Q1 2022 Quest Diagnostics Inc Earnings Call
Welcome to the Quest diagnostics first quarter 2022 conference call at the request of the company. This call is being recorded the entire contents of this call, including the presentation and question and answer session that will follow are copyrighted property of quest diagnostics.
Rights reserved any redistribution retransmission or rebroadcast of this call in any form without the written consent of quest diagnostics. Mr. Please go ahead with it.
Vice President of Investor Relations for Quest.
Go ahead please.
Thank you and good morning, I'm joined by Pete <unk>, Our Chairman Chief Executive Officer, and President, Jim Davis, CEO , and Mark <unk>, 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, 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 .
Subsequently filed quarterly reports on Form 10-Q .
Current reports on form 8-K.
The company continues to believe that the impact of the COVID-19 pandemic on future operating results and cash flows <unk> financial condition will be primarily driven by.
Pandemic severity duration healthcare insurer government and client payer reimbursement for COVID-19 molecular tests.
That mix impact on the U S health care system in the U S economy, and the timing scope and effectiveness of federal state and local governmental responses to the pandemic, including the impact of vaccination efforts, which are drivers beyond the company's knowledge and control.
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.
<unk> revenues or volumes referred to the performance of our base 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 <unk>.
Yeah.
Thanks, Shawn and thanks, everyone for joining us today, well, we're off to a good start in 2022.
We drove strong year over year growth in our base business, which excludes COVID-19 testing.
COVID-19 volumes remained strong early in the quarter and decreased in February and March.
Aligned with the market.
We continue to make investments to further accelerate growth in our base business and our efforts to improve productivity, helping us to offset inflationary pressures.
So based on the strength of our business, we are raising our 2022 guidance.
This morning, I will discuss our performance for the first quarter of 2022.
And then Mark will provide more detail on the financial results and talk about our updated financial outlook for 2022.
But first I want to ask Jim Davis to give us an update on our leadership transition Jim.
Yes, Thank you Steve.
We're making very good progress on the transition yesterday, we announced a series of organizational changes and leadership appointments seasoned executive.
To help us accelerate growth and drive operational excellence first Kathy Doherty has been named senior Vice President of the retail businesses. Kathy has deep knowledge of our business gained through three decades of leadership at quest. She will oversee the regional and enterprise operations the commercial organization.
Marketing she will also be responsible for driving operational excellence, including program drive, our companys quality and productivity initiatives.
Next Carrie Eglinton manner is taking on an expanded role as senior Vice President advanced in General Diagnostics clinical solutions for one in five years carry has been responsible for bringing innovative solutions to the market through quest clinical franchises before joining client Cary has nearly two decades of leadership experience.
In health care and medical technologies.
Patrick <unk>, who has led our west region and has been with quest diagnostics for more than nine years is named senior Vice Presidents diagnostic services, which is a portfolio of data driven analytics and services businesses, which enable employers providers pharma companies and others to deliver.
Health care more effectively and efficiency efficiently. This portfolio includes employer population health employer solutions exam, one healthcare analytics solutions and quest help connect and.
And before joining cliffs, Patrick had over 20 years of leadership experience in the biotech and molecular diagnostics industry.
Mark Delaney has joined <unk> as senior Vice President and Chief Commercial Officer, Mark has responsibility for the commercial team, including sales and sales operations.
Previously he held senior sales and marketing leadership roles over his 30 year career at GE healthcare and Hill ROM.
And finally, Richard Adams has joined Quest as Vice President and General manager of our consumer initiated testing business, a new role Richard has two decades of leadership experience in E Commerce digital marketing and customer experience and will lead our rapidly growing direct to consumer testing.
These appointments demonstrate the depth and strength of our management team and we're really excited about the leadership and expertise that both mark and Richard Adams will bring to us. Additionally, we're making very good progress on our CFO selection process.
And are on track to name a leader in the next several months the management transition is going very well and the changes we've announced yesterday are an important step in positioning us for the future Steve I'll now turn it back to you. Thanks.
Thanks, Jim and I agree the transition is going well now turning to our results our base business to continue to build strong recovery up more than 6% from the prior year.
Total revenues were $2 $6 billion earnings per share was $2.92 on a reported basis.
And $3 22.
Just the business.
Cash provided by operations was $480 million.
COVID-19 testing revenues were approximately $600 million in the first quarter down approximately 28% from 2021.
Nearly 60% of the COVID-19 revenues came from the AMA Chrome peak in January .
We project continued demand for PCR testing through the end of the year and into 2023, albeit at lower levels.
The public health emergency was extended into July .
Maintaining our current level of reimbursement and based on these factors. We've raised our COVID-19 revenue guidance for the full year of 2022 to between $815 million to $1 billion.
Turning to our base business in the first quarter, we continue to make progress.
Executing our two point strategy to accelerate growth and drive operational excellence.
So here are some highlights from the floor.
We continue to make inroads with our health plans, gaining share and increasing revenues faster than the market.
Our health plan revenues without COVID-19 grew faster than our overall base business did in the quarter.
We also deepened relationships with payers through value based contracting. We currently have about 30% of our health plan revenues are tied to value based elements.
These include patient health outcomes quality or shared savings.
We take we can grow this to about 50% over the next few years and.
And we believe these value based contracts are achieving better alignment with health plans, which we believe will allow us to gain share.
We're also working with our hospital health system leaders to help them execute their lab strategy.
Our large partnership so tax and snack Meridian health in New Jersey Memorial Hermann, Texas, and those with community Health network, and essentially say Vincent Zoom, Indiana are performing well.
Hospitals look to us for their help with through laboratory design.
<unk> management.
We can enable them to monetize outreach lab assets that help them free up needed capital.
We have continued to make important investments to strengthen our advanced diagnostics capabilities and are already seeing results.
We continue to make investments to accelerate growth in oncology hematology hereditary genetic studio genomic sequencing.
The services in pharma services.
Since we ramped up our investments in our advanced diagnostics portfolio, we have already accelerated growth by several hundred basis points and expect to deliver the 8% growth earlier than 'twenty 'twenty, four which we committed to at our 2021 Investor day.
