Q3 2023 Quest Diagnostics Inc Earnings Call

Welcome to the Quest diagnostics diagnostics third quarter 2023 conference call.

The request of the company. This call is being recorded the entire contents of the call, including the presentation and question and answer session that will follow are the copyrighted property of quest diagnostics with all rights reserved any redistribution retransmission or rebroadcast of this call in any form without the written consent of quest diagnostics is.

Strictly prohibited.

Yeah.

I would like to introduce John <unk>, Vice President of Investor Relations.

For Quest Diagnostics go ahead please.

Thank you and good morning, I'm joined by Jim Davis, Our Chairman, Chief Executive Officer, and President and Samsung <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 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.

Any references to base business testing revenues or volumes referred 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. We grew our base business nearly 5% in the third quarter largely by driving growth in our physician and hospital channels.

Our consumer channel also continued to produce solid base business revenue growth.

In addition, we are pleased that we have now successfully completed negotiations for all our strategic health plan renewals that were scheduled for this year. These strengthen collaborations will position us to build on growth opportunities going forward.

Our invigorate program is on track to deliver 3% annual productivity improvements and savings. In addition, the productivity of our base business improved sequentially and year over year.

Given the strength of our business and a robust pipeline of professional lab services and M&A opportunities, we are well positioned for continued growth.

This morning, I'll discuss highlights from the third quarter, then Sam will provide more details on our financial results and talk about our updated financial guidance for 2023.

Now, let's turn to some of the highlights from the quarter. Our strategy is to drive growth by continuing to meet the evolving needs of our core customers physicians hospitals and consumers, we are enabling 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 remain a key driver of our growth with an emphasis on accretive hospital outreach purchases as well as smaller independent labs.

Finally, our strategy includes driving operational improvements across the business with strategic deployment of automation and AI to improve quality efficiency and service.

Here are a few key updates on the progress we have made in these areas and position lab services, we delivered mid single digit base business revenue growth driven by the strength in our cardio metabolic and general health and wellness testing our strong relationships with health plans were also a key driver in the quarter as I am.

Mentioned earlier, we successfully completed negotiations for all our strategic health plan renewals that were scheduled for this year.

Our success is a result of the clinical and economic value, we deliver to health plans and their members.

Today more than 50% of the health plan revenues are generated from these value based contracts, which are fueling double digit growth compared to our traditional health plan contracts together with our health plans, we have a renewed focus on initiatives to reduce leakage to high cost out of network labs.

In addition, we are working together to redirect volumes from high cost labs to quest.

Importantly, this is good for both patients and employers which are paid for the majority of health care costs.

In Hospital Lab services base revenues grew high single digits in the quarter as we saw strength in hospital reference testing and continued progress with our most recent pls relationships, including Northern Light Health Lee Health and tower health.

Our hospital strategy is to help health systems improve productivity and patient care by delivering innovative laboratory testing that is high quality accessible and affordable we continue to manage a robust pipeline of professional lab services and hospital outreach acquisition opportunities.

Health systems continue to face labor and cost pressures, which are prompting more of them to reach out to us for help with their lab strategy and in some cases monetize their hospital outreach business. Our professional lab services can help manage hospitals labs supply chain and workforce. We are also providing.

Insights from our analytical solutions to guide hospitals to deliver the right test to the right patient at the right time.

In addition hospital outreach acquisitions enable health systems to focus their expertise in capital on the areas of their business that support patient care and drive growth.

In consumer health, we generated solid base business revenue growth from our consumer initiated testing channel in the quarter.

In addition, our consumer channel was again profitable this quarter. We attribute this strong performance to continuing demand for our expanded test menu, including F. T is comprehensive health and tuberculosis blood testing.

Underpinning each of these key channels physician hospital and consumer is our advanced diagnostics. These highly innovative higher growth test areas include molecular genomics in oncology as well as several other key areas.

During the quarter, we grew revenues double digits and multiple clinical areas, including neurology women's and reproductive health cardio metabolic and infectious disease and immunology, we are particularly encouraged by growth in our all timers disease portfolio, which features our <unk> detect blood.

Testing services.

These innovative services use highly sensitive mass spectrometry technologies to provide insight into all timers risk based on amyloid proteins and the a P O genetic risk marker during.

During the quarter, we saw strong demand for our all timers cerebral spinal fluid panel as well, which helps providers identified levels of both amyloid and tau protein as well as the <unk> status.

We also grew significantly in womens and reproductive health, especially in noninvasive prenatal and carrier screening tests.

During the quarter the FDA granted breakthrough designation for our add no associated virus called AAV companion diagnostic, which we developed in collaboration with <unk> therapeutics for their duchesne muscular dystrophy gene therapy.

This FDA designation places us at the forefront of AAV test innovation and the growing area of cell and gene therapies and positions us to build collaborations with other biopharmaceutical companies.

Finally, the integration of Haystack oncology remains on track the acquisition positions us to enter the high growth liquid biopsy area of minimal residual disease or <unk> testing.

We expect to launch our first <unk> test in early 2024 from our oncology center of excellence in Lewisville, Texas.

Now turning to operational and productivity improvement our invigorate program is well on its way to delivering our targeted 3% annual productivity improvements and savings.

Like to share three examples of how we're improving operations.

First we are deploying front and automation to enhance specimen processing in our Pittsburgh, and Dallas laboratories, which will improve quality and productivity.

More sites are planned to receive front end automation during 2024.

We are expanding the use of optical character recognition or OCR to scan and data from samples coming into our labs by freeing up specimen processors from this manual data entry, we will improve our productivity of paper based Rex coming into all of our regional labs by 30%.

Finally, we continue to optimize our real estate footprint.

Post pandemic, we need less space for some of our call center and administrative functions, we've reduced our real estate footprint by nearly 250000 square feet by consolidating functions into existing spaces.

Before I hand, it over to Sam I'd like to offer our perspective on the rule recently proposed by the food and drug administration that would regulate laboratory developed test as medical devices lab developed tests are essential medical innovations that providers used to guide care for patients every day.

Services are highly regulated under federal legislation known as clear.

In addition to the oversight by states accredited bodies and Medicare as it makes coverage determinations.

If enacted the Fda's proposed rule would impact patient care by compromising access slowing diagnostic innovation and adding unnecessary costs to our health care system.

We agree with the long standing assertion of our Trade Association Act law that the FDA does not have the statutory authority to unilaterally regulate L. D teas under its existing medical device authority.

Now I'll turn it over to Sam to provide more details on our performance and our updated 2023 guidance Sam.

Thanks, Jim in the third quarter consolidated revenues were $2 3 billion down seven 7% versus the prior year.

<unk> business revenues grew four 6% to $2 to $7 billion, while COVID-19 testing revenues declined 92% to $26 million.

Revenues for diagnostic information services declined seven 9% compared to the prior year, reflecting lower revenue from COVID-19 testing versus the third quarter of 2022, partially offset by growth in our base business.

Total volume measured by the number of requisitions declined 5% versus the prior year with acquisitions contributing 50 basis points of the total volume.

Total base testing volumes grew five 7% versus the prior year.

Revenue per requisition declined seven 2% versus the prior year driven by lower COVID-19 molecular volume.

Base business revenue per req declined 4% due to growth in our pls relationships and lower demand for respiratory panels.

Partially offset by an increase in unit price reimbursement and test mix.

Positive unit price reimbursement was consistent with our expectations.

Reported operating income in the third quarter was $342 million or 14, 9% of revenues.

Compared to $392 million or 15, 8% of revenues last year.

On an adjusted basis operating income was $380 million or 16, 6% of revenues compared to $423 million or 17% of revenues last year.

The year over year decline in adjusted operating income is related primarily to lower COVID-19 testing revenues wage increases and higher benefit costs.

Partially offset by growth in the base business lower performance based compensation and head count reductions.

We continue to closely manage the cost of our corporate and support functions and our actions to reduce support costs by approximately $100 million. This year remain on track.

Reported EPS was $1.96 in the quarter compared to $2 17, a year ago.

Adjusted EPS was $2 22 compared to $2 36.

Operator: Welcome to the Quest Diagnostics 3rd quarter 2023 conference call. At the request of the company, this call is being recorded. The entire contents of the call, including the presentation and question and answer session that will follow, are the copyrighted property of Quest Diagnostics with all rights reserved.

Last year.

Cash from operations year to date was $745 million.

Versus $138 billion in the prior year period.

The decline in operating cash flow was primarily related to lower operating income and timing of collections.

Operator: Any redistribution, retransmission, or rebroadcast of this call in any form without the written consent of Quest Diagnostics is strictly prohibited.

Turning to our updated full year 2023 guidance rare.

Revenues are now expected to be between $9, one nine and $9 to $4 billion.

