奎斯特診斷 (DGX) 2021 Q3 法說會逐字稿

Welcome to the Quest Diagnostics' Third Quarter 2021 Conference Call. At the request of the company, this call is being recorded. The entire contents of the call, including the presentation and question-and-answer session that will follow, are the copyrighted property of Quest Diagnostics with all rights reserved. Any redistribution, retransmission or rebroadcast of this call in any form without the written consent of Quest Diagnostics is strictly prohibited.

Now I would like to introduce Shawn Bevec, Vice President of Investor Relations for Quest Diagnostics. Go ahead, please.

Thank you, and good morning. I'm joined by Steve Rusckowski, our Chairman, CEO and President; and Mark Guinan, our Chief Financial Officer.

During this call, we may make forward-looking statements and we'll discuss non-GAAP measures. We provide a reconciliation of non-GAAP measures to comparable GAAP measures in the tables to our earnings press release. Actual results may differ materially from those projected. Risks and uncertainties, including the impacts of the COVID-19 pandemic that may affect Quest Diagnostics' future results include, but are not limited to, those described in our most recent annual report on Form 10-K and subsequently filed quarterly reports on Form 10-Q and current reports on Form 8-K.

The company continues to believe that the impact of the COVID-19 pandemic on future operating results, cash flows and/or its financial condition will be primarily driven by the pandemic severity and duration; health care insurer; government and clients payer reimbursement rates for COVID-19 molecular tests; the pandemic's impact on the U.S. health care system and the U.S. economy; and the timing, scope and effectiveness of federal, state and local governmental responses to the pandemic, including the impacts of vaccination efforts, which are drivers beyond the company's knowledge and control.

For this call, references to reported EPS refer to reported diluted EPS and references to adjusted EPS refer to adjusted diluted EPS. Any references to base business, testing, revenues or volumes refer to the performance of our business, excluding COVID-19 testing. Growth rates associated with our long-term outlook projections, including total revenue growth, revenue growth from acquisitions, organic revenue growth and adjusted earnings growth are compound annual growth rates. Finally, revenue growth rates from acquisitions will be measured against our base business.

Now here is Steve Rusckowski.

Thanks, Shawn, and thanks, everyone, for joining us today. Well, we had a strong third quarter as COVID-19 molecular volumes increased throughout the summer, while our base business continued to deliver solid value growth versus the prior year and 2019.

In late summer, we experienced some softness in the base business across the country, but soft in rebound in September. Importantly, our base business continued to improve sequentially in the third quarter, which speaks to the ongoing recovery. We have raised our outlook for the remainder of the year based on higher-than-anticipated COVID-19 volumes as well as continued progress we expect to see in our base business, despite rising labor cost and inflationary pressures. The momentum of our base business positions us to deliver the 2022 outlook we shared at our March Investor Day.

So this morning, I'll discuss our performance for the third quarter of 2021 and update you on our base business, and then Mark will provide more detail on our financial results and talk about our updated outlook and underlying assumptions.

But before turning to our results in the third quarter, I'd like to update you on the progress we've made in our Quest for Health Equity initiative, a more than $100 million initiative aimed at reducing health care disparities in underserved neighborhoods. Since we've established it just over a year ago, we have launched 18 programs across the United States and Puerto Rico, ranging from supporting COVID-19 testing of vaccination events, to educating young students on healthy nutritional choices, to providing funding support for our long-haul COVID-19 clinic in Puerto Rico.

Recently, we announced a collaboration with the American Heart Association that will expand research and mentorship opportunities for Black and Hispanic scholars to drive hypertension management and COVID-19 relief. We're off to a good start, and I look forward to updating you on our continued progress as Quest for Health Equity enters its second year.

Now turning to our results for the third quarter. Total revenue of $2.77 billion, down 40 basis points versus the prior year. Earnings per share were $4.02 on a reported basis, down approximately 3% versus the prior year and $3.96 on an adjusted basis, down 8% versus the prior year. The revenue and earnings declines in the third quarter reflect lower COVID-19 testing in 2021 versus the prior year, partially offset by continued recovery in our base business. Cash provided by operations increased by nearly 20% year-to-date through September to approximately $1.75 billion.

Now starting with COVID-19 testing. Our COVID-19 molecular volumes increased in the third quarter versus the second quarter due to the spread of the Delta variant over the course of the summer. Testing began to increase meaningfully in mid-July and peaked in early mid-September. Our observed positivity rate peaked in mid-August and has steadily been declining across much of the country in recent weeks. We performed an average of 83,000 COVID-19 molecular tests a day in the third quarter and maintained strong average turnaround times of approximately 1 day for most specimens throughout the surge.