We remain excited about the opportunities you see in the direct to consumer testing market.
As you know we are ramping up investments in our consumer business and this is having an impact.
It is a quarter of our direct to consumer revenues more than doubled compared to the prior year driven by strong growth in both our COVID-19 testing offerings as well as our base business testing.
We're seeing continued solid demand for test slide comprehensive metabolic payables and complete blood counts.
Also our new and improved digital experiences are on track to launch later this year.
Finally, we've been expanding our diagnostic services portfolio.
We are collaborating with a small digital imaging software firm too.
To deliver diabetic retinal imaging services through designated Quest diagnostic patient service centers across the United States.
This will aid in the screening of patients as part of a diabetes management program.
The second part of our strategies is to drive operational excellence, we remain focused on improving our operational quality service and cost, thereby driving productivity gains.
We're not immune to the current inflationary environment, but we're tightly managing our operations.
And are expecting another good year of invigorate savings and productivity improvements to help offset these pressures.
So by way of for example, our procurement team continues to work with our strategic suppliers to mitigate potential price increases and improved productivity.
Through our long term relationships.
Also to date the team has effectively managed challenges in our global supply chain.
We also look to our suppliers to deliver innovation to help us.
Lower overall cost of testing and improved quality.
The most recent example is the rollout of our new Euro analysis platform that is being deployed across our laboratory network.
Or is it a lab in Clifton, New Jersey has been operational for about a year and we're seeing incremental productivity gains from the investments made in automation and artificial intelligence.
Our new schedule at check in initiative encourages patients to make appointments.
Allowing us to better manage demand <unk> productivity, while enhancing the patient experience.
The system has been successfully deployed to over 700 patient service centers.
Our continued investment in operations is producing results and we are well on our way to achieving our targeted productivity gains of 3% of our cost structure in 2022.
Now Mark will provide more details on our performance and share more insights on our updated guidance for the remainder of 2022 Mark.
Thanks, Steve.
In the first quarter consolidated revenues were $2, six 1 billion down 4% versus the prior year.
Base business revenues grew six 3% to more than $2 billion.
While COVID-19 testing revenues declined 27, 6% to approximately $600 million.
Revenues for diagnostic information services declined three 9% compared to the prior year.
The decline reflected lower revenue from COVID-19 testing services versus the first quarter of 2021, partially offset by strong growth in our base testing revenue.
Total volume measured by the number of requisitions increased one 3% versus the prior year and was roughly flat on an organic basis.
Total base testing volumes increased more than 6% versus the prior year, excluding acquisitions total based testing volumes grew nearly 5%.
We experienced some modest softening of base testing volumes in January during the peak of the other crime search but volumes rebounded in February and March.
COVID-19 testing volumes surged joined the spread of Amazon variance during the winter and volumes peaked in January but declined through the month of February and into March <unk>.
Together with our JV partner Sonora Quest, we resulted approximately $7 2 million molecular tests.
Questor levels resulted roughly $6 3 million molecular test down approximately 2 million tests, and 1 million tests versus the prior year and fourth quarter respectively.
We also result in nearly 450000 serology tests in the first quarter.
Our COVID-19, molecular volumes have generally stabilized and an average of roughly 30000 tests per day over the last four weeks excluding cinema request.
Revenue per requisition declined five 2% versus the prior year, driven primarily by lower COVID-19 molecular volume.
Base business revenue per Rep was up modestly.
Importantly, we continue to see an improving price environment unit price reimbursement pressure was less than 100 basis points in the quarter.
Reported operating income in the first quarter was $513 million or 19, 7% of revenues compared to $660 million or 24, 3% of revenues last year.
On an adjusted basis operating income was $554 million or 21, 2% of revenues compared to $708 million or 26% of revenues last year the.
The year over year decline in adjusted operating income is primarily related to lower COVID-19 testing volume a higher portion of COVID-19, molecular testing volume from nontraditional channels, which carry additional expenses and logistics costs.
Documents to accelerate growth in our base business and lower average reimbursement for COVID-19 molecular tests.
These headwinds were partially offset by strong growth in our base business.
As many of you have heard the health resources and services administration, our versa stopped accepting claims to test and treat uninsured patients on March 20.
Due to insufficient funding.
First around the program to provide funding for COVID-19 testing vaccination in treatment for uninsured patients.
Approximately 14% of our COVID-19, molecular testing volume has come from uninsured patients, which is much higher than the 1% to 2%, we typically see in our base business.
As a result, we were unable to bill <unk>.
$20 billion in COVID-19 testing work that was performed just prior to the March 23rd Hurts the cutoff date.
Moving forward, we are now billing uninsured patients for COVID-19 testing directly upfront as a result, we've seen a decline in our uninsured COVID-19 molecular testing volumes in late March and into April and this is reflected in trends I shared earlier.
Reported EPS was $2 92 in the quarter compared to $3 46, a year ago.
Adjusted EPS was $3 22.
Compared to $3 76 last year.
Cash provided by operations was $480 million in Q1 versus $731 million in the prior year period.
And we repurchased $350 million in stock during the first quarter.
Now turning to our updated guidance.
Revenues are now expected to be between $9, two and $9 5 billion.
A decline of approximately 12% to 15% versus the prior year.
Base business revenues are expected to be between 835, and $8 5 billion, an increase of approximately 4% to 6%.
COVID-19 testing revenues are expected to be between $850 million and 1 billion a decline of approximately 64% to 69%.
Reported EPS expected to be in a range of $7 88, and $8 38.
And adjusted EPS to be in a range of $9 and $9 50.
Cash provided by operations is expected to be at least $1 6 billion and capital expenditures are expected to be approximately $400 million.
Before concluding I will touch on some assumptions embedded in our updated 2022 guidance as well as some additional considerations.
Our guidance assumes COVID-19, molecular volumes to average approximately 10 to 20000 tests per day for the rest of the year.
This reflects modest continued declines in Q2 from the roughly 30000 tests per day, we are seeing in April and some degree of stabilization during the second half of the year.