Base business revenues are expected to be between $8 99, and nine point all $4 billion.

COVID-19 testing revenues are expected to be approximately $200 million.

Shawn Bevec: I would like to introduce Shawn Bevec, Vice President of the Investor Relations for Quest Diagnostics. Go ahead, please. 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-gap measures. We provide a reconciliation of non-gap measures to comparable gap measures in the tables to our earnings press release.

Reported EPS narrowed to be in a range of $7 61.

The $7 71.

And adjusted EPS narrowed to a range of $8 65.

The $8 75, with a midpoint of $8 70.

Unchanged.

Cash from operations is expected to be approximately $1 $3 billion in.

And capital expenditures are expected to be approximately $400 million.

Shawn Bevec: Actful 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 10K and subsequently filed quarterly reports on form 10Q and current reports on form 8K. 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 excluded COVID-19 testing.

With that I will now turn it back to Jim.

Thanks Sam.

To summarize we delivered solid base business revenue growth of nearly 5% in the quarter. We successfully completed negotiations for all of our strategic health plan relationships that were scheduled for this year.

We also drove improved productivity in our base business as we have done throughout 2023.

Finally, given the strength of our base business combined with a robust pipeline of professional lab services and M&A opportunities. We are well positioned for continued growth ahead.

Shawn Bevec: 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.

And 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.

Jim Davis: Now, here is Jim Davis. Thanks, Sean, and good morning everyone. We grew our base business nearly 5% in the third quarter, largely by driving growth in our position in hospital channels. Our consumer channel also continued to produce solid base business revenue growth. In addition, we are pleased that we have now successfully completed negotiations for all our strategic health plan renewals that were scheduled for this year. These strengthen collaborations will position us to build on growth opportunities going forward.

You have any additional questions. We ask you please fall back into the queue.

So he placed into the queue. Please press star one from your phone.

Withdraw please press star two.

Again to ask a question press star one.

Our first question comes from Ann Hynes with Mizuho Securities You May go ahead.

Good morning. Thank you can you just comment on progress on what's happening with turnover and do you still feel good about your 16 and a half a margin goal for 2023.

Yes, good morning, Thanks, Hey, the employee turnover.

Jim Davis: Our invigorate program is on track to deliver 3% annual productivity improvements and savings. In addition, the productivity of our base business improves sequentially and year over year. Given the strength of our business in a robust pipeline of professional lab services and M&A opportunities, we are well positioned for continued growth.

Again improved from Q2 to Q3, so we've certainly seen improvements as we've marched from Q1 to Q2 to Q3 and expect to see more improvements as we go to Q4, having said that we're still not back to 2019 or pre COVID-19 levels, but.

But we feel optimistic that as we go into next year, it'll actually be a continued tailwind for us.

Jim Davis: This morning, I will discuss highlights from the third quarter.

Sam Samad: Then Sam will provide more details on our financial results and talk about our updated financial guidance for 2023.

Sam do you want to comment on yes, sure and thanks for the question so.

As you recall on the Q2 call, we talked about operating margins expectations being approximately 16, 5%.

Jim Davis: Now let's turn to some of the highlights from the quarter. Our strategy is to drive growth by continuing to meet the evolving needs of our core customers, physicians, hospitals, and consumers. We are enabling 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 remain a key driver of our growth with an emphasis on accretive hospital outreach purchases as well as smaller independent labs. Finally, our strategy includes driving operational improvements across the business, with strategic deployment of automation and AI to improve quality, efficiency, and service.

As Jim mentioned, we're seeing slight improvement in terms of turnover. We have made some investments in are going to be making some investments in terms of frontline phlebotomist and anticipation of volumes coming into the winter season here, but also the strong utilization that we've seen.

And with regards to margins, we now expect to be slightly below the approximately 16, 5% for the year, we're making really good progress on all the cost initiatives and also the productivity improvement initiatives volumes have been strong.

Especially in light of volumes, we have to make some targeted investments in terms of frontline staff and Phlebotomus, Yes, and let me just make one other comment on the margins you know if you go back and start with Q1 of this year in Q1, we were just slightly north of 15%.

Jim Davis: Here are a few key updates on the progress we have made in these areas. In physician lab services, we delivered mid single digit based business revenue growth driven by the strength in our cardio metabolic and general health and wellness testing. Our strong relationships with health plans were also a key driver in the quarter. As I mentioned earlier, we successfully completed negotiations for all our strategic health plan renewals that were scheduled for this year.

And in that quarter, we did $120 million of Covid revenue and as you know the reimbursement was still at $100 that quarter, we got to the second quarter and we improved our margins up to 16, 7% with Covid going from 120 down to $41 million and in the second quarter Cove.

Was that a blended rate of call. It $75 now we go back into the third quarter and Covid is really insignificant in our results. It's only a percent of our total revenue and the reimbursement on that small 1% as you know for the whole quarter was at 50 Bucks and we had 16, 6%.

Jim Davis: Our success is a result of the clinical and economic value we deliver to health plans and their members. Today, more than 50% of the health plan revenues are generated from these value based contracts, which are fueling double digit growth compared to our traditional health plan contracts. Together with the health plans, we have a renewed focus on initiatives to reduce leakage to high cost out of network labs. In addition, we are working together to redirect volume from high cost labs to quests. Importantly, this is good for both patients and employers, which are paying for the majority of health care costs.

So basically in line with Q2, so we're really proud of the productivity efforts and it's really coming through in these numbers and the progress that the teams have made from Q1 to Q2 to Q3.

And our next call operator Westenburg.

With Piper Sandler.

You May go ahead, all right. Thanks for taking hi, thanks for taking the question.

Jim Davis: In hospital lab services, based revenues grew high single digits in the quarter as we saw strength in hospital reference testing and continued progress with our most recent PLS relationships, including northern light health, Lee health, and tower health. Our hospital strategy is to help health systems improve productivity and patient care by delivering innovative laboratory testing that is high quality, accessible, and affordable. We continue to manage a robust pipeline of professional lab services and hospital outreach acquisition opportunities.

Thank you for the commentary on <unk>.

Proposal, one on al on <unk> I'm not sure.

If you can answer it yes, because I mean right now, it's still kind of maybe a little bit more hypothetical here, but now how it should be anticipate potential cost as it stands the way it is.

I mean is this about going back to the FDA with some of the more high value tasks or is this maybe about switching out tax maybe IBD cleared.

Products I mean, how does this.

Look for question.

Some of this may be theoretical right now because we don't know what it is going to look like in a month.

Jim Davis: Health systems continue to face labor and cost pressures, which are prompting more of them to reach out to us for help with their lab strategy, and in some cases monetize their hospital outreach business. Our professional lab services can help manage hospital labs, supply chain, and workforce. We are also providing insights from our analytical solutions to guide hospitals to deliver the right test to the right patient at the right time. In addition, hospital outreach acquisitions enable health systems to focus their expertise in capital on the areas of their business that support patient care and drive growth.

Yeah I think your last statement is accurate it's largely theoretical at this point because we don't know what is going to look like in the FDA certainly opened it.

Opened this up to commentary in response back from from industry and Hecla and other associations.

Look having said all of that.

L. L. D. Ts are not the most significant part of our operations in fact, its on a volume basis, it's less than 10% of what we do.

And the free labs that we do our L. Dte's most the majority of our LDP Zen are actually ISO certified we do companion diagnostics, which which is a regulated form of testing right you're on label for our pharmaceutical drugs.

Jim Davis: In consumer health, we generated solid base business revenue growth from our consumer initiated testing channel in the quarter. In addition, our consumer channel was again profitable this quarter. We attribute the strong performance to continuing demand for our expanded test menu, including STIs, comprehensive health, and tuberculosis blood tests. Underpinning each of these key channels, physician, hospital, and consumer is our advanced diagnostics. These highly innovative, higher growth test areas include molecular genomics and oncology, as well as several other key areas.

No.

It's just not.

It's not a huge deal for US right now now having said all that we're going to work with our trade Association. We don't believe the rule makes sense. We don't believe it's fair and we will continue to work to arrive at something that we do think is good for everyone.

Operator next question.

And our next question comes from Lisa Gill with Jpmorgan you May go ahead.

Jim Davis: During the quarter we grew revenues, double digits, and multiple clinical areas, including neurology, women's and reproductive health, cardiometabolic, and infectious disease and immunology. We are particularly encouraged by growth in our Alzheimer's disease portfolio, which features our AD detect blood testing services. These innovative services use highly sensitive mass spectrometry technologies to provide insight into Alzheimer's risk based on AMOLED proteins and the APOE genetic risk marker. During the quarter we saw strong demand for our Alzheimer's cerebral spinal fluid panel as well, which helps provide our Alzheimer's identified levels of both AMOLED and TOW proteins, as well as the APOE status. We also grew significantly in women's and reproductive health, especially in non-invasive prenatal and carrier screening tests.

