Quest Diagnostics Incorporated

of Quest Diagnostics with all rights reserved. Any redistribution, retransmission, or rebroadcast of this call in any form without the written consent of Quest Diagnostics is strictly prohibited. I'd now like to introduce Sean Bevick, Vice President of Investor Relations for Quest Diagnostics. Please go ahead, sir.

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

Thanks, Sean, and good morning, everyone. For the full year 2023, we delivered strong revenue growth of 7% in our base business and delivered on our earnings commitment as we transitioned away from COVID testing. The results we announced this morning reflect a strong fourth quarter and full year for our base business in which we made substantial progress on our strategy to drive top line growth across our core customer channels and improve profitability. Throughout the year, we advanced our growth strategy with innovative testing solutions, new and expanded relationships with health systems, and a robust pipeline of M&A and professional lab services opportunities. We also delivered double-digit revenue growth in several clinical areas, including advanced cardiometabolic, prenatal and hereditary genetics, and neurology. We also strengthened our oncology offering with a strategic investment in higher growth, minimal residual disease testing. In addition, our efforts to improve quality and productivity delivered our invigorate goal, which helped us offset the cost headwinds we faced throughout the year. This morning, we issued guidance for 2024 that reflects a return to overall revenue growth while balancing the earnings tailwinds and headwinds we see for the year. Looking beyond 2024, we are well positioned to deliver our long-term financial outlook to drive mid-single-digit revenue growth and high single-digit earnings growth. I'm grateful to our dedicated Quest colleagues for making this happen. Every day, they bring our purpose to life, working together to create a healthier world, one life at a time. Before discussing highlights from 2023, I'd like to share some recent regulatory updates. First, as you know, Congress once again delayed Medicare reimbursement cuts and the next data collection process under PAMA that were scheduled to take place in 2024. While we are pleased with the delay, we continue to work closely with our trade association to seek a permanent fix to PAMA through SALSA, the Saving Access to Laboratories Services Act. ACLA's highest priority this year is to secure passage of SALSA. ACLA and nearly 7,000 other individuals and groups submitted comments last quarter on a rule proposed by the FDA to regulate laboratory-developed tasks as medical devices. Lab-developed tasks are essential medical innovations that are already highly regulated under federal legislation known as CLIA. In addition to the oversight by states, accredited bodies and Medicare as it makes coverage determinations. If enacted, the FDA's proposed rule would compromise patient access to essential lab testing. It would also slow diagnostic innovation and add unnecessary healthcare costs. We agree with ACLA that the FDA does not have the statutory authority to unilaterally regulate LDTs and believe that resuming discussions with the FDA, Congress, ACLA, and other stakeholders on a legislative solution is the most prudent path forward. Now I'll recap our strategy and discuss highlights from the fourth quarter. Then Sam will provide more detail on our financial results and talk about our financial guidance for 2024. Our strategy to drive growth is focused on delivering solutions that meet the evolving needs of our core customers, physicians, hospitals, and consumers. We enable growth across our customer channels through advanced diagnostics with an intense focus on faster growing clinical areas including molecular genomics and oncology. In addition, acquisitions are a key growth driver with an emphasis on accretive hospital outreach purchases as well as smaller independent labs. Our strategy also includes driving operational improvements across the business with strategic deployment of automation and AI to improve quality, efficiency, workforce experience, and service. Here are some updates on the progress we have made in these areas in the fourth quarter. In physician lab services, we delivered mid-single-digit base business revenue growth. We attribute this growth to return to care, overall market growth, and share gains driven by the competitive strengths of our scale and innovative offerings. We continue to execute hospital outreach and independent lab acquisitions, which generate volume for our physician channels. In January, we entered into a definitive agreement to acquire select assets of Lenco, an independent New York-based laboratory company, and expect to complete the transaction later this quarter. In addition, we acquired outreach assets of Steward Healthcare, which will deepen our reach to patients in Massachusetts, Pennsylvania, and Ohio. As we said earlier, our acquisition pipeline is very strong and we expect to complete additional transactions in 2024. Our strong relationships with health plans were also a key driver of growth in 2023 as we grew revenues from health plans by high single digits versus the prior year. As we've indicated, we successfully completed negotiations for all our strategic health plan renewals that were scheduled in 2023. Health plans and self-insured employer clients recognize the clinical and economic value we deliver to them and their members. Today, more than half of health plan revenues now come from value-based contracts, which enable faster growth compared to our traditional health plan contracts. In addition, working with health plans, we continue to reduce so-called lab leakage to