As we look toward 2023, our expectation for COVID-19, molecular and serology testing volumes assumes that the COVID-19 testing run rates in the second half of 2022 continues into next year.
Last week, the public health emergency was again extended another 90 days through mid July .
We assume average reimbursement for COVID-19, molecular testing to hold relatively steady through this period, while the public health emergency country renewed beyond July additional extensions are not captured in our guidance.
We remain prepared for additional future surges collecting COVID-19 testing volume from a range of customers. While the phe is in effect, we continue to incur incremental costs from non traditional channels for supplies special logistics route and channel expenses for this volume, which can represent roughly $30.
Incremental cost per test therefore, you should not assume the higher reimbursement due to the phe extension drops right to the bottom line.
As Steve noted earlier, we're already seeing some returns in our investments to accelerate growth, particularly in the areas of advanced diagnostics and direct to consumer testing and would expect a margin tailwind on these investments in 2023.
As a reminder, we are planning to spend approximately $160 million on these investments. This year, we spent approximately $30 million in the first quarter and are looking for these investments to ramp up in Q2 to support the launch of our new consumer site later this year.
<unk> of the standup costs are temporary but variable marketing costs will increase following the launch of the new site.
We'll also be adding additional head count this year to support our consumer offering as well as bioinformatics capabilities within advanced diagnostics.
Finally, we know Theres a lot of focus on expectations for 2023.
While it's clearly too early to provide specific guidance for next year based on everything we know and see today, we expect to deliver top line and earnings consistent with our long term outlook that we provided at our 2021 Investor day.
I will turn it back to Steve.
Thanks, Mark well to summarize we're off to a good start in 2022 driving strong year over year growth in the base business.
We continue to make important investments to accelerate growth and we are seeing the results.
Based on the strength of our base business, we have raised our outlook for the remainder of the year.
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.
Limit yourself to one question. If you have additional questions. We ask that you please call back in the queue.
First question comes from Ricky Goldwasser from Morgan Stanley . Your line is open.
Alright.
Good morning, So a really nice nice job on the quarter managing.
Cost and improving margins.
How has the performance in Q1 compared to your expectations and how should we think about the.
The margin expansion opportunity for the rest of the year from from <unk> levels.
We look at that as a baseline.
Yes, Ricky thanks for the question.
As you look at the way the quarter played out.
OMA crime was more severe than we had anticipated which drove higher COVID-19 revenues, but we also.
Solid base business impacted by that so definitely in January as we mentioned the base business was softer.
So relative to our expectations in Q1, more COVID-19 less base business, but as we exited the quarter and certainly as we've talked about February and March the base business bounce back to our expectations. So while we're very pleased with where we see the base business growth for the year. It would've been even higher had it not been for OMA.
And the margins really were what we were expecting so.
Walk through on the last call how some of the margin impact in Q4 was really temporary around the annual incentive plan and some costs related to.
Some special things that we needed to do for Covid testing in that quarter.
Over time, that's where we're having a fair amount of absences.
So the things that we really saw its temporary but good news is that once we got beyond <unk> those cost generally to go go away and we anticipate further reduction in some of those special expenses related to Covid safety and protection for our employees as we continue to advance hopefully and <unk>.
Get into the endemic.
The pandemic, so I'd say other than the higher covered revenue and a little lower base in January generally the quarter played out as expected and that's why we're comfortable raising the bottom and upper end of our guidance at the midpoint or decide to reiterate what mark said about the base business.
Underscore that we're pleased with what we saw in Q1. It would have been better if we didn't have the sources that mark talked about in January .
To remind everyone that we posted about six 3% growth in our base business, which has only about 100 basis worth of acquisitions. So the organic growth through its around five and again if January was stronger would have been stronger than that so we feel good about that started the year, which gives us confidence for the full year. So feel good about the start.
For the year for our base business that gave us the <unk> to raise guidance for the full year beyond Covid.
One.
An additional comment on that when you look at the compares the easiest compare on that basis with Q1, so to Steve's point, we could have done even better than we would have would have done better than the $6. Three of January has not been impacted by <unk>.
We go through the balance of the year. The compares do get a little tougher because a lot of the recovery from the pandemic.
Occurred.
Late in 2020 in early in 2021, so that the growth going forward is more going to be driven by share and less about utilization in the market recovery.
So can I just quickly follow up on that you.
You talked about the improvement in segment margins more difficult comps, so how's demand shaping up in April to date.
Yes.
Yes, so you know.
The business continues to perform at a high level as it was exiting in Q1 so.
We wouldn't be updating our guidance if we weren't confident that what we saw in terms of the performance. Early has continued so we're more focused on overall growth as opposed to the percentage year over year, because obviously the compare makes it complicated. So we're very happy as we get into April and we see the performance of our base business.
And as we mentioned Covid has kind of stabilized we're not sure how long that will continue we certainly took a little bit of a volume hit from the change in her son.
And.
Because theres been a little bit of a spike I'd say some of that was partially offset by the market growing a little bit.
Recently, so that's probably the way you get to reasonably flat level of Covid testing over the last month.
Okay.
Thank you operator next question.
Our next question comes from Patrick Donnelly from Citi. Your line is open good morning, Patrick.
Hey, good morning, Thank you guys for taking the questions.
Maybe just another one on the margins you've touched on it a little bit there on the first question.
Can you just talk about I guess, given the ongoing growth investments wage inflation can you just talk about kind of your thoughts as we work our way through this year and into 'twenty. Three obviously, the phe extension should help on that front in terms of kind of the margin side. So again I guess when we look at the earnings range.
How should we think about the base margin piece again ex that Asps as we work our way through this year and then again into 'twenty three.
So as Mark indicated in his prepared remarks some.
Changing dynamics of our business with investments in the second quarter, and then plus COVID-19 in the back half of the year will be indicated.
We will be coming out of the year in the back half with the amount of Covid testing, we would expect.
It is a good level to think about in 'twenty three.
So while we also expect us to continue to get the investment returns.
We expect an advanced diagnostics and consumer testing starting in the back half of again, what Mark said in his prepared remarks, and we believe that an investment return will be a tailwind for us in 'twenty three.