Thanks, very much good morning, I'm just curious if you have an update as to how we should think about Panama herself that going into 2024, just given the current environment in D C.

Sure well you're right. The current environment is a little.

Certain at this point and but here's here's what I would say.

The current standstill in salt in Congress.

I think we'll make what we call a comprehensive Pam.

Panama reform more difficult right. So salsa I think will be more difficult to get through their share having said all that Pamela a delay in the cuts of Panama again.

Went to the CBL. So this is a new analysis from the CBL updated versus last year and again, the CBO scored a one year delay as a significant cost savings to the government.

And again the reasons for that is because if you continue to delay the Panama cuts you're going to continue.

Jim Davis: During the quarter the FDA granted breakthrough designation for our ADNO associated virus called AAV, companion diagnostic, which we developed in collaboration with syreptopheraputics, for their Duchenne muscular dystrophy gene therapy. This FDA designation places us at the forefront of AAV test innovation in the growing area of cell and gene therapies and positions us to build collaborations with other biopharmaceutical companies.

Continued to delay a new data collection process and we our trade Association and obviously the CBO is convinced that a new data collection process will lead to higher rates. So we feel good.

That the likelihood of a fourth Pam a delay.

Will occur, but certainly it has to be part of some broader health care package and Theres a lot of things that will be in that health care package that are important to a lot of different constituencies. So we're confident that something will get done there.

Jim Davis: Finally, the integration of Haystack oncology remains on track. The acquisition positions us to enter the high growth liquid biopsy area of minimal residual disease or MRD testing. We expect to launch our first MRD test in early 2024 from our oncology center of excellence in Lewisville, Texas.

Thank you.

Operator.

And our next question comes from Peter Chickering with Deutsche Bank You May go ahead.

Hi, there you've got Kieran Ryan on for <unk>. Thanks for taking the question.

Jim Davis: Now turning to operational and productivity improvement, our invigorate program is well on its way to delivering our targeted 3% annual productivity improvements and savings. I'd like to share three examples of how we're improving operations. First, we are deploying front end automation to enhance specimen processing in our Pittsburgh and Dallas laboratories, which will improve quality and productivity. More sites are planned to receive front end automation during 2024. We are expanding the use of optical character recognition or OCR to scan in data from samples coming into our labs. By freeing up specimen processes from this manual data entry, we will improve our productivity of paper-based wrecks coming into all of our regional labs by 30%.

Just looking at the sequential margin progression implied for <unk>. This year it looks like it's.

Materially better than kind of what you averaged in that pre COVID-19 2017 through 2019 range.

So is that just really the tailwind you have around it.

Invigorate better turnover and lower deferred comp just combining to drive a better trends than normal.

And I was just wondering is there is there any offsets there on some of these oil and commodity related costs. So we've seen step ups.

Relatively recently.

Yes, Kieran this is Sam thanks for the question. So I think some of the drivers that you would expect in Q4 are what we've been executing and seeing in Q3 and in earlier in the year I mean, Jim talked about the sequential improvement in operating margins. Despite the fact that COVID-19 is coming down significantly.

Jim Davis: Finally, we continue to optimize our real estate footprint. Post pandemic, we need less space for some of our call center and administrative functions. We've reduced our real estate footprint by nearly 250,000 square feet by consolidating functions into existing spaces.

So what we would expect in Q4 is the following that helps our margins, which has been playing out so far over the course of the year. One is price we continue to see a healthy positive environments around price and we in fact saw positive price in Q3, and we expect to see positive price in Q4, and that's driven by all that.

Jim Davis: Before I hand it over to Sam, I'd like to offer our perspective on the rule recently proposed by the Food and Drug Administration that would regulate laboratory developed tests as medical devices. Lab-developed tests are essential medical innovations that providers use to guide care for patients every day. These services are highly regulated under federal legislation known as CLIA. In addition to the oversight by states, accredited bodies and Medicare as it makes coverage determinations.

Work that we're doing around the strategic plan.

Third party plan renewals and some of the value based contracting that we're doing there so definitely the healthiest pricing environment that we've seen in awhile CIP. As you said is a factor it was dilutive in the first quarter. It turned profitable in the second quarter. It was profitable in the third and we expect it to be profitable again in the fourth.

Jim Davis: If enacted, the FDA's proposed rule would impact patient care by compromising access, slowing diagnostic innovation, and adding unnecessary costs to our health care system. We agree with the longstanding assertion of our Trade Association, ACLA, that the FDA does not have the statutory authority to unilaterally regulate LDTs under its existing medical device authority.

We continue to do the cost.

The benefit of the cost reductions in Q4, we talked about $100 million of annual impact of cost reductions on the SG&A line and we expect to see that at.

At least one third of that being in Q4 as well because those savings started in Q2, and then we're taking a lot of actions as well around improving productivity invigorate. There's one of them that you mentioned, but that's also factoring into margins. So all of that is driving the <unk>.

Sam Samad: Now I'll turn it over to Sam to provide more details on our performance and our updated 2023 guidance. Sam, thanks Jim. In the third quarter, consolidated revenues were $2.3 billion, down 7.7% versus the prior year. Based business revenues grew 4.6% to $2.27 billion, while COVID-19 testing revenues declined 92% to $26 million. Revenues for diagnostic information services declined 7.9% compared to the prior year, reflecting lower revenue from COVID-19 testing versus the third quarter of 2022, partially offset by growth in our based business.

Then pre pandemic trends that you've talked about now as I said earlier, we are still seeing turnover in higher than what we would expect it has improved slightly in Q3, but it is still trending higher than.

Where it was pre pandemic and.

As I said, given the strong utilization that we're seeing across the business and we saw that in Q3 slow we're having to make some targeted increases across frontline staff a phlebotomist to help service some of these volumes and we expect that.

Sam Samad: Total volume measured by the number of requisitions declined 0.5% versus the prior year, with acquisitions contributing 50 basis points to total volume. Total based testing volumes grew 5.7% versus the prior year. Revenue for requisition declined 7.2% versus the prior year, driven by lower COVID-19 molecular volume. Based business revenue per rack declined 0.4% due to growth in our PLS relationships and lower demand for respiratory panels. Partially offset by an increase in unit price reimbursement and test mix.

To be an impact in Q4 and offsetting morn.

More of a headwind of an impact.

Okay.

Our next caller is Elizabeth Anderson with Evercore you May go ahead.

Hi, guys. Thanks, so much for that question I guess I just wanted to double click on that gross margin a little bit more in the third quarter I think in in different answers, you've given us bits and pieces, but if you could just talk either sequentially or on a year over year basis.

Bank or either if you have dollar amounts or sort of rank order the biggest contributing factors and then secondarily. It sounds like you have.

And some good sightline and can invigorate savings to the fourth quarter and some continuing productivity initiatives. How do we think about the flow through of that into as we start to think about 2024 and sort of what we might be expecting from those sort of cost savings and invigorate program. Thank you.

Sam Samad: Positive unit price reimbursement was consistent with our expectations. Reported operating income in the third quarter was $342 million or 14.9% of revenues compared to $392 million or 15.8% of revenues last year. On an adjusted basis operating income was $380 million or 16.6% of revenues compared to $423 million or 17% of revenues last year. The year-over-year decline in adjusted operating income is related primarily to lower COVID-19 testing revenues, wage increases and higher benefit costs.

Yes. Thank you so with regards to gross margin.

Gross margins in Q3 were in line with our expectations I mean, the key driver I would say for them being below Q2 levels or the fact that we had lower revenues of $45 million going in Q3 versus Q2. So sequentially. We saw a $45 million lower revenues now a portion of that was COVID-19 not the biggest poor.

<unk> it was about roughly $15 million lower revenues in terms of Covid and then because of seasonality.

As expected we saw lower revenues on the base business as well. So when you think about the impact on gross margins and gross margins were down a percentage point sequentially. That's almost entirely driven by revenue the revenue decline and then on Covid.

Sam Samad: Partially offset by growth in the based business, lower performance-based compensation and headcount reductions. We continue to closely manage the costs of our corporate and support functions and our actions to reduce support costs by approximately $100 million this year remain on track. Reported EPS was $1.96 in the quarter compared to $2.17 a year ago. Adjusted EPS was $2.22 compared to $2.36 last year. Cash from operations year-to-date was $745 million versus $1.38 billion in the prior year period. The decline in operating cash flow was primarily related to lower operating income and timing of collections.

We're also talking about or what we are seeing in Q3 was a lower price around COVID-19 in Q2, driven by the fact that the phe didn't end until midway through the quarter, we saw a higher price on average for Covid, we saw a lower price in Q3. So that has an impact on gross margin as well. So those are the key drivers on gross margin.

