Jones, Medicare, which was the historical practice, you know, is going away with Pam up now you add inflation is you suggest and it's absolutely part of the conversation we've been having over the last Robert V Jones, Number of months. And I can tell you that although it's not final. There is one Robert V Jones, National Payer that we've been negotiating and you know it's not final, but it looks like the first price increase, we will have gotten from them and you know, certainly my tenure, and I'm sure more than a decade. So, you know, we've been stabilizing as we shared our commercial negotiations to go from a world of price declines every contract extension to getting it more flat. And, you know, we actually have shared there's a handful of regional plans where we've got increases over the last couple of years, and now we have a national contract that I'm very optimistic we're going to get an increase. And so, you know, how much of it's inflation, how much of it's PAMA, how much of it is our value proposition and seeing that working with us is a benefit for everyone versus treating us as a commoditized provider of a laboratory result. Can't tell you, but we're in a much better place.

And just to remind everyone, our health plan channel business is a significant portion of our revenue every year. But what we've also highlighted, the reason why we do have unit price decreases in our typical assumptions annually is because we have other pressures in our business. We do have direct business to physicians, which we call clients, and our client business is under price pressure over the past several years, and that has contributed to the price pressure. We see, secondly, as we sell the hospitals, and we're doing quite well in the hospital segment, but it is price competitive, and then we have other product lines where we sell our services directly to employers or to insurance companies, and there's price pressure there as well. So when we talk about our unit price changes, it's not all in the commercial health plan area. There's other areas that we have price pressure as well.

Our next question comes from AJ Rice, Credit Suisse. Your line is now open.

Hey, AJ. Hey, thanks. Hi, everybody. Just trying to maybe ask a high level question about how the pandemic is maybe impacting your business for the long term. It seems like in the pandemic we've seen people move away from just traditional physician office visits at some level, virtual care, other alternative sites to get their primary care. Are you seeing, and does that help you or hurt you if people go to these other avenues which may generate testing volume. Do you think you capture a disproportionate share of that? And then the other thing I was gonna ask about the pandemic was related to the, you've said that as you have out performance because of COVID testing, you accelerated some of your programs for cost savings and other efficiencies. Should we think of that as just enhancing the visibility on the 3% cost reduction annual goal or? are there things you're doing that might even present some upside to 22 and beyond?

Yeah, so thanks, AJ, for your question. Let me take the first one. I'll ask Mark to comment on the second part of your question. First of all, telehealth, as we all know, has really increased considerably during the pandemic and has really hit an inflection point, and patients and consumers are now very comfortable with getting a portion of their health care delivered through telehealth networks, whatever that might be. And as we have watched it, initially a lot of the telehealth visits started with mental health and behavior health and have now transitioned to more general health and primary care and even specialized care. So with all those visits happening in telehealth, you have to engage with the patient and you have to be able to enter orders And fortunately for us, despite the pandemic and before the pandemic, we have strong relationships with all the telehealth companies. And as you would expect, they're only going to work for us with a small group of laboratories. And Cuesta would be one of those laboratories. So we're very well positioned with the telehealth providers. But you also know that even though there are telehealth companies, telehealth is provided through integrated delivery systems, hospital systems. in different ways and they might use one of the telehealth provider platforms, but they're still providing that through their physicians and using their EMR. And so when they enter the order, it's going to be entered the order the same way as in the past. So we're watching it carefully. We do believe it's a positive trend for us given what I just described, but it's complicated because it all depends how telehealth platforms are deployed. and particularly with so many owned physicians by integrated delivery systems, and they're still conducting the business as they do. It all depends how they actually implement their telehealth services throughout their network and how that will affect our business. But again, for us, we believe it is a positive. So Mark, do you want to take the second part?

Yeah, actually, AJ, could you repeat the second part?