So this is a transitional year with those investments a transitional year for Covid.
Mark you'd like to give a little perspective on Q2, and then the back half yes.
Ill.
Try to answer your question, specifically, Patrick so on inflation, we talked about building in.
An extra 100 basis points or so.
It'll wages cost and that was in our original guidance through.
Three five months of the year, we haven't seen anything that suggests that wasn't a reasonable assumption. So basically inflation is about where we were expecting and I would say on non wage items, such as materials and supplies and so on certainly fuel costs have been bouncing around but nothing that has deviated significantly from our critical assumptions coming into the year.
Around inflation the Phd.
As significant red.
<unk> revenue and from a dollar or margin perspective.
Certainly is helpful, but from a percentage margin perspective, I want to be clear that its not significantly higher than the post <unk> world because those costs go away that I referenced in her more than $30. So.
Ed.
Our focus on percentage margin the pace is not a big change in terms of what you will see.
And I think the important thing is that as the biggest volume grows we've always shared that incremental organic growth in the base business is a very high level of drop through so the other margin consideration as we grow as we expect to and as we've signaled in our guidance that that will help drive margin expansion and then finally, just a reminder.
That we are in a much better place in price than we've been historically and so therefore, a lot of the invigorate or drive productivity savings that in the past helps pay for inflation the inflation a little bit worse, certainly the pricing environment is better so there's more of that to cover that inflation and also to draw.
Bottom line margin expansion.
So remember too as you think about as we transition through the year.
And Ricky asked about April .
We have a higher level testing good April going on and we do periodically update you on that and that number we expect in our guidance to come down.
As we indicated as we come out of 'twenty, two will be running around 10% to 15000 tests per day.
We're assuming that the phe will expire because we there's no nothing beyond what we've heard so far which will end sometime in July . So as you think about that transition and think about the investments we're making in thank you both.
This momentum we're building in the base business that gives you some perspective of how we're going to.
Come through the three remaining quarters of this year, and then guide us to a reasonable excellent place to be able to deliver with Mark indicated for 2023.
Yes.
Okay. That's helpful.
On the balance sheet cash flow, obviously has been pretty strong for the past few quarters here capital allocation is in focus for investors can you just talk about your priorities there what the M&A pipeline looks like what the funnel looks like and then maybe compare that to kind of the share repo opportunities.
Sure.
So our.
Our capital priorities haven't changed.
We have that commitment to return the majority of free cash flow as we've shared.
Normal times, we get pretty close with the dividend and then we do some share repurchases to offset dilution, obviously with the COVID-19 bolus of cash generation.
We've had the ability to deploy more cash we always prefer to do M&A, because we've got very high standards around the deals that we execute so that would always be the preference, but at any given point in time, given our strong cash on the balance sheet and our ability to generate cash we're not going to sit on it so the $350 million of first.
It's more a reflection of how much cash we had at year end and the fact that we didn't do a transition transaction in Q1 as opposed to any change in priority. So Steve would you want to comment on the pipeline.
Yes, yes, so we feel good about.
Then our commitment of about 2% growth through acquisitions.
We deliver that consistently we feel good about our ability to on a routine basis deliver the consolidation strategy. We've been executing on goods. We've got a few that were working on we still feel that we're going to be able to get to a number close to that 2% in 2022. So.
I've said in the first quarter.
Later than that.
This is lumpy, but we do expect though where people bring a few on a few of those.
Second quarter, the third quarter to deliver what we expect.
Great. Thanks, Operator next question.
Our next question comes from AJ Rice from Credit Suisse. Your line is open good morning, a J.
Hi, everybody.
Obviously, a value based arrangements are becoming more significant as you described in your prepared remarks I wondered if we could get you to step.
Step back and talk about a few of the key features of these arrangements and discuss how they allow quest to do better economically. It sounds like you think you can do better economically under these types of arrangements and I know you've referred to.
Pricing can be better used to always think of managed care pricing as being a 1% to 2% negative headwind each year has that dynamic changed or is it mainly because of these value based arrangements.
Yes, So let me start and then I'll ask mark or Jim kind of add to this.
As we said in our strategy or a health plan.
This change is a big opportunity for US number one number two is we do plan about gaining share and number three we are gaining share. So our health plan revenues are growing faster than our overall revenues, we believe growing fast so the market. So we're making progress.
So in that regard. The second question is the environment has gotten better.
We've indicated in prior calls in prior quarters.
Great.
<unk> proven to be true as we go throughout this year as we get into renegotiations with the plans. We believe we have a stronger position to negotiate some cases modest price increases because we are delivering more and more value.
Our quality is improving service performing our performance is better and we have an opportunity to help them narrow their networks narrow the number of providers. They have with a number of these programs. So so it has gotten better as we indicated dose of 100 basis points overall I'll remind you, though when we talk about price there's a lot of focus.
The plants.
We are price pressures in the hospital business from a client billed business, but at least on the health plan side has gotten better and we have gotten modest increases for some of the contract renewals that we've had.
In terms of value based contracting the biggest opportunity we have which you indicated in the past is around United.
And United is a very different relationship for us than what we had.
<unk> had years ago. It is clearly a relationship that we're working different aspects to be able to pick up share and as part of that.
In my remarks, we do have shared savings opportunities that we have opportunities together to do a better job with their membership.
Their clients and then beyond United.
Have extended that thinking to other parts of our health plan portfolio with other concepts. They are not all identical.
But they have similar characteristics in general where we have better alignment between what they're trying to accomplish and what we're trying to accomplish and then be and we're all trying to achieve what's been described as the triple aim, which is better quality better experience at lower cost and that's resonating very well in the marketplace.
Overall as you know this entire Charlie.
Totally focused organizations on that not just the plans with integrated delivery systems as well, so if you'd like to add something too.
Yes, so a J.
First when we think about value based care and arrangements that does not necessarily mean cabinets.
So as Steve indicated with both Unitedhealthcare and anthem.
Many of these value based care.
<unk> come to us through performance on leakage agreements, where they provide us list of physicians that are using out of network class and when we move that work. There is a value based there is an incentive for class.