In line with our expectations Invigorate and Jim will make a couple of comments on invigorate here, but with regards to invigorate. The actions are yielding the percent productivity improvements and cost reductions that we expected and those will continue into 2024, but Jim.

Maybe make a couple of moments, yes, certainly Elizabeth so.

Sam Samad: Turning to our updated full year 2023 guidance, revenues are now expected to be between $9.19 and $9.24 billion. Base business revenues are expected to be between $8.99 and $9.04 billion. COVID-19 testing revenues are expected to be approximately $200 million. Reported EPS narrowed to be in a range of $7.61 to $7.71 and adjusted EPS narrowed to a range of $8.65 to $8.75 with the midpoint of $8.70 unchanged. Cash from operations is expected to be approximately $1.3 billion and capital expenditures are expected to be approximately $400 million.

We're going to set targets going into 2020 four that are similar to what we've done in the past. So we expect to generate approximately 3% variable cost productivity.

Throughout our entire operation that's phlebotomy logistics the front end up our lab and then actually all of the processing, we've talked broadly about the use of automation, we're driving that as fast and furious as we can we've talked about the use of artificial intelligence to do some of the.

Manual work that our lab taxes could be automated.

Reading of curves.

We've talked about in the past the use of artificial intelligence in microbiology Hematology Urinalysis and then we continue to work you know the standard things that we always work as a business reimbursement and denials, there's always a big bucket of opportunity for us paper racks I talked in the in the prepared remarks about implementing.

Jim Davis: With that, I will now turn it back to Jim. Thanks, Sam. To summarize, we delivered solid base business revenue growth of nearly 5% in the quarter. We successfully completed negotiations for all of our strategic health plan relationships that were scheduled for this year. We also drove improved productivity in our base business as we have done throughout 2023.

Jim Davis: Finally, given the strength of our base business, combined with a robust pipeline of professional lab services and M&A opportunities, we are well-positioned for continued growth ahead.

OCR technology to read all of these paper Rex had still come in we work them down every single year, but there's still a fair number even if it's 15% to 20% when you do the math on that close to 200 million racks theres still a ton of opportunity. There. So we feel good about our productivity efforts going into next year, we invest in it we put.

Talented teams around it and we will continue to drive it hard.

Great. Thanks, so much.

Youre welcome.

Oh, yes.

Operator: And now we'd be happy to take your questions. Operator? Thank you.

America.

Yeah.

Hi, Good morning, Thanks for taking my question, So I've got two.

Operator: 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 any additional questions, we ask you please fall back into the queue. To be placed into the queue, please press star one from your phone. To withdraw, please press star two. Again, to ask a question, press star one.

The first one just going back to Pam.

You know in 2023, it got delayed and I think it will probably get the weight in 'twenty four but in 'twenty three we didn't see a lot of the savings dropped down to the bottom line because of Hay stack and some of the other.

Investments that you're doing I guess for 'twenty four.

Does that drop down if it were to get delayed I E.

Anne Hines: Our first question comes from Anne Hines with Visuho Securities. You may go ahead. Good morning. Thank you. Can you just comment on progress on what's happening with turnover? Do you still feel good about your 60-1.5 margin goal for 2023? Thanks. Yes, good morning. Thanks. Hey, the employee turnover, again, improved from Q2 to Q3. So we've certainly seen improvements as we've marched from Q1 to Q2 to Q3 and expect to see more improvements as we go to Q4.

Is it accretive to what your plans would be is that you're going to do it or does it get offset by that so that's the first one and then I've got a follow up.

Yeah, well first I'd say with respect to the dropdown when we look at the dropdown on the incremental growth that we've gotten through our base business and we look at the dropdown on that growth.

We're pretty happy with it okay and that that is after the dilution effect that we've seen from haystack. The investments, we're making there which are going to propel future growth as we go into next year.

We will take our we're not going to give guidance today, but we're going to take a close look if pamela does get delayed we'll obviously look at both investment opportunities to drive future growth. We will look at investment opportunities to drive margin improvement Invigorate investments and then we'll also obviously.

Anne Hines: I mean, say that we're still not back to 2019 or pre-COVID levels, but we feel optimistic that as we go into next year, it'll actually be a continued tailwind for us. Sam, do you want to comment on that? Yeah, sure. And thanks for the question. So as you recall on the Q2 call, we talked about operating margins, expectations being approximately 16.5%. As Jim mentioned, we're seeing slight improvement in terms of turnover.

We look at returning.

We always do the majority of our free cash to shareholders.

Thanks.

Just follow up on the Alzheimer diagnostics are you going to seek FDA approval for that I'm, just curious on reimbursement patient costs, what's the test cost in doing it just I'm just curious on sort of what your strategy is there.

Anne Hines: We have made some investments and are going to be making some investments in terms of front line in a phlebotomist and anticipation of volumes coming into the winter season here, but also the strong utilization that we've seen. And with regards to margins, we now expect to be slightly below the approximately 16.5% for the year. We're making really good progress on all the cost initiatives and also the productivity improvement initiatives, volumes have been strong, but we, you know, especially in light of volumes, we have to make some targeted investments in terms of front line staff and phlebotomists.

That is a new diagnostic category.

Okay. So there is reimbursement for the test today CMS has established about $100 reimbursement for the blood based <unk>.

$42 40 test having.

Having said all that the preponderance of our orders in the preponderance of our reimbursement actually comes from client Bill where we directly Bill health systems that are that are caring for these patients and I would tell you that the reimbursement is it is better than what we see on average for many.

Anne Hines: Yeah, and let me just make one other comment on the margins. You know, if you go back and start with Q1 of this year, and Q1, we were just slightly north of 15%. And in that quarter, we did $120 million of COVID revenue, and as you know, the reimbursement was still at $100 that quarter. We go to the second quarter, and we improved our margins up to 16.7% with COVID going from 120 down to 41 million.

Care, because it's a incredibly value added tests so.

So we price it appropriately.

At this point, we're not seeking FDA approval for it it's an L. D T like many of the <unk> that we run.

And so we're pretty happy.

Anne Hines: And then the second quarter COVID was at a blended rate of, of, call it $75. Now we go back into the third quarter, and COVID is really insignificant in our results. It's only a percent of our total revenue, and the reimbursement on that, you know, small 1%, as you know, for the whole quarter was at $50. And we hit 16.6%. So, you know, basically in line with Q2. So we're really proud of the productivity efforts, and it's really coming through in these numbers, and the progress that the teams have made from Q1 to Q2 to Q3.

With it the growth has been substantial and I would also tell you that the growth of our CSF testing the cerebral flus cerebral.

Spinal fluid testing is also significantly up in the quarter as clinicians are.

You know using both CSF and blood based biomarkers to make to help with the diagnosis of patients and you know.

Derek maybe just to come back to the <unk> question and add a couple of points there for you and others that are on the call.

Given the uncertainty around Panama, we will plan today as a Panama is going to come back and will not be delays in 2024.

David Westenberg: And our next caller, David Westenberg, with Piper Sandler. You may go ahead. Hi, thanks for taking the question.

I'd say, that's the prudent thing to do that's the only thing we can do at this stage given the uncertainty so we will plan as if.

Prices will come down next year, because Panama will come back.

Jim Davis: Thank you for the commentary on the FDA's proposal on LEDs. I'm not sure if you can answer it yet because right now it's still maybe a little bit more hypothetical here, but now how it should be anticipate potential costs is if it stands the way it is. I mean, is this about going back to the FDA with some of the more high-value tasks, or is this maybe about switching out to maybe IVD clear products?

Now if as we.

I would say on balance I would say there is a likely chance that payment will get delayed and if that were to happen and as we've talked about before we could see an $80 million to $90 million benefit as a result of that delay not benefit versus this year, but benefits versus our planning.

And when that and if that happens I should say then we will assess how much we invest in the business to everything that Jim said earlier, how much potentially could drop to the bottom line to EPS, but that decision is not made yet we'll make that decision when we set guidance and we will evaluate the investments that we can make and then evaluate what we can do.

Jim Davis: I mean, how does this, you know, look for a request? And, you know, I get some of this is maybe theoretical right now because we don't know what it's going to look like in a month. Yeah, I think your last statement is accurate. It's largely theoretical at this point because we don't know what it's going to look like. And the FDA, you know, certainly opened this up to commentary and in response back from industry and aqua and other associations.

As EPS improvement.

Great. Thanks for the clarity I appreciate it.

Our next caller is Andrew Brachman with William Blair You May go ahead.

Hi, guys. Good morning, and thanks for taking the question.