high-cost out-of-network labs, partly by redirecting the volume to Quest. Importantly, this is good for both patients as well as employers, which pay for the majority of healthcare costs. In hospital lab services, we drove high single-digit base business revenue growth in the fourth quarter with strength in both reference and professional laboratory services. Hospital reference testing, in particular, grew much faster than historical trends and well above our estimated growth for the market. Increasingly, health systems recognize that our innovative laboratory testing and collaborative lab management solutions can help them improve quality, productivity, affordability, and care. They also continue to face labor and cost pressures, prompting more of them to reach out to us to help with their lab strategy. Our professional lab services help manage a hospital's lab, supply chain, and workforce. We also provide insights from our analytical solutions to help hospitals manage utilization to deliver the right test to the right patient at the right time. In the fourth quarter, we completed two PLS relationships that will contribute modest growth in the first quarter of this year. We also provide health systems the opportunity to transition their non-core outreach laboratory assets to us through acquisitions. By selling their outreach assets to Quest, These hospitals are better able to redeploy scarce capital to areas of their business that have a greater impact on patient care. Our consumer-initiated testing service, QuestHealth.com, generated revenues of approximately $45 million in the full year 2023, with strong base business growth. Our return on ad spend and customer acquisition costs remained favorable in the fourth quarter. Another element of our CIT strategy is to drive revenue growth through channel partners. In 2023, we generated more than $30 million through this channel. We are also excited about new product releases in 2024, including blood testing for PFAS, or forever chemicals, via questhealth.com. PFAS chemicals have been used in industrial and consumer products for decades and may contaminate food and water. In late January, the CDC issued new guidelines that recognize the value of PFAS blood testing for individuals that may have elevated exposure levels, which may increase risk of kidney cancer, high cholesterol, and other health conditions. According to a study in the Journal of Endocrine Society, PFAS chemicals accounted for approximately $22 billion in U.S. healthcare costs in 2018. In advanced diagnostics, we experienced double-digit growth across several clinical areas in the fourth quarter, including advanced cardiometabolic, prenatal and hereditary genetics, and neurology. Growth in neurology was driven largely by our Alzheimer's disease portfolio of tests, which is among the most comprehensive in the fast-evolving field of Alzheimer's care. Our innovations include our A.D. detect blood tests for early risk assessment based on amyloid beta proteins and APOE genetic risks. This week, we also added PTAL-181 to our AD Detect blood test line to complement insights from amyloid beta testing. In addition, our Alzheimer's disease test portfolio includes several CSF tests for diagnosis and monitoring based on amyloid beta, PTAL-181, and APOE. We intend to add additional biomarkers later this year and continue to expand our menu. In molecular genomics and oncology, we are on track to launch our Haystack minimal residual disease test to physicians later this year from our Oncology Center of Excellence in Louisville, Texas. We also believe Haystack MRD can help support clinical research and recently announced clinical trial collaborations using this innovative technology with the Rutgers Cancer Institute, Alliance Foundation Trials, and Tricellus Life Sciences. In the fourth quarter, we announced a collaboration with Universal DX, which has developed an innovative blood test for screening for colorectal cancer, including precancerous lesions. We look forward to supporting Universal's effort to gain regulatory approval for this test. Through a collaboration with Cypher, we are expanding patient access to the PRISM-RA test for aiding treatment selection for rheumatoid arthritis. Turning to operational excellence, our Invigorate program delivered our targeted 3% annual cost savings and productivity improvements. Here are three examples of how we're improving operations. First, we continue to make progress in using front-end automation to enhance specimen processing. In 2023, we completed front-end automation upgrades in our Pittsburgh and Dallas laboratories, which will improve quality and productivity. This year, we'll add five additional sites. Second, we also expanded the use of AI to improve quality, efficiency, and workforce experience in several clinical areas. AI can quickly identify patterns that signify possible disease in digital images of patient cultures and slides. In 2023, we expanded the use of AI in microbiology to help identify bacteria as well as in cytogenetics to identify chromosomal abnormalities. Looking forward, we are encouraged by the opportunities to use AI in several additional clinical areas, including cytology, pathology, and parasitology. Third, in 2023, we deployed an AI tool at our CliftonLab that helps laboratory staff continuously identify ways to be more productive in their daily routines. And we look forward to introducing this AI job helper in other labs and support processes. Finally, we made significant progress improving the margins of our base business in 2023. I'd like to personally thank our Quest colleagues whose efforts have helped make this possible. With that, I'll turn it over to Sam to provide more details on our performance and our 2024 guidance. Sam? Thanks, Jim.