Proactively work with both payers on moving work out of expensive health system laboratories, and proactively to give US a list of physicians that are using that those labs and we go after it.
Finally, we've worked hand in hand, with both of those plans and others on approaching employers and getting employers to see the benefits of steering their employees to independent labs like quest diagnostics.
What we do.
Enter into these capitation arrangements I can assure you going forward, we're going to have a much greater say in what we call. The clinical pathways that are used by physicians to ensure that utilization makes sense for the clinical condition.
The physician diagnosis.
Only thing I'll add a J is.
There is elements in those contracts that Jim just described the one I'll add it's also.
<unk> talked about in the past when we do an acquisition of hospital outreach instead of the rates immediately dropping to our rates.
The step down in a majority of our large contracts right now so we kind of share the value of moving that work through an acquisition.
Which aligns our incentives and really the greatest.
The value of this if it moves the conversation around away from price being the way, we create value and more towards steerage and leases, which Jim talked about in partnering and working together to get not just the work too.
<unk> got a better price, but also there is things that come with it benefits the patients the physicians.
Our tools and our technology, it's our quality I mean, you know that is.
United Appeal and its not about the price, it's really about a couple of dozen metrics around quality and tools.
Everything from what is their experience and theyre in the patient drops center to how we see the data to the payer and the frequency and quality. So theres a lot beyond price that determines value in this space and that's where we've been successful in moving the conversation and yes, then within the contracts themselves. There is the shared savings and these other valve.
<unk> driven parameters that can get us a better price or more value as we demonstrate to them.
Creating value for them as well.
Alright, great. Thanks, a lot.
Next question comes from Peter Chickering from Deutsche Bank. Your line is open.
Hey, good morning, guys. Thanks for taking my questions back.
Back to the guidance question.
Obviously, you didn't assume any share repo besides offsetting dilution what does your current guidance assume.
Got it back into net income.
Guidance for.
From the previous guidance using <unk> hundred 24 million diluted shares in the fourth quarter versus the current guidance I 121 million shares I'm backing into the midpoint of the range of net income essentially flat despite revenues up $200 million sort of at the low end. So as that goes into a margin compression of about 10 basis points. So a long way of saying is the margin guy.
<unk> down today versus previous guidance and any color on why.
Yes at this point the share repurchases that we've done.
Much offset our equity program. So it's not as if there is a huge decline in waste, though based on what we've done and in terms of going forward it would be dependent on Emma.
M&A opportunities versus buyback, so theres no material change in our waste, though contemplated in our guidance relative to what we gave back in February .
And.
As you see in our results.
We exited Q1 was about $700 million for the cash.
And obviously, we're going to put that to use as a good way we're looking at acquisitions as we've talked about.
And will that in due course throughout the remainder of the year.
I mean justice for drill into that back into previous guidance does your current guidance with the share count you had before because the current share counts you'll get to net income of about $1 1 billion for both the current <unk>.
The current guidance versus previous guidance. Despite revenues going up is that the right math because that would imply margin compression of about 10 basis points, yes.
Yes, so I would not I'm wondering what's the takeaway and implication of margin compression piano and remember that we don't do point estimates, we do ranges. So theres a lot of moving parts everything from.
Top line mix clinical mix.
Exactly precisely how much currently testing we get going forward.
And.
Sure obviously deployment of cash so thats why we give a range. So we feel very good about the margins. We would expect that the margins would improve on the base business going forward certainly the COVID-19 element in everything from the phe to the amount of volume we have could impact margins as well I'll give you. One example, if youre looking at.
Net.
Income margin certainly some of the Jv's.
Specifically some of our quest, where they have done a lot of Covid testing, where we have no revenue, but we get the earnings contribution from that so theres a lot of things that can kind of skew margin, but I think what people really want to understand that the base business. So what's going to happen going into 2023, we're very comfortable that the base business will be.
At or above pre pandemic levels, and we will have a larger base business in 2023 with some level of Covid testing and the margin performance that you saw in Q1, we're not expecting it to erode even despite the fact that we did talk about ramping up some of our <unk> investments in Q2. So it has all been contemplated at all in that.
Grange of guidance and so it's kind of hard to pin down a specific margin at this point.
But it's not bad news.
Great. Thanks, so much.
Our next question comes from Kevin Kelly Endo from UBS. Your line is open.
Good morning.
Yes.
Wanted to follow up on the guidance question, just a little bit so you'd be in the quarter by roughly 25 and you raised your COVID-19 .
Our revenues by $150 million, or so which depending on what margin you use could could almost.
Equate to that same sort of 25.
The guidance range was the guidance range.
Raise related to the first quarter beat was it related to the Covid increase is there an overlap there how should we think about that.
So the guidance raise was related to the totality of the business.
And again, if you look at Q1 as we shared the base business, whilst performed extremely well it didn't do as well as we had expected when we entered the year because of all the crop. So some of the raise in COVID-19 for the year and the performance in Q1 was really offsetting a slightly softer basis.
Now the good news is that base business came back so that softness in the base business was temporary.
The dynamic is that we do have the <unk> extended but we also have this change in person, which is not which is not insignificant. So we mentioned there was over $20 million of.
Lost opportunity to be able to get paid for the uninsured from some work we did in late March so theres a lot of moving pieces here and so it's really hard to parse precisely what is driving the raise it's really our greater confidence in the business performance for the year in totality with all of those pieces.
So again, while there's a lot of people focus is rightly understood on the mid point I would say just in general the business is in better shape in total than we would've expected.
90 days ago, and Thats why were comfortable raising both the top line and the bottom line as we entered the year. What we indicated for Covid is around 700 to a $1 billion.
And obviously with delivering $600 billion in the first acquired or certainty around what is left within that initial guidance.
Honestly going into the year, there is a lot of uncertainty.
Continental Festival the decline.
How much testing would go on in the back.
Half of the first quarter so the.
Tightening up the range us it raises it but as Mark indicated there's puts and takes of this.
In terms of the impact on our bottom line.
I'll just reiterate we feel good about our start with our base business and we're tracking well for a strong year based upon our initial guidance.