Jim Davis: You know, look, having said all that, you know, LDPs are not the most significant part of our operations. In fact, it's on a volume basis. It's, you know, less than 10% of what we do. And the three labs that we do our LDPs, most the majority of our LDPs in, are actually, you know, ISO certified. We do companion diagnostics, which is a regulated form of testing, right? You're on label for a pharmaceutical drug. So, you know, it's just not, you know, it's not a huge deal for us right now.

Jim I want to go back to your comments around reducing leakage to the high cost labs I think you talked about in your opening remarks, I know that's sort of part of the strategy here, but can you maybe just sort of talk about that opportunity broadly and just sort of quantify how big that could be for your growth going forward.

Yes, I think there's there's two buckets of opportunity there one is reducing leakage to out of network labs and then the second is what I would call steerage of work from high priced in network labs generally in health systems too.

Two independent labs like quest diagnostics, so generally two different initiatives, but it really starts with very strong and tight collaboration with our commercial payers. We work hand in hand with them. They provide us the information on what physicians are using out of network high priced elaborate.

Jim Davis: Now, having said all that. We're going to work with our trade association. We don't believe the rule makes sense. We don't believe it's fair. And we'll continue to work to arrive. It's something that we do think is good for everyone.

Operator: Operator, next question.

<unk> and they provide us the information that what doctors are sending work into health system labs, which as you know not good for patients who are going to pay higher deductibles higher co pays and obviously not good for the people that are paying for the health care in general that's still employers in the country. So it's a really tight partnership.

Lisa Gill: Our next question comes from Lisa Gill with JP Morgan. You may go ahead. Thanks very much.

Jim Davis: Good morning. I'm just curious if you have an update as to how we should think about Pam or salsa going into 2024, just given the current environment and DC. Sure. Well, you're right. The current environment is a little uncertain at this point. And but here's here's what I would say. You know, the current standstill in Congress. I think we'll make what we call a comprehensive pamma reform more difficult, right? So salsa, I think, will be more difficult to get through this year.

We get the information, we distribute that information out to our commercial team.

We call on the customers try to convince them to move to work at the same time, we're always messaging as are the commercial payers out to patients to remind them that.

They can save money by using independent labs like Quest diagnostics, we continue to message physicians and providers and and you know that's why we're seeing significantly higher growth rates with the commercial plans, where we have established these types of relationships.

Jim Davis: Having said all that, Pamma, a delay in the cuts of Pamma, again, went to the CBO. So this is a new analysis from the CBO updated versus last year. And again, the CBO scored a one year delay as a significant cost savings to the government. And again, the reasons for that is because if you continue to delay the pamma cuts, you're going to continue to delay a new data collection process. And we are trade association.

Jim Davis: And obviously the CBO is convinced that a new data collection process will lead to higher rates. So we feel good that the likelihood of a fourth pamma delay will occur, but certainly it has to be part of some broader healthcare package. And you know, there's a lot of things that will be in that healthcare package that are important to a lot of different constituencies. So we're confident that something will get done.

Operator: Thank you. Operator.

Okay.

Yes.

Operator.

Kevin Caliendo with UBS you May go ahead.

Thanks, and thanks for taking my question Congrats on the contract renewals with your major repair.

Partners can you maybe talk a little bit about if theres anything new in the contracts the duration of the contracts is there. The last time you did this there were incentives that actually benefited you in terms of driving volumes just wondering if anything has changed.

Both positively or negatively pricing duration term incentives that kind of thing.

Yeah, we generally don't talk about the terms duration and things like that but what I will tell you is that the trend continues we seek to establish a fair price first and foremost and then second.

And as I just mentioned in the previous question.

Kieran Ryan: And our next question comes from Pito Chickering with Deutsche Bank. You may go ahead. Hi there. You got Kieran Ryan on for Pito. Thanks for taking the question. Just looking at the sequential margin progression implied from 3Q to 4Q this year. It looks like it's, you know, materially better than kind of what you averaged in that pre-COVID 2017 through 2019 range. So is that just really the tailwinds you have around, you know, CIT and big rate better turnover and lower to third count.

Where we can move these requisitions and improve our share of the commercial payer spend we tried to design incentives around that in addition, we tried to design incentives.

When we do a hospital outreach acquisition and the prices go from 300% of Medicare as an example down to our rates, we try to step those rates down over a period of time, so that we derive benefit and the commercial plan derived benefits. So we worked hard to build those types of incentives into the agreement.

And I think the trend just continues in the direction we want.

Kieran Ryan: Just combining, you know, drive a better trends and normal. And I was just wondering if there are any offsets there on some of these oil and commodity related costs that we've seen step up relatively recently. Yeah, Kieran. Thanks for the question. So I think some of the drivers that you would expect in Q4 are, you know, what we've been executing and seeing in Q3 and earlier in the year. I mean, Jim talked about the sequential improvement in operating margins despite the fact that COVID is coming down significantly.

Is this does this lead to sort of more value based care potential for you guys going forward.

Well I separate again value based care from value based contracts. These are what we call value based contracts, meaning when we deliver value back to the commercial payer.

There can be incentive payments involved in that.

When we talk about value based care. These are really our arrangements with some of these ACO reach organizations and some of the other large physician groups that have taken on risk for Medicare advantage plans and we continue.

Kieran Ryan: So, you know, what we would expect in Q4 is the following that helps our margins, which has been playing out so far over the course of the year. One is price. We continue to see, you know, a healthy positive environment around price. And we in fact saw positive price in Q3 and we expect to see positive price in Q4. And that's driven by all the work that we're doing around, you know, the strategic plan.

To embed ourselves when these within these ACO leach programs and continue to work closely with large physician groups that take on this risk and as we've said in the past when these types of relationships are really good for the lab industry. They they.

Managing risk you're managing.

Kieran Ryan: The third party plan renewals and some of the value based contracting that we're doing there. So definitely the healthiest pricing environment that we've seen in a while. Now, CIT as you said is a factor. It was diluted in the first quarter. It turned profitable in the second quarter. It was profitable in the third and we expected to be profitable again in the fourth. You know, we continue to do the cost. I mean, the benefit of the cost reductions in Q4.

The cost of health care to a fixed number every year you are generally going to be incentive to provide early care and early diagnostics. So that you don't have disease progress into more expensive in patient care.

And we continue to work towards that.

Thanks, so much.

Youre welcome.

Our next caller is Jack Meehan with Nephron Research you May go ahead.

Kieran Ryan: We talked about 100 million of annual impact of cost reductions on the SGNA line and we expect to see that. You know, at least one third of that be in Q4 as well because those savings started in Q2. And then we're taking a lot of actions as well around improving productivity and vigorous is one of them that you mentioned, but that's also factoring into margins. So all of that is driving the better than pre pandemic trends that you've talked about.

Thank you good morning.

I had a couple of clean up questions for Sam first is on collections. So seeing a little air builds I know you called it out but anything any color you can add on that and then second is on the base grows 5% pretty good wishes wondering if whether weekdays.

Any impact could have actually been better on an underlying basis. Thanks.

Kieran Ryan: Now, as I said earlier, you know, we are still seeing turnover in, you know, higher than what we would expect. It has improved slightly in Q3, but it is still trending higher than, you know, where it was pre pandemic. And as I said, given the strong utilization that we're seeing across the business and we saw that in Q3, well, we're having to make some targeted increases across frontline staff and flabotomous to help service some of these volumes. And we expect that to be an impact in Q4, an offsetting more, you know, more of a headwind of an impact.

Yeah sure I'll take the first one Jack.

Then we'll talk a little bit about the.

The one timers, so to speak whether weather days.

Listen collections nothing nothing of note there.

I think they are trending or DSO, it's trending a bit up that's really more normal trends given the reduction in COVID-19 with COVID-19.

I think that would help our dsos overall to shorter collection window.

And Dsos down as a result of a higher mix of Covid, but if you look back to pre pandemic I think the dsos are kind of trending back to where they were pre pandemic. So really nothing nothing of note. There. There is some timing at the end of Q3 as well, but thats.

Elizabeth Anderson: Our next caller is Elizabeth Anderson with Evercore. You may go ahead. Hi, guys. Thanks so much for their question. I guess I just want to double click on the gross margin a little bit more in the third quarter. I think in different answers, you've given us bits and pieces, but if you could just talk either sequentially or on a year of your basis sort of a rank, or either if you have dollar amounts or sort of rank order the biggest contributing factors.

Just normal timing within quarters. So I would say in general collections are on track and we're happy with where things are but Jim did you want to make a couple of comments around based on growth in any one timers yeah.

Whether in days and things like that versus last year weather was a slight help I mean.

Elizabeth Anderson: And then secondly, it sounds like you have some good sight line and to invigorate savings to the fourth quarter and some continuing productivity initiatives. How do we think about the flow through on sort of the of that?

Yeah.