In the fourth quarter, consolidated revenues were $2.29 billion, down 1.9% versus the prior year. Base business revenues grew 4.7% to $2.25 billion. While COVID-19 testing revenues declined approximately 80%, to $37 million. Revenues for diagnostic information services declined 2% compared to the prior year, reflecting lower revenue from COVID-19 testing services versus the fourth quarter of 2022, partially offset by strong growth in our base testing revenue. Total volume measured by the number of requisitions increased 1.9% versus the fourth quarter of 2022, with acquisitions contributing 50 basis points to total volume. Total base testing volumes grew 5.2% versus the prior year. Revenue per requisition declined 3.5% versus the prior year, driven primarily by lower COVID-19 molecular volume. Base business revenue per rec was up 0.2%. Unit price reimbursement was positive and consistent with our expectations. Reported operating income in the fourth quarter was $267 million, or 11.7% of revenues, compared to $135 million, or 5.8% of revenues last year. On an adjusted basis, operating income was $338 million, or 14.8% of revenues, compared to $330 million, or 14.2% of revenues last year. The year-over-year increase in adjusted operating income is related primarily to growth in the base business, actions taken in 2023 to reduce support costs, and lower performance-based compensation partially offset by lower COVID-19 testing revenues, wage increases, higher employee health care costs, and higher deferred compensation expense. Reported EPS was $1.70 in the quarter compared to 87 cents a year ago. Adjusted EPS was $2.15 compared to $1.98 last year. Cash from operations was $1.27 billion for full year 2023 versus $1.72 billion in the prior year driven primarily by lower COVID-19 testing revenue. Finally, our Board of Directors has authorized a 5.6% increase in our quarterly dividend from 71 cents to 75 cents per share, or $3 per share annually, effective with the dividend payable in April 2024. The company has raised its dividend annually since 2011. Turning to our full-year 2024 guidance, Revenues are expected to be between $9.35 billion and $9.45 billion. Reported EPS expected to be in a range of $7.69 to $7.99 and adjusted EPS to be in a range of $8.60 to $8.90. Cash from operations is expected to be approximately $1.3 billion and capital expenditures are expected to be approximately $420 million. We have posted a presentation on the investor relations page of our website that includes an adjusted earnings bridge, which shows some of the key elements to bridge from our 2023 adjusted EPS to the 2024 adjusted EPS guidance we shared today. Our 2024 guidance reflects the following considerations. We are no longer providing detailed base business and COVID revenue guidance. However, note that we are assuming that COVID revenues will decline at least $175 million in 2024, which will partially offset the growth we expect from the base business. Most of the COVID headwind in 2024 will occur in the first quarter, as we generated $119 million of COVID revenue in Q1 last year. In terms of M&A, our guidance only contemplates acquisitions that have been announced or closed to date, including the outreach acquisitions from New York Presbyterian and Steward Healthcare, as well as Lenco, the independent lab Jim mentioned earlier. We will absorb a full year of dilution from our acquisition of Haystack Oncology with an incremental impact of approximately 20 cents to adjusted EPS in 2024. We made strong progress improving our base business operating margins in 2023 and expect margin expansion in 2024. We anticipate net interest expense to increase to approximately $190 million in 2024 as a result of higher borrowings following our debt issuance in November. We assume a roughly flat share count compared to the end of 2023. We are expecting adjusted EPS in Q1 to be roughly 21% of our full-year earnings. This is slightly below the typical seasonality and reflects the significant amount of weather disruption we've experienced in January. At this point, we anticipate a weather headwind of 5 to 7 cents in Q1. And finally, as Jim mentioned earlier, we are well-positioned to deliver our long-term financial outlook to drive mid-single-digit revenue growth and high single-digit earnings growth. With that, I'll now turn it back to Jim.