Okay.
A quick follow up on the $160 million in investments.
You said part of it would be temporary part of it would be permanent I think one of the things. We're all trying to figure out here is sort of what the base margins look like in a non COVID-19 or COVID-19 work that is flat year over year, or whatever which seems like were moving into with the base margins normalized would look like so.
And we think about how much might linger any help on that and maybe the question would be.
What do you think base margins will look like.
In 2023 year exiting when.
When COVID-19 becomes endemic versus where they were in 2019 is it possible that those base margins are higher.
Going forward that you guys have figured out a way to be more productive and so I got it.
Got it so remember we're investing $160 million.
And we're investing $160 million, because we have a strong business case to get the returns.
So what we've indicated we're ahead of our plan to get the returns in advanced diagnostics, and we feel bullish about the opportunities to the consumer and the <unk>.
<unk> on both of those fronts.
Good news.
So when when we talk about the second quarter, we mentioned that we're putting in place a new platform also where our consumer business. We are investing in some marketing to get the growth. We would expect and we are getting the results. So far and we will continue to receive the results in the back half of the year. While we also said is that.
Ed as we've come off the 'twenty two into 'twenty three.
Took about a year on year compare with the returns we expect from advanced diagnostics and returns we expect from the consumer that the year on year.
The improvement.
And those businesses will be tailwind for our margins in 'twenty three.
Okay. So so again, we're investing to grow we are investing to get a return we feel good about getting those returns actually quicker than expected and next year or the year on year compare related to that $160 million will be a net tailwind for us in terms of our earnings and 23 market.
Yes.
Either that we shared.
Our view that we could grow our consumer business to a quarter affiliated by 2025, and remember if especially if you strip out the Covid testing revenue. This was a business that was small millions not that long ago. So there is significant growth.
Projected in this business and we feel very comfortable and confident we just talked about the performance.
This past quarter, and we don't have our new.
Customer experience.
Capability that we think is really going to make a difference in terms of the ease and the.
And use of that site so.
As Steve said, we will create a tailwind because we'll be investing less relative to the revenue, but in terms of the margin what I'd say is on the business ex consumer the margins will be as good or better than you're used to talk about pre pandemic, but we will have a sizable can.
Super business that is still in investment mode. Because we are still looking to grow. So the overall enterprise margin you should not expect to be expanded the good news is we would expect stronger growth and if for some reason that consumer business doesn't deliver and we can turn off the marketing expense. So its not as if we're adding tons of <unk>.
People or infrastructure costs, but we're very confident in our ability to grow that business, we want to invest to optimize that growth for a period of time. It is going to improve its bottom line next year relative to this year and then certainly over the years beyond that we would expect to have a nice healthy margin on that.
Businesses and it will be quite sizable.
And as Mark said.
As we go through.
Thinking about what we indicated at our Investor day, and we're not going to give you a 'twenty three guidance.
Mark indicated when we think about 'twenty three we're still believing we're comfortably in the range. We would have expect we would expect in 'twenty three in terms of EPS and growth and the second half sets us up nicely.
And what we've implied in our guidance for the full year implies a setup.
Be able to deliver what mark indicated in 'twenty three and.
In the <unk>.
And the view that we indicated at our Investor day and spring of 'twenty. One. So we're consistent and we believe we are on track to delivering what we expected and what you would expect in 'twenty, two and 'twenty three.
Thank you for all that detail.
Thanks.
Our next question comes from Jack Meehan from Wolfe Research your line.
Hey, Jack Hey, Jack.
Hello, and happy to say still at Nephron research.
So Steve on 2023.
Still premature to give a specific number.
But at the Analyst day, you talked about 7% to 9% earnings growth kind of off of an $8 number you were gearing us to at that point.
Now talking about some tail of Covid here too.
Can you just like make sure we're doing the math right can we take 8% grow it add some COVID-19 on top.
Some other moving parts, but is that.
The right way to think about it or where am I wrong.
Berger to refresh all of your memories, and what we said a diverse mark tickets through so at that point.
We said $740 to $8 and a 7% to 9% CAGR from 2022 and beyond and then as we got.
Further along past Investor day, we started this signal that we would expect it to be closer to the $8 or the upper end of the range and because 2022 has more COVID-19 revenue I just want to remind everybody the growth rate for in 'twenty three is going to be below that.
CAGR, but the absolute number we're saying should still be where you would have calculated it back as March of 'twenty. One so just happens to be that the pandemic hung around.
For a little bit longer I also mentioned at Investor day that we did not assume COVID-19 would go away. So in that outlook I had a level kind of a sustained COVID-19 testing, we do expect that COVID-19 testing will be around part of our portfolio and certainly nowhere near the levels of 2020 , one or even what we're projecting this year, but not.
Insignificant so yes.
I would not take COVID-19 as upside to that we certainly had some COVID-19 built into that outlook. What we said remember this was the spring of 'twenty one.
We expect to 'twenty two to be able to grow like we indicated both topline and bottom line.
We also said that continues to this day, we expect that <unk> will continue to be part of our portfolio of tests going forward.
So that was 21 thinking about 'twenty two the same was true for 'twenty two going into 'twenty three.
So we're going to come out of 'twenty, two with took COVID-19 testing.
Do you see the volumes, we indicate which is about 715000 per day. Obviously, we're assuming right now are lower price. We will continue to have COVID-19 testing in 'twenty, three and we've always assumed in our outlook going forward for growth, both topline and bottom line there'll be there'll be COVID-19 test to our portfolio.
Frankly, we think it's a good opportunity.
If we go through the math, even at lower price points. This is a sizable market.
Sure right now we think there is dynamics in the marketplace. We're working on plans to actually gain share in the COVID-19 testing marketplace.
It could be with us for the foreseeable future.
Great.
As a follow up wanted to ask you about the consumer directed testing you talked about the growth rate how much revenue did that area generated in the quarter and can you also talk about interest beyond COVID-19 .
Is there any specific areas of menu that you're targeting or you think are resonating and where.
About investments getting directed.