Not significant at all Jack but it was a slight help because last year's hurricane in September was worse than this year's hurricane the only other comment on days that I would make is.

Sam Samad: We start to think about 2024 and sort of what you might be expecting from those sort of cost savings and invigorate programs. Thank you. Yeah, thank you. So with regards to gross margin, you know, gross margins in Q3 were in line with our expectations. I mean, the key driver, I would say, for them being below Q2 levels were the fact that we had lower revenues of $45 million going in Q3 versus Q2.

Early in the quarter in July the <unk>.

Fourth of July fell on a Tuesday, this year versus a Monday last year so in essence.

Your Monday, and Tuesday are really really bad days versus a year ago, you only had one bad day called a Monday because of fourth fell on a Monday.

But again, that's one day out of.

So, yes, I mean, a little bit of an impact there, but not that significant.

Sam Samad: So sequentially we saw $45 million lower revenues. Now a portion of that was COVID, not the biggest portion. It was about roughly $15 million lower revenues in terms of COVID. And then because of seasonality, as expected, we saw lower revenues on the base business as well. So when you think about the impact on gross margins and gross margins were down percentage points sequentially, that's almost entirely driven by revenue, the revenue decline.

I appreciate it thanks guys.

It's Joe.

Our next caller is Patrick Donnelly with Citi. You May go ahead.

Hey, guys. Thanks for the questions maybe a couple of follow ups on Haystack, you know it sounds like still a 24 timeline. There can you just talk about I guess any more specific timing and the catalysts out there when we could expect to see some data and then just also the spend expectations related to getting that through the approval process as we work on.

Sam Samad: And then on COVID, you know, we're also talking about a or what we are seeing in Q3 was a lower price around COVID in Q2, you know, driven by the fact that the PhD didn't end until midway through the quarter. We saw higher price on average for COVID. We saw lower price in Q3. So that has an impact on gross margin as well. So, you know, those are the key drivers on gross margin.

Her way through 'twenty four would be helpful. Thanks, guys.

Yeah, as we've said haystack continues on the timeline that we set.

For for ourselves for the team.

There has been evidence generation, obviously, that's what we made are.

As part of our decision making process now as we get the assay, what I call ready for commercial release commercial production.

Sam Samad: It's in line with our expectations, invigorates and Jim will make a couple of comments on invigorate here. But with regards to invigorate, the actions are yielding the percent productivity improvements and cross reductions that we expected. And, you know, those will continue in 2024.

We're in the process of establishing relationships with some of our key oncology partners. So when the assay is ready we will start to do some of the testing.

Jim Davis: But Jim, maybe make a couple of comments. Yeah, certainly Elizabeth. So we're going to set, you know, targets going into 2024 that are similar to what we've done in the past. So we expect to generate, you know, approximately 3% variable cost productivity throughout our entire operations. That's lobotomy, logistics, the front end of our lab and then actually all of the processing. You know, we've talked broadly about the use of automation. We're driving that as fast and furious as we can.

Likely.

We'll use a lot of that early testing to then seek reimbursement once we get a substantial <unk>.

<unk> of testing that we feel good about approaching the Max on.

And so far so so good we're bringing up the assay as we mentioned at our Lewisville.

Texas Oncology center of excellence and feel good about that I'll, let Sam touch on.

The financials with respect, yes, sure I mean with regards to spend all talking dilution terms in EPS terms here. This year and then I'll talk address your question around 24, Patrick So again very pleased with the progress that the team is making this year, we're expecting EPS dilution to be in the 15%.

Jim Davis: We've talked about the use of artificial intelligence to do some of the manual work that our lab taxes could be automated, you know, reading of curves. We've talked about in the past, the use of artificial intelligence and microbiology, hematology, your analysis. And then we continue to work, you know, the standard things that we always work as a business reimbursement and denials is always a big bucket of opportunity for us. Paper rex, I talked in the prepared remarks about implementing OCR technology to read all of these paper rex that still come in.

<unk> range, we've talked about that on the Q2 call. It still in the same range, 15% to 20.

If you look towards 24.

What we've said and Theres still applies is that the annualized dilution in 2024 is going to be less than what we expect to see what you see this year. So the 15 to 20, if you annualize that that's 30 to 40 next year. So we expect on an annual basis next year to be less than.

Jim Davis: We work them down every single year, but there's still a fair number. Even if it's 15 to 20%, when you do the math on that close to 200 million rex, there's still a ton of opportunity there. So we feel good about our productivity efforts going into next year. We invest in it. We put talented teams around it and we'll continue to drive it hard.

Operator: Okay. Thank you so much. You're welcome.

Where things are trending this year, so improvement just on an annual basis and then.

We look forward, we expect <unk> 25 dilution to be lower than 24, and then we expect 26 to actually be accretive. So that's consistent with what we said when we announced the deal consistent with what we said on the Q2 call.

Operator: Hi, good afternoon. Thanks for taking my question. So I've got two.

Understood. Thank you guys.

Jim Davis: The first one is going back to Pam. You know, in 2023, it got delayed. And I think it'll probably get delayed in 24. But in 23, we didn't see a lot of the savings drop down the bottom line because of paystack and some of the other investments that you're doing. I guess for 24, or, you know, does that drop down if we're to get delayed? IE, you know, is it creative to what your plans would be?

Thanks, Patrick.

Our next caller is Erin Wright with Morgan Stanley You May go ahead.

Great. Thanks, you laid out some of the key profit drivers for the fourth quarter.

We think about what kind of continues into 2024 I think you mentioned in the previous question Kenneth R. A previous question productivity gains should continue and I understand there's payment dynamics as well, they're somewhat unknown, but should we anticipate a deviation from the long term profit guidance is like 50 to 100 basis points of operating margin expansion next year.

Jim Davis: Is it you're going to do it? Or does it get offset by that? So that's the first one that I've got to follow? Yeah, well, first I'd say with respect to the drop down, when we look at the drop down on the incremental growth that we've gotten through our base business and we look at the drop down on that growth, you know, we're, we're pretty happy with it. Okay. And that, that is after, you know, the dilution effect.

Well, let me clarify Aaron's and thanks for the question by the way so what we talked about in Investor Day is an improvement of 75 to 150 basis points over the three years and that's off of the.

Jim Davis: That we've seen from haystack, the investments we're making there, which are going to propel future growth. As we go into next year, you know, we will take a, we're not going to give guidance today, but we're going to take a close look. If PAMA does get delayed, well, obviously look at both investment opportunities to drive future growth. We'll look at investment opportunities to drive margin improvement and vigorate investments. And then we'll also obviously look at, you know, returning. I mean, like we always do the majority of our free cash to shareholders. Thanks.

Right.

That we have for 2023 so.

We had said at the time the rates was approximately 17%. We said we could improve over the next three years by 75 to 150 basis points in terms of operating margin with the lower end being a family did come back in 'twenty four and the higher end of 150 being either if we had comprehensive reform around salsa or Pam I guess.

Gets delayed so.

So the 75 to 150 over the three years still applies that has not changed now it's going to apply off of a lower base in 2023, because our operating margin expectations have come down as I said earlier on the call. We expect it to be slightly below marginally below the approximately 16, 5% that we talked about on the Q2 call.

Jim Davis: And just follow up on the Alzheimer Diagnostics. Are you going to seek FDA approval for that? I'm just curious on reimbursement, patient cost, you know, what's the test cost and doing it? Just, I'm just curious on some of what your strategy is there, given that it is a new diagnostic category. Okay. So there, there is reimbursement for the test today. CMS is established about $100 reimbursement for the blood-based AB 4240 test.

The positive drivers and by the way that operating margin expansion was four three over the three years not for 2024, but the positive drivers in 2024 still apply.

Jim Davis: Having said all that, the preponderance of our orders and the preponderance of our reimbursement actually comes from a client bill where we directly bill health systems that are, that are caring for these patients. And I would tell you that the reimbursement is, you know, is better than what we see on average from Medicare because it's a incredibly value added test. So, so, you know, we, we price it appropriately. At this point, we're not seeking FDA approval for it.

First of all first and foremost I would say is the pricing environment. We are very encouraged by the pricing environment, we talked about the strategic relationships that have been renewed and we're seeing positive price X Panama, depending on what happens next year, but we're seeing positive pricing. We expect that to continue we're seeing the growth investments starting to yield.

Fruit and CIC being one of them and we talked about that becoming profitable productivity improvements. Both in terms of invigorate and also hires that we do for instance, phlebotomist that we're adding we expect that productivity or their productivity to improve next year as well as they gain more experience and they're more productive so all.