As clinical COVID-19 volumes declined, we are expanding our nonclinical COVID-19 testing to support the return to school, office, travel and entertainment. We're making testing easy, fast and affordable for school systems and other group settings across the country. We are currently performing K-12 school testing in approximately 20 states with 5 additional states ready to come online. We're testing passengers on Carnival Cruise Line and Quest exclusively provided testing at the Boston Marathon earlier this month. In the base business, we continue to make progress on our 2-point strategy to accelerate growth and drive operational excellence.

Now here are some highlights from the third quarter. Our M&A pipeline remains strong. In the third quarter, we completed a small tuck-in acquisition of an independent lab in Florida. We continue to build on an exceptional health plan access of approximately 90% of all commercially-insured lives in the United States. At our Investor Day, we discussed how we have fundamentally changed our relationship with health plans, and we continue to see the promise of value-based relationships come to life.

So here's a couple of examples. We are working with national health plans to help their self-insured employers, employer customers improve quality outcomes and lower the cost of care for both the employers and their employees. Also, effective October 1, we gained access to 1 million Advantage Medicaid members in Florida as their coverage transitions to Centene's Sunshine Health Plan. We're getting good feedback from the provider community and our growing testing volumes through this expanded access opportunity.

Our hospital health system revenue continues to track well above 2019 levels, driven largely by the strength of our professional laboratory services contracts. As we highlighted previously, 2021 performance is benefiting from 2 of our largest PLS contracts to date, Hackensack Meridian Health and Memorial Hermann. Altogether, our PLS business is expected to exceed $500 million in annual revenue this year.

Trends in our hospital reference business also remained steady, with third quarter base testing volumes above 2019 levels. We also generated record consumer-initiated testing revenue through QuestDirect in the third quarter. While COVID testing has been strong contributor to growth, we expect our base direct-to-consumer testing revenue to more than double this year.

Recently, we soft launched a comprehensive health profile on QuestDirect, similar to our Blueprint for Wellness offering for employers. This expanded health plan and P&L offers a deep dive into consumers' health profile, with a battery of tests and biometric measurements to provide a personalized health quotient score that can be used to track health progress over time. And then finally, our MyQuest app and patient portal now has almost 20 million users.

In Advanced Diagnostics, we continue to ramp investments and see strong momentum in key growth drivers. We're seeing strong growth in noninvasive prenatal testing, significantly above 2019 levels and saw solid contribution in our specialty genetics portfolio from Blueprint Genetics. We continue to work closely with the CDC to sequence positive COVID specimens in an ongoing effort to track emerging variants, expanding of the work that we performed in the quarter.

And then finally, we plan to introduce a test service based on a new FDA-approved companion diagnostic for Agilent for a therapy from Eli Lilly for a certain type of high-risk early breast cancer. Quest will be the first laboratory to offer it to physicians nationally at the end of the month.

Turning to our second strategy, driving operational excellence. We made progress to remain on track to deliver our targeted 3% annual efficiencies across the business. Last week, we announced that we completed the integration and consolidation of our Northeast regional operations into our new 250,000 square foot next-generation lab in Clifton, New Jersey. This state-of-the-art, highly automated facility services more than 40 million people across 7 states.

In Patient Services, we are seeing all-time high numbers of patients making appointments to visit our Patient Service Centers. Now more than 50% of Patient Service Center visits are now by appointment versus walk-ins. And this enables patients to be very satisfied and also improves our ability to drive productivity for our phlebotomists.

Similar to our immunoassay platform consolidation, we recently procured a highly automated euro analysis platform that is expected to generate millions in annual savings once these new systems are standardized across our laboratory network.

And then finally, I'd like to recognize and thank all of our nearly 50,000 employees who have worked tirelessly to provide critical COVID-19 testing to our country throughout the pandemic and continue to serve the health care needs of patients who depend on Quest every day. As a demonstration of our gratitude, we're assisting our employees with a onetime payment of up to $500 designed to reimburse costs that they incurred during the pandemic.

Additionally, another year of pandemic pressures and travel restrictions have made it very difficult for many employees to take their hard-earned time off. Therefore, we are providing a payout of most unused paid time off for our hourly employees to ensure they don't forfeit their earned unused time at year-end.

