奎斯特診斷 (DGX) 2022 Q1 法說會逐字稿

Welcome to the Quest Diagnostics First Quarter 2022 Conference Call. At the request of the company, this call is being recorded.

The entire contents of this call, including the presentation and question-and-answer session that will follow, are copyrighted property of Quest Diagnostics 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'd 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, Chief Executive Officer and President; Jim Davis, CEO-Elect; and Mark Guinan, our Chief Financial Officer.

During this call, we may make forward-looking statements, and we'll discuss non-GAAP measures. We provide a reconciliation of non-GAAP measures to comparable GAAP measures in the tables to our earnings press release.

Actual results may differ materially from those projected. Risks and uncertainties, including the impact of the COVID-19 pandemic that may affect Quest Diagnostics's 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 financial condition will be primarily driven by the pandemic's severity and duration; health-care insurer, government and client care reimbursement for COVID-19 molecular tests; the pandemic's impact on the U.S. health-care system and U.S. economy; and the timing, scope and effectiveness of federal, state and local governmental responses to the pandemic; including the impact of vaccination efforts, which are drivers beyond the company's knowledge and control.

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

Now here is Steve Rusckowski.

Thanks, Shawn, and thanks, everyone, for joining us today. Well, we're off to a good start in 2022. We drove strong year-over-year growth in our base business, which excludes COVID-19 testing. COVID-19 volumes remained strong early in the quarter and decreased in February and March in line with the market.

We continue to make investments to further accelerate growth in our base business, and our efforts to improve productivity are helping us to offset inflationary pressures. So based on the strength of our business, we're raising our 2022 guidance.

This morning, I'll discuss our performance for the first quarter of 2022, and then Mark will provide more detail on the financial results and talk about our updated financial outlook for 2022. But first, I'd like to ask Jim Davis to give us an update on our leadership transition. Jim?

Yes. Thank you, Steve. We are making very good progress on the transition. Yesterday, we announced a series of organizational changes and leadership appointments of seasoned executives designed to help us accelerate growth and drive operational excellence.

First, Cathy Doherty has been named Senior Vice President of the regional businesses. Cathy has deep knowledge of our business gained through 3 decades of leadership at Quest. She will oversee the regional and enterprise operations, the commercial organization, and marketing. She will also be responsible for driving operational excellence, including Program Drive, our company's quality and productivity initiative.

Next, Carrie Eglinton Manner is taking on an expanded role as Senior Vice President, Advanced and General Diagnostics Clinical Solutions. For more than 5 years, Carrie has been responsible for bringing innovative solutions to the market through Quest's clinical franchises. Before joining Quest, Carrie had nearly 2 decades of leadership experience in health care and medical technologies.

Patrick Plewman, who had led our West region and has been with Quest Diagnostics for more than 9 years, is named Senior Vice President, Diagnostic Services, which is a portfolio of data-driven analytics and services businesses, which enable employers, providers, pharma companies and others to deliver health care more effectively and efficiently. This portfolio includes employer population health, employer solutions, ExamOne, Healthcare Analytic Solutions and Quest HealthConnect. And before joining Quest, Patrick had over 20 years of leadership experience in the biotech and molecular diagnostics industries.

Mark Delaney has joined Quest as Senior Vice President and Chief Commercial Officer. Mark has responsibility for the commercial team, including sales and sales operations. Previously, he held senior sales and marketing leadership roles over his 30-year career at GE Healthcare and Hillrom.

And finally, Richard Adams has joined Quest as Vice President and General Manager of our Consumer Initiated Testing business, a new role. Richard has 2 decades of varied leadership experience in e-commerce, digital marketing and customer experience and will lead our rapidly growing direct-to-consumer testing business. These appointments demonstrate the depth and strength of our management team, and we're really excited about the leadership and expertise that both Mark and Richard Adams will bring to us.

Additionally, we're making very good progress on our CFO selection process and are on track to name a leader in the next several months. The management transition is going very well, and the changes we've announced yesterday are an important step in positioning us for the future.

Steve, I'll now turn it back to you.

Thanks, Jim, and I agree the transition is going well. Now turning to our results. Our base business continued its strong recovery, up more than 6% from the prior year. Total revenues were $2.6 billion. Earnings per share was $2.92 on a reported basis and $3.22 on an adjusted basis. Cash provided by operations was $480 million.