Thanks, Sam. Finally, I'd like to take a moment to remember Dr. Paul A. Brown, who passed away in January of this year. In 1967, Dr. Brown founded Medpath, the predecessor company of Quest Diagnostics, providing basic lab services from his apartment in New York City. Dr. Brown was a pioneer who invented the blueprint for our industry that today is recognized as essential to quality healthcare and we are grateful for his vision and leadership. To summarize, we delivered strong base business revenue growth in 2023 and achieved our EPS commitments. Our guidance in 2024 reflects a return to total revenue growth while balancing the earnings tailwinds and headwinds we see for the year. Looking beyond 2024, we are well positioned to deliver our long-term financial outlook to drive mid-single-digit revenue growth and high single-digit earnings growth. And I'm grateful to our dedicated Quest colleagues who bring our purpose to life every single day, working together to create a healthier world, one life at a time. Now we'd 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 in the queue. To be placed in the queue, please press star 1 from your phone. To withdraw, press star 2. Again, to ask a question, please press star 1. And our first question of the day will come from Patrick Donnelly of Citi. Your line is open.

Thanks for taking the questions. Probably one for Sam, just on the margin outlook for 24, can you just expand a little bit on expectations there, including, you know, maybe the cadence for the year and then just on the margin front with PAMA, you know, obviously the push out, it's not a function of you getting any windfall by any means, but just that potential headwind being alleviated. Were there investments that you guys were kind of holding off on until you got more clarity on the outcome there? And then as you plan the budget, You greenlit some more of those as PAMA got pushed out. Just wondering how you thought about that expense piece there and a bit more color on margins. Thank you, guys.

Thank you, Patrick, and good morning. So, listen, we made a lot of great progress in 2023 in terms of expanding our margins and offsetting the COVID headwind that we saw in 23. In terms of 24 expectations, as we mentioned on the prepared remarks, We're looking to expand margins, to continue to expand margins in 24. Again, the key drivers of that are going to be volume growth, the expectation of volume growth that we have in the plan. That's going to be the biggest impact in terms of driving margins. We're going to be looking at continuing the great work that we're doing on Invigorate and offsetting any cost headwinds. We're assuming... the labor inflation to be in line with what we saw in 2023. So somewhere in that 3% to 4% growth range, not necessarily expecting it to get worse, but not necessarily expecting it to get better either. In terms of your question on PAMA, Patrick, you're absolutely right. It's not a positive. It's the absence of a negative. So essentially, the delay gives us certainty now for 24 that we're not going to see a decline. And, you know, had PAMA occurred or had PAMA come back in 2024, you're right in the sense that we would have had to potentially defer certain investments. We would have had to make some, you know, potentially difficult cuts to offset some of that impact. And the fact that we have a delay affords us the ability now to make certain investments and to, you know, to avoid some of those difficult cuts that I referenced. But I think the key punchline for 2024 is that we continue to expand operating margins.

Yeah, so Patrick, you heard me discuss in our prepared remarks. We're going to continue to invest in our Alzheimer's portfolio of tests. There's still one important blood-based biomarker that we will bring up later this year, and that will complete our investments in our Alzheimer's testing from a blood-based standpoint. You heard me mention that PFAS testing, we're bringing that test up. We'll be launching that here in the first quarter. We have gotten significant consumer and physician demand to bring that test up. And then finally, you know, we're upgrading some of our laboratory information systems in a couple of our esoteric labs. And so, you know, the lack of this PAMA cut gives us the ability to continue to make those investments.

Thank you. The next question comes from Elizabeth Anderson with Evercore ISI. your line is open.