Now I would like to turn it over to Mark to provide more details on the third quarter financial performance and updated outlook for the remainder of 2021. Mark?

Thanks, Steve. In the third quarter, consolidated revenues were $2.77 billion, down 0.4% versus the prior year. Revenues for Diagnostic Information Services were essentially flat compared to the prior year, which is reflected by lower revenue from COVID-19 testing services versus the third quarter of last year, largely offset by the strong ongoing recovery in our base testing revenue.

Compared to 2019, our base DIS revenue grew approximately 6% in the third quarter, and it was up nearly 2%, excluding acquisitions. Volume, measured by the number of requisitions, increased 5.3% versus the prior year, with acquisitions contributing approximately 2%. Compared to our third quarter 2019 baseline, total base testing volumes increased 9%. Excluding acquisitions, total base testing volumes grew approximately 4% and benefited from new PLS contracts that have ramped over the last year.

We saw a rebound in our base business volumes in September, following a modest softening in August that we believe was at least partially caused by the rise of the Delta variant and the timing of summer vacations. Importantly, our base business revenue and volume grew sequentially in the third quarter. This helps illustrate the ongoing recovery as historically, total revenue and volume typically stepped down in Q3 versus Q2 due to summer seasonality.

As most of you know, COVID-19 testing volumes grew in the third quarter versus Q2, which was in line with broader COVID-19 testing trends across the country. We resulted approximately 7.6 million molecular tests and nearly 700,000 serology tests in the third quarter. So far in October, average COVID-19 molecular volumes have declined approximately 10% from where we exited Q3, but are still above the levels we expected prior to the surge of the Delta variant, while the base business continues to improve since September.

Revenue per requisition declined 5.4% versus the prior year, driven primarily by lower COVID-19 molecular volume and, to a lesser extent, recent PLS wins. Unit price headwinds remained modest and in line with our expectations. Reported operating income in the third quarter was $652 million or 23.5% of revenues compared to $718 million or 25.8% of revenues last year. On an adjusted basis, operating income in Q3 was $694 million or 25% of revenues compared to $831 million or 29.8% of revenues last year. The year-over-year decline in operating margin was driven by lower COVID-19 testing revenue, partially offset by the recovery in our base business. Reported EPS was $4.02 in the quarter compared to $4.14 a year ago. Adjusted EPS was $3.96 compared to $4.31 last year. Cash provided by operations was $1.75 billion through September year-to-date versus $1.46 billion in the same period last year.

Turning to guidance. We have raised our full year 2021 outlook as follows. Revenue is expected to be between $10.45 billion and $10.6 billion, an increase of approximately 11% to 12% versus the prior year. Reported EPS is expected to be in the range of [$4.69] (sic -- see press release: "14.69") and $15.09, and adjusted EPS to be in the range of $13.50 and $13.90. Cash provided by operations is expected to be approximately $2.2 billion and capital expenditures are expected to be approximately $400 million.

Before concluding, I'll touch on some assumptions embedded in our updated outlook. We expect COVID-19 molecular volumes to continue to decline from Q3 levels throughout the remainder of the year. At the low end of our outlook, we assumed approximately 50,000 molecular tests per day in Q4 and serology volumes to hold relatively steady at approximately 5,000 tests per day. As you may know, late last week, the public health emergency was again extended another 90 days through late January. We expect reimbursement for clinical COVID-19 molecular testing to hold relatively steady through the remainder of the year. However, we continue to assume average reimbursements to trend lower in Q4 and as our mix of COVID-19 molecular volumes potentially shift from clinical diagnostic testing to more return-to-life surveillance testing.

Finally, we continue to assume low single-digit revenue growth in our base business in Q4 versus 2019. Getting to the midpoint, our higher end of our outlook range assumes stronger COVID-19 molecular testing volumes and/or stronger growth in our base business.

I will now turn it back to Steve.

Thanks, Mark. Well, to summarize, we had a strong third quarter. We have raised our outlook for the remainder of the year based on higher-than-anticipated COVID-19 volumes as well as our continued progress we expect to see in our base business. And finally, the momentum of our base business positions us to deliver the 2022 outlook we shared at our March Investor Day.

So now we'd be happy to take any of your questions. Operator?

(Operator Instructions) Our first question comes from Kevin Caliendo, UBS.