COVID-19 testing revenues were approximately $600 million in the first quarter, and that's down approximately 28% from 2021. Nearly 60% of the COVID-19 revenues came from the Omicron peak in January. We project continued demand for PCR testing through the end of the year and into 2023, albeit at lower levels.

The public health emergency was extended into July, maintaining our current level of reimbursement, and based on these factors, we've raised our COVID-19 revenue guidance for the full year of 2022 to between $850 million to $1 billion.

Turning to our base business. In the first quarter, we continued to make progress executing our 2-point strategy to accelerate growth and drive operational excellence. So here are some highlights from the quarter.

We continued to make inroads with our health plans, gaining share and increasing revenues faster than the market. Our health plan revenues without COVID-19 grew faster than our overall base business did in the quarter. We also deepened relationships with payers through value-based contracting. We currently have -- about 30% of our health plan revenues are tied to value-based elements, and these include patient health outcomes, quality or shared savings. We think we could grow this to about 50% over the next few years, and we believe these value-based contracts are achieving better alignment with health plans, which we believe will allow us to gain share.

We're also working with our hospital health system leaders to help them execute their lab strategy. Our large partnerships (inaudible) Hackensack Meridian Health in New Jersey, Memorial Hermann in Texas and those with Community Health Network and Ascension St. Vincent's in Indiana are performing well. Hospitals look to us for their help with their laboratory design, staffing and management, and we can enable them to monetize outreach lab assets that help them free up needed capital.

We have continued to make important investments to strengthen our advanced diagnostics capabilities and are already seeing results. We continue to make investments to accelerate growth in oncology, hematology, hereditary genetics, genomic sequencing services and pharma services. Since we've ramped up our investments in our advanced diagnostics portfolio, we have already accelerated growth by several hundred basis points and expect to deliver the 8% growth earlier than 2024, which we committed to at our 2021 Investor Day.

We remain excited about the opportunities we see in the direct-to-consumer testing market. As you know, we're ramping up investments in our consumer business, and it's having an impact. In the quarter, our direct-to-consumer revenues more than doubled compared to the prior year driven by strong growth in both our COVID-19 testing offerings as well as our base business tasting. We're seeing continued solid demand for tests like comprehensive metabolic panels and complete blood counts. Also, our new and improved digital experience is on track to launch later this year.

Finally, we've been expanding our diagnostic services portfolio. We are collaborating with a small digital imaging software firm to deliver diabetic retinal imaging services through designated Quest Diagnostics patient service centers across the United States. This will aid in the screening of patients as part of a diabetes management program.

The second part of our strategy is to drive operational excellence. We remain focused on improving our operational quality, service and costs, thereby driving productivity gains.

We're not immune to the current inflationary environment, but we're tightly managing our operations and are expecting another good year of Invigorate savings and productivity improvements to help offset these pressures.

So by way of example, our procurement team continues to work with our strategic suppliers to mitigate potential price increases and improve productivities through our long-term relationships. Also, to-date, the team has effectively managed challenges in our global supply chain.

We also look to our suppliers to deliver innovation that help us lower overall cost of testing and improved quality. The most recent example is the rollout of our new urinalysis platform that is being deployed across our laboratory network. Our new lab in Clifton, New Jersey, has been operational for about a year, and we're seeing incremental productivity gains from the investment we've made in automation and artificial intelligence.

Our new Schedule at Check In initiative encourages patients to make appointments allowing us to better manage demand and phlebotomy productivity while enhancing the patient experience. The system has been successfully deployed to over 700 patient service centers. Our continued investment in operations is producing results, and we are well on our way to achieving our targeted productivity gains of 3% of our cost structure in 2022.

Now Mark will provide more details on our performance and share more insights on our updated guidance for the remainder of 2022. Mark?

Thanks, Steve. In the first quarter, consolidated revenues were $2.61 billion, down 4% versus the prior year. Base business revenues grew 6.3% to more than $2 billion, while COVID-19 testing revenues declined 27.6% to approximately $600 million. Revenues for Diagnostic Information Services declined 3.9% compared to the prior year. The decline reflected lower revenue from COVID-19 testing services versus the first quarter of 2021 partially offset by strong growth in our base testing revenue.

Total volume, measured by the number of requisitions, increased 1.3% versus the prior year and was roughly flat on an organic basis. Total base testing volumes increased more than 6% versus the prior year. Excluding acquisitions, total base testing volumes grew nearly 5%.