Hi, guys. Thanks so much for the question. I have a sort of unrelated two-part combo one. One, can you talk about sort of the progress you're making on Haystack? I know sort of you ended up sort of on the higher end of the dilution. Is that because you're sort of accelerating test push out and have seen, you know, incremental progress on that side? And then secondarily, can you remind us on your thoughts about share repo for the year? I know that's not in your current base guidance assumptions, but just wanted to hear your updated thoughts on that for cap deployment. Thank you.

Okay. Let me address the progress on Haystack. Sam will take the second question. So Haystack is proceeding as we expected. There's no incremental investment versus what we thought. You know, we said last year 15 to 20 cents. for the half year and then likewise 15 to 20 cents incremental this year. We are bringing the assay up in our Louisville, Texas Cancer Center of Excellence. It's proceeding as we expected. We announced, you heard of my prepared remarks, discussions of three clinical trials. So we are doing testing right this moment. Obviously, we're not getting paid for that testing as we continue to validate the assay, but we expect to have it launched here in the first half of the year for commercial purposes.

Yeah, and I'll take the second question. Elizabeth, so, and good morning, first of all. Just to be clear, the Haystack dilution in 2023 was in line with our expectations. It was 15 to 20 cents. That's what we had called, and that's where it came in, in that range of 15 to 20 cents. With regards to share repo, so we did $275 million of share repo in Q4. Our current expectations are to basically offset equity dilution. Sorry, I said in 24, it's 23 in Q4. And our expectations are to offset equity dilution in 24. And that would work out to something in the similar range that we did in Q4. So somewhere around $250 to $275 million. That's the base assumption, which is to offset equity dilution.

The next question will come from Peto Chickering of Deutsche Bank. Your line is open.

Hey, good morning, guys, and thanks for taking my questions. There are a lot of moving pieces in the 2024 bridge you provided. If we look at operating margins excluding ASAC dilution, how are operating margins in 2024 versus 2023? And then 4Q margins missed the street by a decent amount. Can you help us bridge the 4Q margins to what you were guiding to for 2024?

Sure. Why don't I take that, Pito? So, first of all, in terms of operating margin for 2024, what's implied in the guide at the midpoint is expansion of operating margins. We're not calling out specifically what the operating margin rates, but there's definitely growth in terms of the operating margin rates and operating margin dollars in 24 versus 23 where we came in. And that's what's implied in the guide that we gave. With regards to the moving parts around Q4 and then how you bridge that into 2024, listen, there were three things that really impacted us in Q4 from an operating margin rate perspective. We came in at 14.8%. It was still growth year over year, significant growth year over year, despite a significant drop in COVID revenues. But in terms of versus expectations, yes, we missed in terms of operating margin for three key reasons. Number one was employee healthcare costs. So I would weigh these three reasons, by the way, equally. So a third, a third, a third. But basically, employee healthcare costs was a third of that miss. They came in higher than expected in Q4. And we can talk a little bit about what we're doing in 24 with regards to that. Some additional investments that we made towards the end of the year and some higher costs that we made, not necessarily related to labor costs, but some investments that we made, targeted investments in Q4, namely IT. So that was a third of the miss as well. And then a third was deferred compensation expense, which came in higher. Now, remember, that's not an EPS impact. That's an operating margin impact that gets offset on the non-operating expense line. But that impacted our margins, again, to the tune of a third of that miss versus our expectations. Now, if you look towards 24, the employee healthcare costs, I mean, we factored that into our guide. We've also taken steps to lower employee healthcare costs by, I mean, we had frozen for the last three years the employee contribution part of our employee health care cost plan. And, you know, we're having now to pass some of that on back to employees in 2024 because we had, as I said, frozen them over the last three years, even with the significant inflation that we've seen in terms of health care. So, you know, that's already assumed in 2024. As I mentioned to Patrick, what's assumed is also volume growth that's going to help us grow margins. You know, the deferred compensation, that's just noise. We don't really budget for that. If there's a headwind or a tailwind in 24, that just gets offset on the non-operating line and it shows up as neutral in EPS. And, you know, then, as I said, we made some additional investments in Q4 to position the business for 2024. And, you know, that's factored into the guide in terms of any additional investments that we make in 24. So we feel confident about our growth in terms of operating margins this year.