It had to do with accelerating...

accelerating our drive program because of our enhanced performance and i think he's speaking to some of the acceleration and capital purchases that we've made and spending some additional money to get get more improvements than what we would have realized if we didn't have the pandemic aj is that correct

Yeah, so we have had an opportunity to invest more than we probably would have otherwise given this stronger growth than we would have anticipated in 2021. We've talked about that. A lot of that investment has actually been more towards top-line acceleration. So we've talked about what we're doing in advanced diagnostics. We've talked about what we're doing, what it requires to build a consumer business. So I'd say a disproportionate amount of the opportunity, you know, as we try to balance near-term results with longer-term value creation has really been in top line. But yeah, you know, as we looked at some of the things we did during the pandemic, you know, we had an opportunity to update our molecular equipment and into more efficient, you know, more state-of-the-art, probably faster than we normally would have cycled. So that'll give us some efficiency, you know, that maybe wouldn't have otherwise. So I wouldn't, you know, at this point, suggest that we're, you know, ready to commit to more than the 3% productivity, you know, because obviously that's a large number in and of itself and small, you know, basis points changes are really significant. But directionally, I would say yes, AJ, that, you know, this pandemic bolus of value creation and additional cash has enabled us to accelerate some investments, most of it on the top line growth, but certainly some on the productivity side as well.

Next up is Anne Hines, Mizuho Securities. Your line is now open.

Good morning, Anne. Hi, good morning. So I just want to talk about the base volume trends. I know revenue was up first in 2019. But can you give us some color on how much your base volume trends are still down versus pre-pandemic? Maybe X some of the PLS deals that you've signed during the pandemic. And if it's still down, maybe just give a geographic breakdown. And I guess my second question would be, obviously testing was very strong for molecular PCR tests for COVID-19. Can you give us a breakdown how much of that was contributed to this Back to Life initiative, whether it's schools, cities, states, more like maintenance testing? And I know you said in your prepared remarks that you assume revenue per test goes down in Q4. Can you give us what it was in Q3 and maybe just directionally what we should model for Q4? That would be very helpful. Thanks.

Okay. Thanks, Anne. Mark, why don't you start with giving the numbers on base business performance.

Yeah, so... hopefully I can clarify, you know, base volume in total is obviously anything non-COVID related as we've been through the pandemic. We've been reporting, you know, strong growth in base volume, which includes our M&A and our PLS, as you would expect. But we've also been trying to provide some color on utilization. You know, in the absence of an, you know, independent way to measure that, we look at our base volume X the acquired volume, and X, the new PLS deals. And, you know, we've talked about that continuing to improve in addition to the growth we're getting from M&A and from PLS. So in June, the organic-based volumes, the new PLS deals, was getting close to back to the 2019 levels, and then it kind of stabilized in July. It took a little bit of a step back in August. And then as we see where we are through September and into October, it's getting back again very close to being fully recovered in 2019. And that's why I said earlier that we would expect certainly by the end of this year and going into 22 that we'd be fully recovered. Now, it is regionally variable, as we've talked in the past, and that really has not changed. There's certain regions that are actually above where they were in 2019. You know, most notably our Southwest region, as we're looking at, you know, Florida and the South, the volume trends are above. And then a couple other areas that are kind of in that middle point, and then the one area of note that's really been lagging is the East. And it continues to lag. While it certainly has improved from where it was several months ago, it's still down and kind of an outlier, especially in the five boroughs of New York City. And then quickly I'll answer the question on the revenue expectations from molecular testing and I'll let Steve talk about the back to life. So we're still around $90 in the quarter. We're not expecting a meaningful decline in the fourth quarter. Certainly if back to life really, really took off, which is not what we're expecting in the middle of our guidance here. it could have a little bit of a role. But again, it's still net positive, it's just math. So you can expect for your modeling purposes that just a very, very slight decline in Q4, nothing of significance.

And the last question Andy had asked for the breakdown of what we describe as, first of all, the clinical portion of our PCR volumes versus the return to life portion of our clinical volumes. As you can expect, it's tough for us to know exactly, particularly which bucket we can put those in. But I can tell you that the trend line is trending towards more of the return to life. You know, we see the infection rates coming down. And we see programs that we've worked on going up. You know, examples are the return to school programs. We mentioned, you know, 20 states and five more coming. We're also doing some testing for employers if they have mandates in place where they're requiring vaccination or testing. So we see some increase in testings related to, again, employers bringing people back to the workplace and requiring testing or vaccination for that. So I would say trending wise, it is a larger percentage than before, but it's very difficult for us to give you exact numbers on that because we just don't get it through through the orders that we received. But we think what we provided for guidance is clearly what's going to happen in 22.

Next up is Ralph Jacoby with Citi. Your line is now open.