Thanks for all the details in the guidance for '21. I really want to talk about -- into 2022, and sort of you reiterated your guidance from March, which I believe was at the higher end of the $7.40 to $8 range. And I'm just wondering, at this point, what are the assumptions baked in for COVID testing into next year? Do you anticipate that it's going to continue? Do you anticipate there's going to be a meaningful decline? Any color around how you think COVID testing will proceed into next year?

Mark, why don't you start, and then I'll follow.

Sure. Kevin, just to be clear upfront, we haven't provided guidance yet for 2022. We provided an outlook, and we did confirm that today. And things have largely played out where we saw them for 2022 back in March. The base volumes have recovered. We thought we were ahead in June when it was close to being flat to 2019, and potentially saw some upside. Obviously, with Delta, it took a little bit of a step back. But we still expect to enter 2022 with a base volume utilization level similar to pre-pandemic. So that's good.

The second thing is we did assume that COVID will continue at a much lower level than we saw in '20 and '21, but still to be significant and certainly much larger than our current flu testing. And we've referenced in the past that at some point, COVID testing will still be here, but maybe more on the level of flu testing.

At this point, we felt comfortable with what we had assumed back in March around continued need for COVID testing for PCR. And we envisioned a stronger role for serology going into 2022 and think that's a potential. So we feel good about that.

And then we did reference inflationary pressures. We certainly have longer-term contracts on a lot of our purchases, but things like fuel, certainly, we're subject to inflation in the near term and going into 2022. And then most notably, as many people have talked, there's certainly inflation in wages and benefits, and especially in wages.

And that -- as we look at that, we gave a range and we still feel very comfortable that when you put all those pieces together, that the $8.5 billion baseline for revenue in the $7.40 to $8 is certainly still deliverable, maybe in a slightly different way, but still very comfortable that, that's likely where we're going to land when we do finally provide guidance for 2022.

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

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

Our next question comes from Brian Tanquilut, Jefferies.

Congrats on the quarter. So just a follow-up, just as I think about your costs and all the moving pieces. Obviously, the Clifton lab just opened. So how are you thinking about the flow-through of the benefits from that? And how it would potentially offset some of the inflationary pressures that you're seeing on the cost side?

So thanks, Brian, for the question. So as you know and what I reiterated in our prepared remarks, we've been marching with our 2-point strategy for some time. And -- the second strategy is to drive operational excellence, and we have maintained and just reiterated that we do believe we can continue to deliver 3% efficiency or productivity gains going forward.

And that 3% comes from a variety of programs across Quest Diagnostics, and one of which is what we did in Clifton and also reiterated a couple of other programs on the prepared remarks, are working with our suppliers with new integrated platforms, what we've done around immunoassay, what we're doing around our (inaudible) analysis is -- are 2 good examples of more work we can get the benefits from and there's others. So there's a lot more efficiencies and productivity we can continue to get. And as I said before, this is not cost-cutting. This is improvement. And so every time we make an improvement in our operation, we expect our quality improves and our service performance improves, and it has. So we continue to make progress. You see it in our numbers this year, and you'll continue to see it in our '22 numbers as well, and that's always been used to offset headwinds.

And we do have headwinds. We've had headwinds from wage build increases in the past albeit maybe it could be a little bit higher going forward given what we see in the labor market. And then second is we have seen headwinds from price consequences as well, which we've been able to offset. And we'll have some of those in '22 as we've outlined before. And then also any additional inflationary pressures, we will be able to offset most of that, if not all of that, to be able to hit the outlook. And we just reiterated our confidence and our ability to do that. So hopefully, that's helpful.

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

Our next question comes from Ricky Goldwasser, Morgan Stanley.

So one follow-up question on the costs. I mean, clearly, we're all interested in the magnitude of the potential impact of labor and inflation. So maybe you can help us by reminding us what percent of your cost structure today is labor? And how should we think about that breakdown between cost of goods and SG&A?

Mark?

Yes. So Ricky, we've shared in the past, pre-pandemic, that about $3 billion of our cost was related to salary and benefits. Obviously, with COVID moving around, it's hard to cite the precise number, including the COVID testing. So I think that should give you a pretty good idea of what proportion of our cost, a $6-plus billion cost base we had prior to the pandemic is made up of labor, it's somewhere in the 50% range.

And then as we said, as we continue to automate, that certainly offsets some of that. But also, we are seeing an increased amount of demand towards phlebotomy. So that is going the other direction. We obviously considered a net benefit because giving access helps us to grow our business, it certainly makes us more attractive, especially in a world of consumerism. And it's a good thing, but it certainly will drive cost -- labor cost as a percentage of overall cost in the other direction.