Well first of all Josh we're not going to give you a specific numbers for the quarter. What we shared with you. It grew nicely double digits on both the base business as well as encore, but Jim why don't you talk about the portfolio and what we are seeing growth, yes. So Jack as we've talked in the past there is various segments to this consumer initiated testing business.
I'll touch on two one is.
We call them watchful warriors people that have chronic conditions like diabetes like cancer, but their insurance company may only pay for let's just say two <unk> tests, a year and these people worry about the disease and they may come in once a month of the quarter and get testing.
It just makes more sense that they do it through us directly rather than applicable or physician office pain expensive Bill just to get a one C test so there's a lot of.
Demand for.
From these types of patients. The second is we've talked about privacy seekers people, who don't want their insurance company.
Any tests that they may not want their doctor to know that they may not want their spouse. They may not want there.
Mother or father.
Some of this is related to FTE asking so it's a big segment for people that.
Value privacy.
Finally, there is a generation are much younger generation that may.
You may not want to go to the Doctor They don't have a doctor.
They may want to get lapped testing done once a year just to check the underlying health of their of their body and so.
Call. It the 20 to 26 year old segment.
That they don't have primary care physicians, but they are concerned about their health and they come in and get these once a year comprehensive last analyst on that assess the overall health there is.
Others are as well, Jack physical fitness offset check hormone levels before marathons and things like that but those are the primary ones, yes, I'd add Jack that we talked about this previously.
We've moved this what we call blueprint for wellness, which was an offering we gave to employers is a battery of diagnostic testing that gives you a good blueprint for how you're reporting your lipids. Your obviously your glucose and other important metrics and we're actually offering that now.
On our consumer initiated testing website and people really find that interesting so an opportunity to get a full run of diagnostic testing like people have gotten who had employers that sponsors including us we do it for our employee base and it can be very very valuable and then obviously if there is anything thats out of range. Then you go to the Doctor instead.
Going to the Dr refers to get the script.
As Mark said too.
Yes.
Smaller business, particularly on the base business.
And that number is growing strong double digits and what we said is we're committed to the business being about $251 million in size by 2025, well needless to say with the investments that we're making.
The new leadership, we brought in Jim indicated.
And really our primary focused organizational.
Model that we have in place we're getting good traction.
We believe you're going to start to see.
The acceleration of the revenues, we get from it which there will be a net.
Tailwind for us where our growth overall as we go into 'twenty, three and beyond tracking to the $250 million number in 2000. If you just kind of go through the math you can see this is going to be accretive to our growth in 'twenty, three and 'twenty four beyond what we've seen so far because the numbers get much more.
Substantial year on year that gives us a nice lift in our growth rate going forward.
Operator next question.
Our next question comes from Brian <unk> from Jefferies. Your line is open.
Hey, guys. Good morning, just one question Mark I know you don't give quarterly guidance and you've given us some color for the guidance for the year, but just any considerations, we need to be thinking about as it relates to Q2 and then maybe just under 30 dollar cost you mentioned that goes away related to Covid volumes go.
Down per test.
How quickly does that go away I'm guessing some of that's payroll and head count. So just curious like how does that stair step function.
Progress over the course of the year in terms of like eliminating that $30 number.
Yes, so Scott payroll, it's actually a fee we pay to our partner and that relationship that we have is only permissible during the phe. So there is absolute guarantee that will the phe goes away that that payment goes away. So it's directly 100%.
<unk> correlated to that.
In addition to some other costs I mentioned like logistics, and so on and so forth and obviously, if we stop the relationship and stop the payment we don't have the logistics cost as well because we're not making those special runs to areas that normally we wouldn't go to the pickup specimens. So I think you probably have all the pieces, Brian but ill go through it so.
We've talked about a level of testing.
Averaging about 30000 here early in the quarter, we talked about a lower level in the second half. So that's one consideration for Covid you know the phe is through the full second quarter, certainly thats much more of a revenue impact in.
In dollar.
Margin versus percentage margin.
A change from Q2 to the back half of the year and most importantly.
Back to growth mode, and every every week every quarter gives us an opportunity to go out and do what we're doing before the pandemic.
Went over more work slip offices grow organically and all of that.
Benefit the back half relative to where we were in Q1 and certainly expect to be in Q2. So coldly ramp continued ramp down of base business continuing to grow phe likely to go away at least that's in our guidance. But then also importantly that those incremental costs with the Covid testing will go away with the pag.
And then just to remind you what we've told you.
$160 billion, we're investing we said we spent about 30% so far.
And what we've said is in Q2, we've got some investments, we're making particularly we're releasing a new platform okay.
Think about that some of this as period expense, it's one off but some of this is repeatable levels seen in the back half of the year. So some headwinds in the second quarter will be with this investment we continue to make we think in a real great opportunity for us to grow long term, so think about that as well.
The timing of what will happen when throughout the remainder of the year.
I appreciate that thank you guys.
Our next question comes from Derik de Bruin with Bank of America.
Yes.
Thank you and good morning.
Sure.
A couple of questions on advanced diagnostic testing first of all.
One of the other public lab that does a lot of oncology testing.
You've talked about weaker volumes.
So we're coming out of the pandemic could you talk about what you're sort of seeing in oncology testing and some of that market and are you gaining share there and then as a follow up to that.
No.
Your your other main competitor has been doing a number of acquisitions in things like liquid biopsies. We gotta one how is the how are you thinking about building out your pipeline.
Sure.
For the advanced market or some of your booking for your dental acquisition to build that area to enhance the doors all natural bill absolutely. So.
No.
Share it with you.
What we're doing.
Last year, we indicated that our our business and our definition of advanced diagnostics is entirely declined around genetics and molecular than last year. Excluding COVID-19 because that is molecular there was about $1 3 billion in size number one number two is what we have done is we have focused on.
Four areas that I've indicated in my prepared remarks, we're putting the additional investments.
And that is that those investment dollars are throughout the entire value chain.
It's an investment upfront and new test.
Inorganic convention.
Also in our experience that we.
We work with our physicians and the patients that they serve.