Hey, Ralph. Hey, good morning. Thanks. First, just a quick follow-up on a comment you made. Can you give us a sense of how much flu testing you do a year if that's what you're anchoring for based on COVID testing going forward? And then separately, I was just hoping you could talk about COVID reimbursement and the outlook of that for next year. You know, obviously you mentioned PHE got extended, at least for the early part of next year. If that continues to extend, would you expect reimbursement to be better than what you assumed in that $8 EPS for next year? And then also, what about commercial pricing specifically for COVID? Is that tied to PHE or help us understand sort of how that's negotiated and if there's a step down there for next year. Thanks. Mark, you want to start with the flu?

Yeah, so there's quite a bit there, Ralph. Let's see if we can touch on all of them. So, you know, we don't generally share the precise revenue for any given test offering, but, you know, it's significantly lower than, you know, our current levels of COVID and what we would anticipate. The flu is not the baseline for 2022. We still expect COVID testing to be multiples of our flu revenues in 2022. And the reason flu testing is, you know, smaller than it would be otherwise is there's not a ton of molecular testing done. You know, physicians have become very comfortable with doing point of care. Even though the molecular is more precise, they feel like it's good enough in the office and they have an opportunity to make money on it. So, you know, it would probably be several years, although I don't have the ability to call it precisely before we would expect COVID to be at our flu level. And then in terms of the pricing, we have, you know, either specific agreements or general agreements that as long as in the commercial rates, that as long as the federal health emergency continues that the pricing will reflect what we're being paid by the federal government. So it's not mechanistically tied to every contract, but we know that the expectation would be when that goes away. And again, there's still always the possibility they can decouple that $100 reimbursement rate from the health emergency. So there's some other risks as well. But as long as that continues, we would expect most of our commercial pricing to be at the same rate. And then obviously when that goes away, that we would expect negotiations to take it down to more the NLA level. So when I talked about 2022 at the investor day, I talked about a reimbursement rate around $50, which is what the NLA is. And so again, when you put all these pieces together, I want to be clear, we still fully expect to be in the upper end of that $748. I just wanted to caution against upside to that, you know, given everything that's going on with inflation and so on, because we do have some positive things that have developed over the last six months or so. And, you know, some of that is probably going to be partially offset, if not largely offset by labor inflation. So we're still pretty much where we were back in March. So, you know, in the higher end of the $7.48, and then certainly at least $8.5 billion of revenue, which importantly ties back to the 2018 CAGR that we shared with you at Investor Day. And so just getting there in a little different way, but still getting to where we said we would be.

Next question comes from Matt LaRue, William Blair. Your line is now open.

Good morning, Matt. Yeah, hi, good morning. So a number of questions around labor issues. I actually wanted to ask about supply chain. I'm just curious if you're starting to see any challenges in sourcing anything either for your PFCs or the labs, you know, either longer lead times, and then if you're having any issues with sample transport logistics.

So far, Matt, we're keeping up. And we always have battles here and there, even despite the pandemic with, you know, supplies got a complicated business and a lot of pieces have to come together to do what we do. But not a meaningful disruption so far, but we're watching it carefully because we're not through this yet. So the last part of this is around logistics. And again, you know, logistics have become a little more complicated given we do use commercial carriers for some portion of our logistics, but we've been managing our way through that. Fortunately, we have our own network of couriers. We have about 3,500 couriers and automobiles that request employees. We have a fleet of small airplanes that do some of the connections between our collection locations and our laboratories, and they're employed by us. And so we're happy we had those in these uncertain times. And we continue to have strong relationships with the national carriers as well. So, so far, so good.

Next up is Pito Chickering, Deutsche Bank. Your line is now open. Hey, Peter.

Hey, good morning, guys. I follow up on Ann's question around the base testing business. Once you exclude M&A and PLS, can you give us color on where the tests are coming in from, specifically looking at primary care visits versus specialty visits versus hospital visits? Just curious if hospitals slow down in fourth quarter with the COVID surge, does it impact anything on your fourth quarter growth?