We experienced some modest softening of base testing volumes in January during the peak of the Omicron surge. The volumes rebounded in February and March. COVID-19 testing volumes surged during the spread of Omicron variant during the winter, and volumes peaked in January but declined through the month of February and into March.

Together with our JV partner, Sonora Quest, we resulted approximately 7.2 million molecular tests. Quest alone resulted roughly 6.3 million molecular tests, down approximately 2 million tests and 1 million tests versus the prior year and fourth quarter, respectively. We also resulted in nearly 450,000 serology tests in the first quarter. Our COVID-19 molecular volumes have generally stabilized at an average of roughly 30,000 tests per day over the last 4 weeks, excluding Sonora Quest.

Revenue per requisition declined 5.2% versus the prior year, driven primarily by lower COVID-19 molecular volume. Base business revenue per rep was up modestly. Importantly, we continue to see an improving price environment. Unit price reimbursement pressure was less than 100 basis points in the quarter.

Reported operating income in the first quarter was $513 million or 19.7% of revenues compared to $660 million or 24.3% of revenues last year. On an adjusted basis, operating income was $554 million or 21.2% of revenues compared to $708 million or 26% of revenues last year. The year-over-year decline in adjusted operating income is primarily related to lower COVID-19 testing volumes; a higher portion of COVID-19 molecular testing volume from nontraditional channels, which carry additional expenses and logistics costs; investments to accelerate growth in our base business; and lower average reimbursement for COVID-19 molecular tests. These headwinds were partially offset by strong growth in our base business.

As many of you have heard, the Health Resources and Services Administration, or HRSA, stopped accepting claims to test and treat uninsured patients on March 22 due to insufficient funding. HRSA runs the program to provide funding for COVID-19 testing, vaccination and treatment for uninsured patients. Approximately 14% of our COVID-19 molecular testing volume has come from uninsured patients, which is much higher than the 1% to 2% we typically see in our base business. As a result, we were unable to bill HRSA for over $20 million in COVID-19 testing work that was performed just prior to the March 23 HRSA cutoff date.

Moving forward, we're now billing uninsured patients for COVID-19 testing directly upfront. As a result, we've seen a decline in our uninsured COVID-19 molecular testing volumes in late March and into April, and this is reflected in trends I shared earlier.

Reported EPS was $2.92 in the quarter compared to $3.46 a year ago. Adjusted EPS was $3.22 compared to $3.76 last year. Cash provided by operations was $480 million in Q1 versus $731 million in the prior year period, and we repurchased $350 million in stock during the first quarter.

Now turning to our updated guidance. Revenues are now expected to be between $9.2 billion and $9.5 billion, a decline of approximately 12% to 15% versus the prior year. Base business revenues are expected to be between $8.35 billion and $8.5 billion, an increase of approximately 4% to 6%. COVID-19 testing revenues are expected to be between $850 million and $1 billion, a decline of approximately 64% to 69%.

Reported EPS is expected to be in a range of $7.88 and $8.38, and adjusted EPS to be in the range of $9.00 and $9.50. Cash provided by operations is expected to be at least $1.6 billion, and capital expenditures are expected to be approximately $400 million.

Before concluding, I'll touch on some assumptions embedded in our updated 2022 guidance as well as some additional considerations. Our guidance assumes COVID-19 molecular volumes to average approximately 10,000 to 20,000 tests per day for the rest of the year. This reflects modest continued declines in Q2 from the roughly 30,000 tests per day we were seeing in April and some degree of stabilization during the second half of the year.

As we look to our 2023, our expectation for COVID-19 molecular and serology testing volumes assumes that the COVID-19 testing run rates in the second half of 2022 continues into next year.

Last week, the public health emergency was again extended another 90 days through mid-July. We assume average reimbursement for COVID-19 molecular testing to hold relatively steady through this period. while the public health emergency could be renewed beyond July, additional expenses are not captured in our guidance. We remain prepared for additional future surges collecting COVID-19 testing volume from a range of customers.

While the PHE is in effect, we continue to incur incremental costs from nontraditional channels for supplies, special logistics routes and channel expenses for this volume, which can represent roughly $30 in incremental cost per test. Therefore, you should not assume the higher reimbursement due to the PHE extension drops right to the bottom line.

As Steve noted earlier, we're already seeing some returns in our investments to accelerate growth, particularly in the areas of advanced diagnostics and direct-to-consumer testing and would expect a margin tailwind on these investments in 2023. As a reminder, we're planning to spend approximately $160 million on these investments this year. We spent approximately $30 million in the first quarter and are looking for these investments to ramp up in Q2 to support the launch of our new consumer site later this year.