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

Sure. So as I said in my introductory remarks, we have a product that we sell for years to employers called Blueprint for Wellness. And we offer it to our Quest employees as well. So it's fabulous, a fabulous dipstick reading on an annual basis for people to get an indication of what's going on with their health.

And if you do it year upon year, you've got a good, nice trending capability that I found beneficial since I've been here at Quest, and I know many of our employees have as well and many of our customers have. So we're now using that as the product to introduce that through our direct-to-consumer channel, the QuestDirect. We're very optimistic about the possibility that this has. We believe that it has a unique capability that few others provide. And we also believe it's hitting the market at the right time, where many people have not gone to their primary health care providers.

And we believe that there's a lot of opportunities now for people to directly engage with us as a consumer to buy this directly from us. As far as pricing, Mark can you share what we're thinking about in terms of pricing even though this is a soft launch?

Yes, so it's going to be a couple of hundred dollars. And when you look at the individual elements that are contained in here, it's a reasonable price for everything that you get. And I can also tell you that we've gotten a lot of feedbacks that this score that we give people, which really simplifies how the interpret results is a huge consumer positive.

So there's a lot of reason to believe that this could get some additional momentum for our consumer business. And we think the pricing is reasonable, and we feel that the product we're delivering is something that consumers really find interesting and valuable.

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

Our next question comes from Jack Meehan, Nephron Reiser.

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

Yes. Let me start, and Mark, please add. We've been on this march, as I said in my remarks, to continue to demonstrate to our health plan partners that we continue to deliver value. And I believe we're making tremendous progress.

One is that we're picking up access in the number of lives. I mentioned 90% of interim lives are, we're a network with within the United States, and we're happy about the progress of picking some more up this coming year. So that's moving along.

Second, as far as pricing is concerned, we continue to march through our contracts as they are up from renewal. And we have said in earlier calls that we're now very fairly priced. As a matter of fact, we believe we offer a very affordable price offering to the health plans and their memberships with great quality, great service and very competitive pricing, so much so that we're part of these preferred lab networks.

So we're justified. We are getting some modest price increases. And we do believe, going forward, that we can continue to pound that drum and we are using what other people are using across the United States that, in fact, now that we're entering a new inflationary period, our costs are going up just like yours and therefore, we need to start talking about modest price increases going forward.

So Mark, you would like to add anything to that?

Yes. So Jack, I think you appreciate, I'm sure a lot of people do as well that our health plan contracts typically are 3 to 5 years. So it's not as if every health plan contract is up for renegotiation in any window of time. But -- so we've been socializing PAMA and how that is changing the dynamics and how they can look at the NLA rates and be confident that they have a competitive rate because they know what the -- that's the market for the independent labs, which we said is lower than the market, but the market for the independent labs. So this whole notion of a price below Medicare, which was the historical practice, is going away with PAMA.

Now you add inflation, as you suggest, and it's absolutely part of the conversation we've been having over the last number of months. And I can tell you that although it's not final, there is one national payer that we've been negotiating. And it's not final, but it looks like the first price increase we will have gotten from them in certainly tenure and I'm sure more than a decade.

So we've been stabilizing as we shared our commercial negotiations to go from a world of price declines every contract extension to getting it more flat. And we actually have shared there's a handful of regional plans where we've got increases over the last couple of years. And now we have a national contract that I'm very optimistic we're going to get an increase.

And so how much of it's inflation, how much of it's PAMA, how much of it is our value proposition and seeing that working with us is a benefit for everyone versus treating us as a commoditized provider of laboratory result, can't tell you, but we're in a much better place.

And just to remind everyone, our health plan channel business is a significant portion of our revenue every year. But what we've also highlighted, the reason why we do have unit price decreases in our typical assumptions annually is because we have other pressures in our business. We do have direct business to physicians, which we call clients. And our client business is under price pressure over the past several years, and that has contributed to the price pressure we see.

Secondly is we sell to the hospitals, and we're doing quite well in the hospital segment, but is price competitive. And then we have other product lines where we sell our services directly to employers or to insurance companies and there is price pressure there as well. So when we talk about our unit price changes, it's not all in the commercial health plan area, there's other areas that we have price pressure as well.

Our next question comes from A.J. Rice, Crédit Suisse.

Just trying to maybe ask a high-level question about how the pandemic is maybe impacting your business for the long term. It seems like in the pandemic, we've seen people move away from just traditional physician office visit at some level, virtual care, other alternative sites to get their primary care.