And it's also around the services that we have to provide which another counseling with our sales force to be able to have better reach within the markets that we serve so its through the full value chain and what we have been running at historically has to grow.
3% to 4% growth in that business and what we said in our 'twenty one.
Investor Day is we're going to accelerate growth.
Single digits, and we indicated today that we're making good progress against that and that number is about 8% now in that majority.
The majority of the assumption is for doing that organically with the investment we're making however.
All in the past we've made some selective acquisitions.
Particularly.
Blueprint genetics, which gives us a bioinformatics capability that enhances our capability around genetics.
And what we indicated last year is that strategy is working in those areas of growth.
Our growing strong double digits and that strong double digits in 'twenty one versus 'twenty.
And also in 'twenty, one versus 19 pre pandemic levels. So we feel our organic strategy of investing is working out and then try to share as we continue to look at acquisitions that would make sense to enhance our portfolio, but remember we've been very disciplined about doing acquisitions.
We have very tight criteria.
Four acquisitions, where they have to be accretive to our revenue from a reasonable period of time.
Accreted to our belief around the earnings opportunities around ROIC.
They have to be accretive to our growth.
And therefore, when we look at potentially buying things versus investing or invest in yourselves. We're always considering the trade off of how we continue to build value. So that's been our strategy and our strategy. We put in place is working ahead of schedule and we feel good about it going forward, Jim anything like that.
And Dirk you asked about our oncology performance and when we think about our oncology business is obviously, a solid tumor component to that.
Pathology work that that throws off.
Molecular tests when needed.
<unk> is doing well and has recovered from 2019 levels and then Theres a core hematology business, which has always been a real strength of quest diagnostics and that business continues to expand so.
Our oncology portfolio is in good shape, you mentioned liquid biopsy.
<unk> is a market.
And what we've referred to as the <unk> D side minimally residual disease side.
We are working on an assay theres also commercially available assays from our suppliers, but considering Paul.
In terms of pre cancers and cancer screening assays.
Bit more out there.
Something we watch because you know there are 63 65 startup companies for the liquid biopsy that received a $1 billion of metro.
Venture capital money last year, and we're certainly keeping an eye on the space of the space and as Steve indicated.
If we find one that meets all of our criteria.
Multiple cost closely at it.
Operator next question.
Our next question comes from Ann Hynes from Mizuho Securities. Your line is open good morning Ann.
Hi, good morning, So one more margin question.
I think the issue is maybe we are overestimating the margins on Covid back into your base business.
And you referred to your partner, which I'm assuming is Cvs that you have to pay that fee can you tell us what percentage of your test is Cvs so neat.
To make sure that we are estimating just kind of the consolidated margin for Kobe correctly.
Hey, Mark so.
That's not our only park so when we talk about non traditional channels.
Not limited to one partner and what I would what I can share is that.
We grew before the.
<unk> changed to where it was almost up to half of our volume.
That was coming from the non traditional channels and a higher proportion of the non traditional volume wise uninsured.
And since the uninsured volumes have dropped off that for.
Proportion has dropped off as well as we go but it's still it's still significant and.
I would not want to comment specifically on any partner and certainly the one you mentioned is not our only partner.
Okay.
The range that percent of our volume that comes through these retail partners actually varies.
During searches I would say it's less.
It reduces because we start that then get a lot of estimates from physician offices urgent care centers and hospitals.
When Covid subsides then.
That becomes slightly larger percentage of our mix, but then during surges, we can do less pooling and Tim can take a little bit of ahead on the turnaround times $25 isn't a lot of the contracts and certainly in cms's payment. So theres a lot of dynamics that.
Can offset each other and that's why we really want to focus people that we can make a reasonable margin on the CMS reimbursement rate on COVID-19 .
Forward and it's not as if the price change will all drop to the bottom line.
And going back to what's in our numbers and what space and what's Covid.
I will keep on reiterating remember we took advantage of the opportunity we have.
In 2020 , one to invest in accelerating growth.
And those investments take time. They are ahead of schedule and Thats going to help US next year year on year. So think about that too is it kind of goes through the plan for this year into next.
Couple questions.
Our final question comes from Rachel bottomed from J P. Morgan Your line is open.
Hi, Thanks for taking the question. So could you just elaborate on the pls contract momentum that you've been seeing especially in hospitals return to normal how should we think about the cadence of those wind.
Revenue contributions for this year.
Yes so.
I mentioned in our prepared remarks, three that we've announced.
And.
Our relationships are strong and continuing.
To demonstrate we can bring real value to these integrated delivery systems.
Mind you all what it is is one is just we help them run their labs and you see one you see one but they save money.
A lot of hospital systems are struggling as you know.
Volumes just in some cases of recoveries like the acuity level of patients and the beds are higher on the fixed fixed reimbursement and then secondly, as are helping inflationary pressure.
Both systems, which has been tough for them to offset.
So so that's the first piece the second is when we ever relationship our advanced diagnostics business and in our overall sophisticated testing.
Which we call reference testing with hospitals also as an opportunity. So we typically bring bringing the larger share of that with hospitals and then finally, we have an opportunity.
<unk> in some cases to buy their outreach business, which is the nice opportunities for us to build value, which helps us with acquisition target, but also helps us because eventually they're accretive because we know how to integrate these quite well so let's work alright, yes.
Going forward the funnel continues to build.
<unk>, we have robust is in that as well.
Jim and I are internally.
Dave together working a large number of these accounts, we personally do a fair amount of travel and.
Spend time with the management team engaged in these opportunities. So we do believe it continues to yield us a nice opportunity going forward to continue to accelerate growth. So just anything like that.
I'd, just say that funnel of opportunities is very strong right now.
Contracts take a long time to negotiate obviously.
Inviting in somewhat that run your health system laboratory during Covid.
Yes.
Is that something that health systems are trying to get our debt.
Covid has subsided and helps us.
It used in taking care of Covid patients is under control I think youll see the deal activity pick up.
Yes.
Okay, great. So thanks again for joining our call. We appreciate your continued support and you all have a great day.
Thank you for participating in the quest diagnostics first quarter 2022 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 dotcom forward Slash investor.
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