Yeah, so first off, Peter, to be clear, the, you know, utilization trend that I talked about being nearly fully recovered doesn't exclude all PLS. It just, since we're comparing to 2019, it's excluding, you know, some of the really large deals that we've done recently, you know, so that we don't cloud what we think utilization is. So we had a PLS business aside back in 2019. I'm not taking that out. because obviously that's part of the trend as well. So, you know, when you look at the sources, you know, we've shared that, you know, the recovery has been pretty broad-based. There's not a lot of differences, especially now. Early in the pandemic, there were some. We talked about prescription drug monitoring certainly being one that was lagging. A lot of that was policy-driven. Some of that, not all of it, but a lot of it's been addressed. And certainly we've seen the toxicology or prescriptive drug monitoring business coming back in the same ballpark as some of our other clinical areas. We did see hospitals recovering faster early in the pandemic as they returned to, you know, treating patients for elective surgeries and so on. Physician office was a little more lagging. But at this point, as we talked about in the prepared remarks, the physician, business is quite strong. And, you know, we're seeing, you know, the volumes, especially in some of the regions, you know, above where they were in 2019. So we don't feel other than the east, that there's been any sort of a fundamental change in either patient engagement with with physician offices and or the prescribing practices for for our diagnostics business specifically.

Next up is Tycho Peterson, JP Morgan. Your line is now open.

Hey, Tycho. Hi, this is Casey on for Tycho. Two quick ones for you guys. The first one, do you think that the increased cash spent per requisition or test density trends that you've called out in 2021 will continue into 2022? And is that baked into that $7.40 to $8 EPS outlook? And then my second one is just on capital deployment. You guys have completed the ASR, right? Yes. Should we expect any more buybacks in 4Q, and what share count should we use for our model for 4Q?

Thank you. I'll take the first one, Mark. You can take the second. Bruce is on REC density, that is the number of tests per requisition. We assume there's a lot of different moving parts, as you know, for our business, one of which is the mix of tests. The second is the number of tests per requisition. We have channel mix changes. So all of that is complicated in our outlook that we've provided. So we assume that that's in there. And, Mark, you want to talk about capital deployment question?

Sure. So the ASR, you know, should be wrapped up sometime in the next 30 days. So therefore, at this point, you know, even if we did additional purchases once the window opens and, You know, not committing to anything at this point because we always say there's a balance between potential M&A and share repurchases. It wouldn't have a significant impact on our way so this year. So any sort of additional purchases of our shares repurchases would be more of an impact for 2022. And obviously we'll talk about that in detail when we come up to the guidance for 2022 early next year.

Next up is Derek DeBrown. Bank of America, your line is now open.

Good morning, Jim. Hi, this is John on for Derek. I wanted to dig into the base business growth, specifically within your advanced diagnostics business. Was there any notable trends for cancer and genetic testing? If you could comment on the growth trajectory, that would be great.

John, in our remarks, we're pleased with the recovery we've seen in advanced diagnostics and remind everyone that our definition of advanced diagnostics are entirely molecular and genetics. And when I say recovery, and I did say molecular, it does not include our COVID testing. So it's, you know, our base, if you will, molecular and genetic testing. And we saw very good growth and beyond recovery for our prenatal testing, feel good about that. And we are seeing nice, growth for our genetics business, and as you recall, we did an acquisition with Bluebird Genetics last year, and that's progressing nicely and giving us some nice growth and strength in that business. So we feel good about the recovery and growth we're seeing in those areas that we're really focused on, and genetics in general is one of those areas.

next up is mike new shell evercore isi your line is now open hey mike hey thanks um so do you know there's a labor and inflation cost you know issues you have talked about that you can you know absorb in in your 2022 hours does that have any any change um in the long term uh sort of growth targets that you laid out for post 2022 in terms of uh earnings growth yeah so i uh at this point

Obviously, we have a broad range. But I would say that just like we've done in other periods of time, we'll look for and identify offsets to that. So it's not significant enough that we should deviate on a multi-year outlook in terms of our earnings growth being in the high single digits. And although we have identified everything over the next several years, I'm sure as we move through time, we'll look for other productivity opportunities to offset some of that.

There are no more questions.

Okay, very good. So thanks, everyone, for joining our call today. We appreciate your continued support, and everyone have a great day.

Thank you for participating in the Quest Diagnostics Third Quarter 2021 Conference Call. A transcript of prepared remarks on this call will be posted later today on Quest Diagnostics website at www.questdiagnostics.com. A replay of the call may be accessed online at www.questdiagnostics.com forward slash investor or by phone at 866-360-7722. for domestic callers or 203-369-0174 for international callers. Telephone replays will be available from approximately 10.30 a.m. Eastern Time on October 21st, 2021 until midnight Eastern Time, November 4th, 2021. Goodbye.