Are you seeing -- and does that help you or hurt you if people go to these other avenues, which may generate testing volume? Do you think you capture a disproportionate share of that? And then the other thing I was going to ask about the pandemic was related to the -- you've said that as you have outperformance because of COVID testing, you accelerated some of your programs for cost savings and other efficiencies. Should we think of that as just enhancing the visibility on the 3% cost reduction and annual goal? Or are there things you're doing that might even present some upside to '22 and beyond?

Yes. So thanks, A.J., for your question. Let me take the first one, and I'll ask Mark to comment on the second part of your question.

First of all, COVID tests, we all know, has really increased considerably during the pandemic and has really hit an inflection point. And patients and consumers are now very comfortable with getting a portion of their health care delivered through telehealth networks, whatever that might be. And as we have watched it initially, a lot of the telehealth visits started with mental health and behavior health and have now transitioned to more general health and primary care and even specialized care.

So with all those visits happening in telehealth, you have to engage with the patient and have to be able to enter orders. And fortunately, for us, despite the pandemic and before the pandemic, we have strong relationships with all the telehealth companies. And as you would expect, they're only going to work for us with a small group of laboratories, and Quest would be one of those laboratories. So we're very well positioned with the telehealth providers.

But you also know that even though there are telehealth companies, telehealth is provided through integrated delivery systems, hospital systems in different ways, and they might use one of the telehealth provider platforms, but they're still providing that through their physicians and using their EMR. And so when they enter the order, it's going to be enter the order the same way as in the past.

So we're watching it carefully. We do believe that there's a positive trend for us given what I just described, but it's complicated because it all depends how telehealth platforms are deployed, and particularly with so many owned physicians by integrated delivery systems, and they're still conducting the business as they do. It all depends how they actually implement their telehealth services throughout their network and how that will affect our business. But again, for us, we believe it is a positive.

So Mark, do you want to take the second part?

Yes. Actually, A.J., could you repeat that -- the second part?

It had to do with accelerating our drive program because of our enhanced performance. And I think he's speaking to some of the acceleration in capital purchases that we've made and spending some additional money to get more improvements than what we would have realized if we didn't have the pandemic.

A.J., is that correct?

Same.

Yes. So we have had an opportunity to invest more than we probably would have otherwise given this stronger growth than we would have anticipated in 2021. We've talked about that. A lot of that investment has actually been more towards top line acceleration. So we've talked about what we're doing in Advanced Diagnostics. We talked about what we're doing, what requires to build the consumer business. So I'd say a disproportionate amount of the opportunity as we try to balance near-term results with longer-term value creation has really been in top line.

But yes, as we looked at some of the things we did during the pandemic, we have an opportunity to update our molecular equipment and into more efficient, more state-of-the-art, probably faster than where we would have cycled. So that will give us some efficiency that maybe we wouldn't have otherwise.

So I wouldn't, at this point, suggest that we're ready to commit to more than the 3% productivity because obviously, that's a large number in and of itself, and small basis points changes are really significant. But directionally, I would say, yes, A.J. that, this pandemic goal of value creation and additional cash has enabled us to accelerate some investments, most of it on the top line growth, but certainly some on the productivity side as well.

Next up is Ann Hynes, Mizuho Securities.

So I just want to talk about the base volume trend. I know revenue was up versus 2019. But can you give us some color on how much your base volume trends are still down versus pre-pandemic, maybe ex some of the PLS deals that you've signed during the pandemic? And if it's still down, maybe just to give a geographic breakdown?

And I guess my second question would be, obviously, testing was very strong for molecular PCR test for COVID-19. Can you give us a breakdown how much of that was contributed to like this back-to-life initiative, whether it's schools, city states, more like maintenance testing? And I know you said in your prepared remarks that you assume revenue per test goes down in Q4. Can you give us what it was in Q3 and maybe just directionally what we should model for Q4? That would be very helpful.

Okay. Thanks Ann. Mark, why don't you just start with giving the numbers on base business performance as a start?

Yes. So hopefully, I can clarify. Base volume, in total, is obviously anything non-COVID related as we've been through the pandemic. We've been reporting strong growth in base volume, which includes our M&A and our PLS, as you would expect. But we've also been trying to provide some color on utilization in the absence of an independent way to measure that, we look at our base volume ex the acquired volume and ex the new PLS deals.