Yeah, Peter, let me just go back to Q4 just to talk about the progress we made year over year. So as Sam indicated, our revenue in Q4 versus 22 was down $45 million. And if you look at the mix of that revenue, COVID was down $145 million year over year. And remember, we were getting paid $100 a rec at that point. Our base business offset $100 million of that, which is why we were down $45 million. Despite that bad mix and the lower revenue, we still improved our operating margin by 60 basis points. So we made significant progress in the quarter, and that progress will continue as we march into 2024.

The next question comes from Jack Meehan of Nefron Research. Your line is open.

Thank you. Good morning. Jim, I was hoping... Jim, I was hoping to hear from you, like, what are you assuming in terms of core utilization, in terms of the guide? You know, you've had elevated rates the last couple of years coming out of the pandemic. You know, do you think that can sustain, or are you seeing moderation in any area?

Yeah, so for the fourth quarter, Jack, we saw volume growth of 5.1%. For the total year, we had volume growth of 6.5%. Now, I would tell you at the very beginning portion of this year, the first two to three weeks, with the weather that we saw across the U.S., volume growth was stunted a bit. But in the last week or so, we've seen volume recover to the normal rates and expectations that we have for the year. So you've heard several of the health plans have reported higher utilization in the fourth quarter. We ourselves, because of our own healthcare costs, we know there was higher utilization of our own employees. So we expect it to continue at, you know, slightly above the normal market rates, albeit the first month of the year has been tempered a little bit by weather.

The next question will come from Brian Tenquila of Jefferies. Your line is open.

Hey, good morning, guys, and thanks for taking the question. Maybe, Sam, as I think about, you know, all the comments from Jim on how it looks like the revenue outlook is good, right? You have all these tailwinds potentially going forward with new tests and whatnot. You know, help us bridge to getting back to that EPS or earnings growth in the long-term outlook that you've provided because, you know, obviously 24 is an aberration or there's some one-timers here. But, you know, how do you get us comfortable in that long-term earnings growth, 25 going forward?

Yeah, thanks, Brian, and good morning. So first of all, let me say definitively that we are absolutely still confident about our long-term growth guide that we gave, which is essentially to grow revenues in the mid-single digits, to grow EPS in the high single digits. So long-term growth is unchanged. As you yourself mentioned, there are some headwinds in 2024 that I think are transient or temporary that we see this year. So we've got a COVID revenue decline, which is approximately 175 million or roughly 50 cents year over year. You've got, you know, and we've called this before, but you've got haystack dilution, which is now full-year dilution versus a half-year dilution that we saw in 23. And then you've got interest expense, which is to the tune of about 25 cents, which is really, you know, as a result of the additional debt that we took on and the higher borrowing costs driven by the macro environment that we're in, But that's really to fund acquisitions and to fund growth in the business as well, in the base business. We've got a strong pipeline and we feel really confident about the M&A landscape and the M&A opportunities ahead of us. And we upsized the issuance in November to basically partly pay for the acquisitions that we made in 23, Haystack and to some extent New York Presbyterian, but also to fund the future acquisitions, some of which are not included in this guide. I would say the punchline is we're definitely still confident about the long-term growth of the business and the EPS guide that we gave.

The next question comes from Kevin Caliendo of UBS. Your line is open.

Hi. Good morning, everyone. It's Andrea Alfonso in for Kevin. Thank you so much for taking my questions. Unfortunately, I'm in the enviable position of asking yet another question around margin expectations. I guess my question is, you know, when we think about just the expansion of margins you expect and thinking about, you know, the puts and takes into next year, I guess I want to isolate like what gets better. I know that there's maybe some assumption in there around the M&A you've absorbed so far. You know, is that mildly accretive or just sort of in line or maybe below the margins? Some of your, in one of your slides, I think there was some mention of, you know, gap charges around workforce reductions, et cetera. Is that sort of just lingering on from 2023, or is that in neutrons? Just trying to get an understanding on those two items. Thank you.