Jim Davis: It's an LDT like many of the LDTs that we run. And so we're, we're pretty happy, you know, with it. The growth has been substantial. And I would also tell you that the growth of our CSF testing, the cerebral, cerebral spinal fluid testing is also significantly up in the quarter as clinicians are, you know, using both CSF and blood-based biomarkers to make to help with the diagnosis of patients.

Of those drivers we expect to continue to turnover is a bit of a.

Uncertain item, we don't necessarily expect it to become worse than it is today, but it's too early to say right now whether that improves markedly in 2020 for the early signs that we saw in Q3 right. Now we are encouraging we saw some slight improvement, but it's too early to say to project what that would mean for 2024.

Sam Samad: And, you know, Derek, maybe just to come back to the PAMA question and add a couple of points there for you and others that are on the call. Given the uncertainty around PAMA, we will plan today as if PAMA is going to come back and will not be delayed in 2024. That's, I say that's the prudent thing to do. That's the only thing we can do at this stage given the uncertainties.

First thing I'd say is we're encouraged by the volume trends and as you know incremental volume coming into the business in a business that has lots of fixed cost certainly mixes up the existing margin rate. So we feel good about the volume trends in our physician office, we feel good about the volume trends in health systems.

Sam Samad: But we will plan as if, you know, prices will come down next year because PAMA will come back. Now, if, as we, you know, I would say on balance, I'd say there's a likely chance that PAMA will get delayed. And if that were to happen. And as we've talked about before, we could see an 80 to 90 million dollar benefit as a result of that delay, not benefit versus this year, but benefit versus our planning.

And as I mentioned in the script, we feel good about our funnel of M&A.

Opportunities that are in front of us as we.

March through the fourth quarter and early next year.

Sam Samad: And if that happens, I should say, then we will assess how much we invest in the business to everything that Jim said earlier and how much potentially could drop to the bottom line to EPS. But that decision is not made yet. We'll make that decision when we set guidance and we will evaluate investments that we can make and then evaluate what we can drive as EPS improvement. Thanks for the clarity Sam. Appreciate it.

Operator.

Our last call for Us Brian <unk> with Jefferies. You May go ahead.

Hey, good morning, guys.

I guess, Sam just a follow up on Aaron's question really quickly if we think about the composition of margin between gross profit and G&A.

Is this the right baseline to build off of factoring all the things that you mentioned, so just productivity gains and maybe Panama and then maybe just Jim a quick follow up hospital.

Deals obviously, you've had some growth there how should we be thinking about the pipeline and your ability to sustain the growth rate given what's in the pipeline today.

Jim Davis: Our next caller is Andrew Brackmann with William Blair. You may go ahead. Hi guys, good morning and thanks for taking the question. Jim, I want to go back to your comments around reducing leakage to high-cap cost labs. I think you talked about in your opening remarks. I know that's sort of part of the strategy here, but can you maybe just sort of talk about that opportunity broadly and just sort of quantify how big that could be for your growth going forward. Thanks.

Yes, I mean with regards to the first question, Brian We believe it is the right baseline to build off of 2024 is not the period to look at in terms of that improvement that we talked about the 75 to 150. There are a couple of factors in there one of them. There is the uncertainty of pharma, obviously, but the other one is <unk>.

<unk>, which is approximately $200 million. This year is going to be a factor next year in terms of the dropbox.

Jim Davis: Yeah, I think there's two buckets of opportunity. There one is reducing leakage to out of network labs and then the second is what I would call steerage of work from high priced in network labs, generally in health systems to to independent labs like Quest Diagnostics. So generally two different initiatives, but it really starts with to very strong and tight collaboration with our commercial payers. We work hand in hand with them. They provide us the information on.

Going to be a negative factor again, albeit a much smaller one than what we saw from 'twenty two into 'twenty, three but it's still going to be a factor in terms of the approximately $200 million going to something we believe much less than that as it becomes just another regular tests like a flu test for instance, but the baseline. We believe is the right one and we are still confident about the.

<unk> 75 to 150 basis point improvement on operating margin.

Over the three years.

Jim Davis: What physicians are using out of network high priced laboratories and they provide us the information that what doctors are sending work into health system labs, which as you know, you know, not good for patients who are going to pay higher deductibles higher co pays and obviously not good for the people that are paying for the health care. And general that's still employers in the country. So it's a really tight partnership. We get the information.

Brian as I said in the script.

We're encouraged by the.

The breadth and depth of our funnel of opportunities and hospital outreach as well as Pls and I say that.

Our teams are working them very hard.

The trends are pointing down in our direction right.

But the cost of capital going up for health systems.

Jim Davis: We distribute that information out to our commercial team. We call on the customers, try to convince them to move the work. At the same time, we're always messaging as are the commercial payers out to patients to remind them that you know, they can save money by using independent labs like Quest Diagnostics. We continue to message physicians and providers and and you know, that's why we're seeing significantly higher growth rates with the commercial plans where we have established these types of relationships.

Their investments I think are truly focusing on the things that will drive growth for health systems, whether that's investments in neurology cardiology cancer obstetrics those are the things that drive growth in health systems and so when.

When you make all those investments, albeit now at capital costs that are significantly higher.

You know they can turn to us to make the investments they need in laboratories.

Do you see institutions like New York Presby.

Sell their outreach book of business and really focus their investments on the things that are driving their growth I think that's a good sign of how health care systems.

Jim Davis: Thank you for taking my question. Congrats on the contract renewal with your major pair partners. Can you maybe talk a little bit about if there's anything new in the contracts, the duration of the contracts, is there the last time you did this, there were incentives that actually benefited you in terms of driving volumes, just wondering if anything has changed both positively or negatively pricing, duration, terms, incentives, that kind of thing. Yeah, we generally don't talk about the terms, duration, things like that.

They're really good strategic ones are really thinking today.

Operator that was our last question Anthony.

All right everyone. Thanks again for joining our call today, we certainly appreciate all your continued support I also want to thank the quest diagnostics team, who as we've transitioned away from Covid have really done a magnificent job in continuing to drive growth in our base business.

Productivity and continue to satisfy our patients providers and all those that use <unk> diagnostics. So thanks, everyone and have a great day.

Jim Davis: But what I will tell you is that, you know, the trend continues. We seek to establish a fair price first and foremost, and then second, as I just mentioned in the previous question, where we can move these requisitions and improve our share of the commercial payer spend. And we try to design incentives around that. In addition, we try to design incentives when we do a hospital outreach acquisition and the prices go from 300% of Medicare is an example down to our rates.

Thank you for participating in the quest diagnostics third quarter 2023 conference call.

Script of the prepared remarks on this call will be posted later today on <unk>.

Diagnostics website.

W. W. Adcock quest diagnostics dotcom.

Play of the call may be accessed online at Www, Questdiagnostics dotcom forward slash investor or by phone at two zero.

All 33693502 for international callers are one 890 455759 for domestic callers.

Jim Davis: We try to step those rates down over a period of time so that we derive benefit and the commercial plan derives benefit. So we work hard to build those types of incentives into the agreement. And I think the trend just continues in the direction we want.

The phone replays will be available from approximately 10 30, a M. Eastern time on October 24, 2023 until midnight Eastern time.

Jim Davis: Does this lead to sort of more value-based care potential for you guys going forward? Well, I separate again, value-based care from value-based contracts. These are what we call value-based contracts, meaning when we deliver value back to the commercial payer, there can be incentive payments involved in that. When we talk about value-based care, these are really our arrangements with some of these ACO-reach organizations and some of the other large-position groups that have taken on risk from Medicare-advantaged plans.

Seven 2023, thank you and goodbye.

Jim Davis: And we continue to embed ourselves within these ACO-reach programs and continue to work closely with large-position groups that take on this risk. And as we said in the past, these types of relationships are really good for the lab industry. If you're managing risk, you're managing the cost of healthcare to a fixed number every year, you're generally going to be incentive to provide early care and early diagnostics so that you don't let disease progress into more expensive in-patient care. And we continue to work towards that. Thanks so much. You're welcome.

Jack Meehan: Our next caller is Jack Mien with Nephron Research. You may go ahead. Thank you.

Sam Samad: Good morning. I had a couple of clean-up questions for Sam. First is on collections, so seeing a little AR build. I know you called it out, but anything, any color you can add on that. And then second is on the base growth. Five percent is pretty good, which is wondering if weather or weekdays had any impact could have actually been better on an underlying basis? Thanks. Yeah, sure. I'll take the first one, Jack.

Sam Samad: And then we'll talk a little bit about the, you know, any one time or so to speak, whether weather or days. Listen, collections, nothing, nothing of note there. I think AR trending or DSO's trending a bit up. That's really more normal trends given the reduction in COVID, you know, with COVID, I think that would help our DSO's overall to shorter collection window and DSO's down as a result of a higher mix of COVID.