A portion of these stand-up IT costs are temporary, but variable marketing costs will increase following the launch of the new site. We'll also be adding additional head count this year to support our consumer offering as well as bioinformatics capabilities within advanced diagnostics.

Finally, we know there's a lot of focus on expectations for 2023. While it's clearly too early to provide specific guidance for next year, based on everything we know and see today, we expect to deliver top line and earnings consistent with our long-term outlook that we provided at our 2021 Investor Day.

I'll now turn it back to Steve.

Thanks, Mark. Well, to summarize, we're off to a good start in 2022, driving strong year-over-year growth in the base business. We continue to make important investments to accelerate growth, and we are seeing the results. Now based on the strength of our base business, we've raised our outlook for the remainder of the year.

Now we'll be happy to take your questions. Operator?

(Operator Instructions) Our first question comes from Ricky Goldwasser from Morgan Stanley.

So really nice job in the quarter managing costs and improving margins. So how has the performance in Q1 compared to your expectations? And how should we think about the margin expansion opportunity for the rest of the year from 1Q levels if we look at that as a baseline?

Yes, Ricky, thanks for the question. As you look at the way the quarter played out, Omicron was more severe than we had anticipated, which drove higher COVID revenues, but we also saw the base business impacted by that. So definitely, in January, as we mentioned, the base business was softer. So relative to our expectations in Q1, more COVID, less base business. But as we exited the quarter, and certainly, as we talked about in February and March, the base business bounced back to our expectations. So while we're very pleased with where we see the base business growth for the year, it would have been even higher had it not been for Omicron.

And the margins really were what we were expecting. So we walked through on the last call how some of the margin impact in Q4 was really temporary around the annual incentive plan and some costs related to some special things that we needed to do for COVID testing in that quarter, some over time as we were having a fair amount of absences and some things that we really saw as temporary. The good news is that once we got beyond Omicron, those costs generally did go away, and we anticipate further reduction in some of the special expenses related to COVID safety and protection for employees as we continue to advance hopefully and get into the endemic and out of the pandemic.

So I'd say other than the higher COVID revenue and a little lower base in January, generally, the quarter played out as expected, and that's why we're comfortable raising the bottom and upper end of our guidance and the midpoint.

Just like to reiterate what Mark said about the base business, just to underscore that we're pleased with what we saw in Q1. It would have been better if we didn't have the softness that Mark talked about in January and remind everyone that we posted about 6.3% growth in our base business, which had only about 100 basis worth of acquisitions. So the organic growth was around 5% and, again, if January was stronger, it would've been stronger than that.

So we feel good about the start of the year, which gives us confidence for the full year. So feel good about the start of the year for our base business. And that gave us the confidence to raise guidance for the full year beyond COVID.

And an additional comment on that. When you look at the compares, the easiest compare on the base business was Q1. So to Steve's point, we could have done even better and would have done it better than the 6.3% if January had not been impacted by Omicron. But as we go through the balance of the year, the compares do get a little tougher because a lot of the recovery from the pandemic occurred late in 2020 and early in 2021. So the growth going forward is more going to be driven by share and less about utilization and the market recovery.

So can I just quickly follow up on that? You've talked about the improvement in Feb and March but more difficult comp. So how is demand shaping up in April to-date?

Yes. So the business continues to perform at a high level as it was exiting in Q1. So we wouldn't be updating our guidance if we weren't confident that what we saw in terms of the performance early has continued. So we're more focused on overall growth as opposed to the percentage year-over-year because, obviously, the compare makes it complicated. So we're very happy as we get into April and we see the performance of our base business. And as we mentioned COVID is kind of stabilized. We're not sure how long that will continue. We certainly took a little bit of a volume hit from the change in HRSA. And because there's been a little bit of a spike, I'd say some of that was partially offset by the market growing a little bit recently. So that's probably the way you get to a reasonably flat level of COVID testing over the last month.

Our next question comes from Patrick Donnelly from Citi.

Maybe just another one on the margins. You touched on it a little bit there in the first question. Can you just talk about -- I guess given the ongoing growth investments, wage inflation, can you just talk about kind of your thoughts as we work our way through this year and into '23? Obviously, the PHE extension should help on that front in terms of kind of the margin size. Again, I guess when we look at the earnings raise, how should we think about the base margin piece, again, ex that ASP as we work our way through this year and again into '23?