Yeah, so thank you for the question. With regards to margin expansion, as I mentioned earlier, a big factor is going to be driven by volume growth that we see in 2024. That's really the key factor. we're going to continue the invigorate actions that we have talked about to the tune of 3% cost reduction across our entire cost base. And that's, you know, we actually met that target in 23. We slightly exceeded it. And in 24, it's going to be, you know, continuing with those initiatives. With regards to any, you know, workforce reductions, there aren't any workforce reductions planned right now. Usually when we have, when you look at that gap to non-gap, we just have a a placeholder for potential workforce reductions there or potential restructuring charges. But there isn't anything that's related specifically to any headcount cuts. Now, we do have the cost reductions in 24 that we continue to see. So in Q1, for instance, we have some benefit from some cost reductions that we didn't see in Q1 of last year, but then we'll continue to be very disciplined about our P&L as we go forward in 24. Yeah, so that's really the key driver in terms of our margin growth.

The next question will come from Lisa Gill of JPMorgan. Please go ahead. Ms. Gill, please check the mute button on your phone.

Good morning. Thanks for taking my question. You talked a lot about volume growth this morning, but I'm just curious on the price side. If I go back to the last couple of quarters, you talked about stabilizing pricing with health plans. You talked earlier about health plan leakage and the opportunity there. So maybe can you put those two pieces together for us as we think about the growth for next year of how much is volume and how much of that is on the price side?

Yeah, so let me just recap. 2023, and then we'll get into 2024. So in 2023, price, pure price, price per test, provided us a slight lift year over year. Okay, so our base rev per rec that we've reported was up 1.2%, and price was a positive contributor towards that. Now, going into 2024, we expect, again, price to be flat to slightly up for the year. We concluded all of the significant health plan renegotiations in 23. Obviously, there's a new tranche that always comes, about a third, 25% to 33% renew every year. But we feel confident that prices will remain flat to slightly up as we enter 2024.

The next question will come from Derek DeBrown of Bank of America. Your line is open.

Hi, good morning. Thanks for taking my questions. So changing track a little, you know, look, the LDT legislation looks like it's making more progress than it has. It's like, can you quantify what your exposure is to LDTs and sort of your thought process here? I mean, you're introducing a bunch of new tests would qualify for that. So how do you think about incremental investments if that goes through and would you discontinue tests there? And then as a follow-up, there's been some legal movement lately on the MRD space. There's been some litigation that's happened that has blocked some other players from the market. Does Haystack have freedom to operate as you sort of look at what's changed in the IP landscape on that? And how do you think about your IP portfolio on Haystack and being able to not get sued? Thanks.

Yeah, so let me address your second question first. We have no risk with respect to the IP on the underlying technology that we're using in Haystack. We feel very confident about it. Much of that IP comes out of John Hopkins University, and we're solid there, so no risk. In terms of LDTs, I think we've said in the past, about 10% of our tests are considered LDTs. We'll wait to hear from the FDA in April what the final rule is and then we'll make decisions as an industry from there. What I would tell you is that we do a significant amount of work for the pharmaceutical industry today and we do a significant amount of work for international laboratories. Both of those require us to be ISO certified And when you're doing work for the pharmaceutical industry, especially for companion diagnostics, you're essentially operating already under FDA regulations. So it's not going to be anything radical that we don't know what we need to do. Will there be further investments and steps required to get all of our laboratories that do LDTs accredited? Yes, there will be. but it's not a heavy lift for Quest Diagnostics.

Before we take our next question, as a reminder, if you would like to ask a question, please press star then one. The next question will come from Andrew Brackman of William Blair. Your line is open, sir.

Guys, good morning. Thanks for taking the question. I want to go back to the Alzheimer's offerings and the investments that you're making there. Can you maybe just sort of talk at a high level about the opportunity that you see for that category? Should we sort of think about this market kind of ultimately looking something like oncology, where you have screening, therapy selection, monitoring, et cetera, or does this sort of take a different path for you guys? Thanks.