And we've talked about that continuing to improve, in addition to the growth we're getting from M&A and from PLS. So in June, the organic base volumes, ex the new PLS deals was getting close back to the 2019 levels, and then it kind of stabilized in August -- in July, it took a little bit of a step back in August. And then as we see where we are, through September and into October, it's getting back again very close to being fully recovered in 2019. And that's why I said earlier, that we would expect certainly by the end of this year and going into '22 that we'll be fully recovered.

Now it is regionally variable as we've talked in the past, and that really has not changed. There are certain regions that are actually above where they were in 2019, most notably our Southwest region as we're looking at Florida in the South, the volume trends are above. And then a couple of other areas that are kind of in that middle point, and then the one area of note that's really been lagging is the East. And it continues to lag while it certainly has improved from where it was several months ago, it's still down and kind of an outlier, especially in the 5 boroughs of New York City.

And then quickly, I'll answer the question on the revenue expectations for molecular testing, and I'll let Steve talk about the back-to-life. So we are still around $90 in the quarter. We're not expecting a meaningful decline in the fourth quarter. Certainly, if back-to-life really, really took off, which is not what we're expecting in the middle of our guidance here, it could have a little bit of a role. But again, it's still net positive, it's just math. So you can expect, for your modeling purposes, just a very, very slight decline in Q4, nothing of significance.

And the last question, Ann had asked for the breakdown of what we described is, first of all, the clinical portion of our PCR volumes versus the return-to-life portion of our clinical volumes. And as you can expect, it's tough for us to know exactly, particularly which bucket we can put those in. But I can tell you that the trend line is trending towards more of the return-to-life. We see the infection rates coming down, and we see programs that we've worked on going up.

Examples are the return to school programs. We mentioned 20 states and 5 more coming. We're also doing some testing for employers if they have mandates in place where they're requiring vaccination or testing. So we see some increase in testing related to, again, employers bringing people back to the workplace and requiring testing or vaccination for that.

So I would say trending-wise, it is a larger percentage than before. But it's very difficult for us to give you exact numbers on that because we just don't get it through the orders that we've received. But we think what we provided for guidance is clearly what's going to happen in '22.

Next up is Ralph Giacobbe with Citi.

First, just a quick follow-up on the comment you made. Can you give us a sense of how much flu testing you do a year, if that's what you're anchoring for baseline COVID testing going forward? And then separately, I was just hoping you could talk about COVID reimbursement and the outlook of that for next year?

Obviously, you mentioned PHE got extended at least for the early part of next year. If that continues to expand, would you expect reimbursement to be better than what you assumed in that $8 EPS for next year? And then also, what about commercial pricing, specifically for COVID? Is that tied to PAG? Or help us understand sort of how that's negotiated, and if there's a step down there for next year?

Mark, do you want to start with the flu?

Yes. So there's quite a bit there, Ralph. We'll see if we can touch on all of them. So we don't generally share the precise revenue for any given test offering, but it's significantly lower than our current levels of COVID and what we would anticipate.

So the flu is not the baseline for 2022. We still expect COVID testing to be multiples of our flu revenues in 2022. And the reason flu testing is smaller than would be otherwise is there's not a ton of molecular testing done. Physicians have become very comfortable with doing point of care. Even though molecular is more precised, they feel that it's good enough for the office and they have an opportunity to make money on it.

So it will probably be several years, although I don't have the ability to call it precisely before we would expect COVID to be at our flu level. And then in terms of the pricing, we have either specific agreements or general agreements that as long as -- in the commercial rates, but as long as the federal health emergency continues, that the pricing will reflect what were being paid by the federal government.

So it's not mechanistically tied to every contract, but we know that the expectation would be when that goes away. And again, there's still always a possibility they can decouple that $100 reimbursement rate from the health emergency. And so there's some other risks as well. But as long as that continues, we would expect most of our commercial pricing to be at the same rate. And then obviously, when that goes away, that we would expect the negotiations to take it down to more the NLA level.

So when I talked about 2022 at the Investor Day, I talked about a reimbursement rate around $50, which is what the NLA is. And so again, when you put all these pieces together, I want to be clear, we still fully expect to be in the upper end of that $7.40 to $8. I just wanted to caution against upside to that, given everything that's going on with inflation and so on, because we do have some positive things that have developed over the last 6 months or so.

And some of that is probably going to be partially offset, if not, largely offset by labor inflation. So we're still pretty much where we were back in March, in the higher end of the $7.40 to $8, and then certainly at least $8.5 billion of revenue, which importantly ties back to the 2018 CAGR that we shared with you at Investor Day. And so just getting there in a little different way, but still getting to where we said we would be.