Sam Samad: But if you look back to pre-fandemic, I think that DSO's are kind of trending back to where they were pre-pandemic. So really nothing, nothing of note there. There's some timing at the end of Q3 as well, but that's, you know, that's just normal timing within quarters. So I would say in general, collections are on track, and we're happy with where things are.

Jim Davis: But Jim, did you want to make a couple of comments around base growth in any one time? Yeah, you know, weather and days and things like that. You know, versus last year, whether was a slight help. I mean, you know, you know, not significant at all, Jack, but it was a slight help because last year's hurricane in September was worse than this year's hurricane. The only other comment on days that I would make is, you know, early in the quarter in July, the fourth of July fell on a Tuesday this year versus the Monday last year.

Jim Davis: So in essence, you know, your Monday and Tuesday are really, really bad days versus the year ago. You only had one bad day called a Monday because the fourth fell on a Monday. But again, that's one day out of, you know, 90s. So yeah, I mean, a little bit of an impact there, but not that significant. I appreciate it. Thanks, guys. Thanks, Joe.

Patrick Donnelly: Our next caller is Patrick Donnelly with City. You may go ahead. Hey, guys. Thanks for the questions. Maybe a couple of follow-ups on haystack. You know, it sounds like still a 24-time line there. Can you just talk about, I guess, any more specific timing and a catalyst set there when we could expect a cease of data. And then just also the spend expectations related to getting that through the approval process as we work our way through 24 would be helpful.

Patrick Donnelly: Thanks, guys. Yeah, as we said, haystack continues on the timeline that we set for ourselves for the team. You know, there's been evidence generation. Obviously, that's what we made our, you know, was part of our decision making process. Now, as we get the assay, what I call ready for commercial release, commercial production, we're in the process of establishing relationships with some of our key oncology partners. So when the assay is ready, we'll start to do some of the testing.

Patrick Donnelly: Likely, what we'll use a lot of that early testing to then seek reimbursement once we get a substantial buildup of testing that we feel good about approaching the max on. And so far, so, so good. We're bringing up the assay, as we mentioned in our Lewisville. Texas oncology center of excellence and feel good about that.

Sam Samad: All that Sam touch on the financials with respect. Yeah, sure. I mean, with regards to spend, I'll talk in dilution terms and EPS terms here this year, and then I'll talk, address your question around 24. So again, very pleased with the progress that the team is making this year. We're expecting, you know, EPS dilution to be in the 15 to 20 cent range. We talked about that on the Q2 call. It's still in the same range 15 to 20 cents.

Sam Samad: If you look towards 24. What we've said and this still applies is that the annualized dilution in 2024 is going to be less than what we expect to see what you see this year. So the 15 to 20 cents, if you annualize that, that's 30 to 40 cents next year. So we expect on an annual basis next year to be less than, you know, where things are trending this year. So improvement just on an annual basis.

Sam Samad: And then as we look forward, you know, we expect 25 dilution to be lower than 24. And then we expect 26 to actually be a creative. So that's consistent with what we said when we announced the deal, consistent with what we said on the Q2 call. Understood.

Operator: Thank you guys.

Erin Wright: Thanks. On the colors, Aaron Wright with Morgan Stanley, you may go ahead. Thanks.

Sam Samad: You laid out some of those key profit drivers for the fourth quarter. And as we think about what kind of continues into 2024, I think you mentioned in the previous question, kind of, or a previous question productivity gains should continue. And I understand there's payment dynamics as well that are somewhat unknown. But should we anticipate a deviation from the long-term profit guidance is like 50 to 100 basis points operating on an expansion next year?

Sam Samad: Well, let me clarify Aaron and thanks for the question, by the way. So what we talked about an investor day is an improvement of 75 to 150 basis points over the three years. And that's off of, you know, the rate that we have for 2023. So, you know, we had said at the time the rate was approximately 17%. We said we could improve over the next three years by 75 to 150 basis points in terms of operating margin with the lower end being a fama.

Sam Samad: They come back in 24 and the higher end of 150 being either if we had comprehensive reform around salsa or PAMA gets delayed. So the 75 to 150 over the three years still applies. That has not changed. Now it's going to apply off of a lower base in 2023 because they're operating margin expectations have come down. As I said earlier on the call, we expected to be slightly below marginally below the approximately 16.5% that we talked about on the Q2 call.

Sam Samad: The, you know, the positive drivers and by the way, that operating margin expansion was for three over the three years, not for 2024, but the positive drivers in 2024 still apply. I mean, first of all, first and foremost, I would say is the pricing environment. We are very encouraged by the pricing environment. We talked about the strategic relationships that have been renewed and seeing positive price, you know, X PAMA, depending on what happens next year.

Sam Samad: But we're seeing positive price and we expect that to continue. We're seeing, you know, the growth investments starting to yield fruit and CIT being one of them. And we talked about that becoming profitable. Productivity improvement, both in terms of invigorates. And also, you know, hires that we do, for instance, lobotomous that we're adding. We expect that productivity or their productivity to improve next year as well as they gain more experience and they're more productive.

Sam Samad: So all of those drivers we expect to continue to turn over is a bit of an uncertain item. We don't necessarily expect it to become worse than it is today, but it's too early to say right now whether that improves markedly in 2024. The early signs that we saw in Q3 right now are encouraging. We saw some slight improvement, but it's too early to say to project what that would mean for 2024.

Sam Samad: Yeah, Aaron, the last thing I'd say is we're encouraged by the volume trends. And as you know, incremental volume coming into the business in a business that has lots of fixed cost. Certainly mixes up the existing margin rate. So we feel good about the volume trends in our physician office. We feel good about the volume trends and health systems. And as I mentioned in the script, we feel good about our funnel of M&A opportunities that are in front of us as we, you know, march through the fourth quarter and early next year.

Operator: Operator.

Brian Tanquilut: Our last call for is Brian Tanquilut with Jeffrey. You may go ahead. Hey, good morning, guys. I guess, Sam, just fall upon Erin's question really quickly. If we think about the composition of a margin, you know, between gross profit and GNA, is this the right baseline to build off of, you know, factoring all the things that you mentioned, such as productivity gains and maybe PAMA, and then maybe just a quick follow-up hospital deals.

Brian Tanquilut: Obviously, you've had some growth there. How should we be thinking about the pipeline and your ability to sustain the growth rate given what's in the pipeline today? Thanks. Yeah, I mean, with regards to the first question, Brian, you know, we believe it is the right baseline to build off of. 2024 is not, you know, the periods to look at in terms of that improvement that we talked about the 7,5, 250. There are a couple of factors in there.

Brian Tanquilut: One of them is there's the uncertainty of PAMA, obviously, but the other one is, you know, COVID, which is approximately 200 million this year, is going to be a factor next year in terms of the drop-offs, you know, it's going to be a negative factor again, albeit a much smaller one than what we saw from 22 into 23, but it's still going to be a factor in terms of the approximately 200 million going to something we believe much less than that as it becomes just another regular test like a flu test, for instance. But the baseline we believe is the right one and we are still confident about the 75 to 150 basis point improvement on operating margin over the three years.

Brian Tanquilut: Yeah, Brian, as I said in the script, you know, we're encouraged by the the breadth and depth of our funnel of opportunities in hospital outreach as well as PLS. And I say that, you know, our teams are working them very hard. And the trends are pointing in our direction, right? With the cost of capital going up for health systems, their investments I think are truly focusing on the things that will drive growth for health systems, whether that's investments in neurology, cardiology, cancer, obstetrics, those are the things that drive growth in health systems.

Brian Tanquilut: And so when you make all those investments, albeit now at capital costs that are significantly higher, you know, they can turn to us to make the investments they need in laboratories. When you see institutions like New York Presby, you know, sell their outreach book of business and really focus their investments on the things that are driving their growth, I think that's a good sign of how health care systems, you know, they're really good strategic ones are really thinking today. Operator. That was our last question. All right.

Jim Davis: Everyone, thanks again for joining our call today. We certainly appreciate all your continued support. I also want to thank the Quest Diagnostics team who as we've transitioned away from COVID have really done a magnificent job in continuing to drive growth in our based business, drive productivity and continue to satisfy our patients, providers and all those that use Quest Diagnostics. So thanks everyone and have a great day. Thank you for participating in Quest Diagnostics' third quarter, 2023 Conference Call.

Jim Davis: A transcript of the prepared remarks on this call will be posted later today on Quest Diagnostics' website at www.questdiagnostics.com A replay of the call may be accessed online at www.questdiagnostics.com-forward-flash-investor or by phone at 203-369-3502 for international callers or 1-800-945-5759 for domestic callers. Telephone replays will be available from approximately 10.30 a.m. Eastern time on October 24th, 2023 until midnight Eastern time of November 7th, 2023. Thank you and goodbye.