Yeah, so thanks for the question. It's a great question. So first, I would say that there's just broader awareness of testing options that are now available to both consumers and to physicians. In part, this is because of new therapeutics that have been introduced has just created widespread awareness. As you know, the majority of testing today for Alzheimer's is conducted via PET CT, which are expensive, you know, $2,500 to $4,000 exams, or CSF testing, cerebral spinal fluid, which is not an expensive lab test. However, the procedure to extract CFS out of the human body is an expensive procedure. And likewise, the total cost of that is roughly $1,000. We have brought up blood-based assays for APOE, which is a genetic risk for Alzheimer's. We've brought up a blood-based assay for what we call AB4240, which is generally considered the earliest indicator, amyloid plaque, the earliest indicator of dementia and or Alzheimer's onset. And then we've brought up one of the two protein markers that are also involved, the tau markers. We've brought up 181, and there's a second one, 217, that we will be bringing up later this year. That, in essence, completes our blood-based offering. And I think there's widespread consumer interest, widespread interest amongst primary care physicians. And we've had double-digit growth all year long in both our blood-based assays and CSF testing, and we expect that double-digit growth to continue on in 2024 and beyond.

The next question will come from Stephanie Davis of Barclays. Your line is open.

Hey, guys. Thank you for taking my questions. Appreciate it. So I was hoping to dig in a little bit more onto the AI questions that you were having and discussions around the prepared remarks. Could you tell me just a little bit more about what you'll be investing into and how the AI Job Helper will help you guys out? And then I guess in a follow-up to that one, is it safe to assume that you'll have more IT investments as you develop some of these AI solutions that will then have more out-year yield for your margin opportunity? Thank you.

Yeah, so good question. The AI tool that we refer to with respect to our CliftonLab is really, it was a tool that we used to analyze workflow within several departments in the Clifton laboratory that actually looked at You know from fairly simple things like steps and movement between equipment loading and unloading of certain racks and we reviewed it and you find some really quick easy simplification efforts to you know adjust equipment move equipment to to minimize. You know the human content or Labor involved in each one of these steps. You know, more broadly, you know, we've deployed AI in two critical areas. One is in microbiology. Microbiology is, you know, you grow things in a dish, you look at it under a microscope. But with one of our partners, we now, we can take digital images of what's growing in the dish, and the system actually reviews those images and makes the initial call of a negative or positive. We still review the positives, you know, by eye, but it's a digital image as opposed to doing it under a microscope. But it's a much quicker read because the system has already indicated if it is positive. We're also in the process of deploying artificial intelligence and digitizing pathology. So, as you know, pathology is generally read under a microscope. We're in the process of implementing digital systems that allow for one to read off of a monitor versus under a microscope. And once you've digitized that slide, you're now able to apply algorithms to, again, at least help with what we call region of interest, pointing out to the pathologist where they should look and inevitably helping the pathologist make the proper diagnosis.

And the last question for today's call will come from Eric Coldwell of Baird. Your line is open.

Thank you very much. I have actually going to have a couple here. First, I missed this. What was the M&A contribution to revenue growth in 2024 guidance?

So it's about 50 basis points right now is what's in the guide, Eric. And it really reflects, as we mentioned in the prepared remarks, the carryover that we have from the acquisitions that we did in 23, which is really New York Presbyterian, the Steward Healthcare, the Lanco acquisition that we signed, and really that's it.

So if I take midpoint revenue guidance at 1.6, remove the COVID headwind, you get to about 3.5 on the base, and then take out 50 BIPs from M&A, you're at 3% organic on the base.

But that's in line.

Yeah, that's correct. Okay. Second question, higher mix of hospital reference testing, it sounds like. You talked about trends in hospital reference being above plan, being above long-term history. What kind of an impact does that have on gross margin in the quarter?

Yes. So, in general, our reference testing, which is more LDT-like than it is the routine testing, as you know, Eric, in general, that carries a higher test margin, higher gross margin. And in general, right, we're not drawing specimens that are derived or taken in hospitals. So, there's very little phlebotomy cost involved in reference work. Generally, the operating margin of our hospital-based tests are going to be higher than the average of the business. So that business did grow at a faster rate than our overall book of business, both in Q4 as well as for the total year. So it was a good mix.

And that was our final question for today.

All right, well, thank you everyone for joining our call and we look forward to further updates through the year. Everyone have a great day.

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