Next question comes from Matt Larew, William Blair.

So a number of questions around labor issues. I actually wanted to ask about supply chain. Just curious if you're starting to see any challenges in sourcing anything either for your PSCs or labs, either longer lead times? And then if you're having any issues with sample transport logistics?

So far, Matt, we're keeping up. We always have battles here and there, even despite the pandemic, with -- supply has got a complicated business and a lot of pieces have to come together to do what we do. But not a meaningful disruption so far, but we're watching it carefully because we're not through this yet.

So the last part of this is around logistics. And again, logistics have become a little more complicated given we do use commercial carriers for some portion of our logistics. But we've been managing our way through that. Fortunately, we have our own network of couriers. We have about 3,500 couriers in automobiles that are Quest employees. We have a fleet of small airplanes that do some of the connections between our collection locations and our laboratories, and they're employed by us. And so we're happy we have those in these uncertain times. And we continue to have strong relationships with the national couriers as well. So, so far, so good.

Next up is Pito Chickering, Deutsche Bank.

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

Mark?

Yes. So first off, Pito, to be clear, the utilization trend that I talked about being nearly fully recovered doesn't exclude all PLS. Since we're comparing to 2019, it's excluding some of the really large deals that we've done recently so that we don't cloud what we think utilization is.

So we had a PLS business size back in 2019. I'm not taking that out because, obviously, that's part of the trend as well. So when you look at the sources, we've shared that -- the recovery has been pretty broad-based. There's not a lot of differences, especially now. Early in the pandemic, there were some. We talked about certain drug monitoring, certainly being one that was lagging. A lot of that was policy driven. Some of that -- not all of it, but a lot of it's been addressed.

And certainly, we've seen the toxicology or prescription drug monitoring business coming back in the same ballpark as some of our other clinical areas. We did see hospitals recovering faster early in the pandemic as they return to treating patients for elective surgeries and so on. Physician office was a little more lagging. But at this point, as we talked about in the prepared remarks, the physician business is quite strong and we're seeing the volumes, especially in some of the regions, above where they were in 2019. So we don't feel, other than the East, that there's been any sort of a fundamental change in either patient engagement with physician offices and/or the prescribing practices for our diagnostics business specifically.

Next up is Tycho Peterson, JPMorgan.

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

Yes. I'll take the first one, Mark, and you take the second which is req density that is the number of tests per requisition. We assume there's a lot of different moving parts, as you know, for our business, one of which is the mix of test. The second is number of tests per requisition being able to -- we have channel mix changes. So all of that is contemplated in our outlook that we've provided. So we assume that that's in there.

And Mark, do you want talk about the capital deployment question?

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

Next up is Derik De Bruin, Bank of America.

This is John on for Derik. I wanted to dig into the base business growth, specifically within your Advanced Diagnostics business. Was there any notable trend for cancer and genetic testing? If you could comment on the growth trajectory, that would be great?

John, in our remarks, we're pleased with the recovery we've seen in Advanced Diagnostics. And to remind everyone that our definition of Advanced Diagnostics are entirely molecular and genetics.

And when I say recovery, and I did say molecular, it does not include our COVID testing. So it's our base, if you will, molecular and genetic testing. And we saw a very good growth, beyond recovery for our prenatal testing. We feel good about that. And we are seeing nice growth for our genetics business.

And as you recall, we did an acquisition with Blueprint Genetics last year, and that's progressing nicely and gave us some nice growth and strength in that business. So we feel good about the recovery and growth we're seeing in those areas that we're really focused on, and genetics, in general, is one of those areas.

Next up is Mike Newshel, Evercore ISI.

So the labor and inflation cost issues you have talked about that you can absorb in your 2022 outlook. Does that have any change in the long-term sort of growth targets that you laid out for post 2022 in terms of earnings growth?

Mark?

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

There are no more questions.

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

Thank you for participating in the Quest Diagnostics' Third Quarter 2021 Conference Call. A transcript of prepared remarks on this call will be posted later today on Quest Diagnostics' website at www.questdiagnostics.com. A replay of the call may be accessed online at www.questdiagnostics.com/investor or by phone at (866) 360-7722 for domestic callers or (203) 369-0174 for international callers. Telephone replays will be available from approximately 10:30 a.m. Eastern Time on October 21, 2021, until midnight Eastern Time, November 4, 2021. Goodbye.