Yes. So as Mark indicated in his prepared remarks, there's some changing dynamics in our business with investments in the second quarter and then less COVID in the back half of the year. And what we indicated, we will be coming out of the year in the back half with the amount of COVID testing we would expect as a good level to think about in '23.

And so what we also expect is to continue to get the investment returns that we expect in advanced diagnostics and in consumer testing starting in the back half. And again, what Mark said in his prepared remarks, and we believe that investment return will be a tailwind for us in '23. So this is a transitional year with those investments, transitional year for COVID. And Mark, you'd like to give a little perspective on Q2 and in the back half.

Yes. And I'll try to answer your questions (inaudible), Patrick. So on inflation, we talked about building in an extra 100 basis points or so in our wages, costs, and that was in our original guidance. And through 3.5 months of the year, we haven't seen anything that suggests that wasn't a reasonable assumption. So basically, inflation is about where we're expecting. And I'd say on nonwage items such as materials and supplies and so on, certainly, fuel costs have been bouncing around, but nothing that has deviated significantly from our critical assumptions coming into the year around inflation.

The PHE is significant on revenue, and from a dollar margin perspective, it certainly is helpful. But from a percentage margin perspective, I want to be clear that it's not significantly higher than the post-PHE world because those costs go away that I referenced, that are more than $30. So when I said the people are focused on percentage margin, I'd say it's not a big change in terms of what you will see.

And I think the important thing is that, as the base volume grows, we've always shared that incremental organic growth in the base business has a very high level of drop-through. So the other margin consideration as we grow, as we expected and as we've signaled in our guidance that, that will help drive margin expansion.

And then finally, just a reminder that we are in a much better place in price than we've been historically. And so therefore, a lot of the greater drive productivity savings, but in the past helped pay for inflation. Like when inflation is a little bit worse, certainly the pricing environment is better. So there's more of that to cover that inflation and also to drive bottom line margin expansion.

So remember, too, as you think about as we transition for the year, and Ricky asked about April, we're at -- we have a higher level of testing in April going on, and we do periodically update you on that. And that number, we expect in our guidance to come down. And as we indicated, as we come out of '22, we'll be running around 10,000 to 15,000 tests per day, and we're assuming that the PHE will expire because we know nothing beyond what we've heard so far, which will end sometime in July.

So as you think about that transition and then think about the investments we're making and think about the nice momentum we're building in the base business, it gives you some perspective of how we're going to come through the 3 remaining quarters of this year and then guide us to a reasonably excellent place to be able to deliver what Mark indicated for 2023.

Okay. That's helpful. And then maybe just on the balance sheet, cash flow obviously has been pretty strong for the past few quarters here. Capital allocation is in focus for investors. Can you just talk about your priorities there, what the M&A pipeline looks like, what the funnel looks like and then maybe compare that to kind of the share repo opportunities?

Sure. So the -- our capital priorities haven't changed. We have that (inaudible) return majority of free cash flow, as we've shared. Normal times, we get pretty close with the dividend then we do some share repurchases to offset dilution. Obviously, with the COVID bolus of cash generation, we've had the ability to deploy more cash. We always prefer to do M&A because we've got very high standards around the deals that we execute. So that would always be the preference.

But at any given point in time, given our strong cash from the balance sheet and our ability to generate cash, we're not going to sit on it. So the $350 million in the first quarter is more a reflection of how much cash we had at year-end and the fact that we didn't do a transaction in Q1 as opposed to any change in priority. So Steve, do you want to comment on the pipeline?

Yes, yes. So we feel good about, again, our commitment of 2% growth through acquisitions. As you know, we've delivered that consistently, and we feel good about our ability to, on a routine basis, deliver the consolidation strategy we've been executing against. We've got a few that we're working on, and we still feel that we're going to be able to get to a number close to that 2% in 2022. So as I said in the first quarter, we're lighter than that. This is lumpy, but we do expect that we'll be moving -- not a few in the second quarter and into the third quarter to deliver what we expect.

Our next question comes from A.J. Rice from Credit Suisse.

Obviously, value-based arrangements are becoming more significant as you described in your prepared remarks. I wondered if we could get you to step back and talk about a few of the key features of these arrangements and discuss how they allow Quest to do better economically. It sounds like you think you can do better economically under these types of arrangements. And I know you've referred to pricing being better. We used to always think of managed care pricing as being a 1% to 2% negative headwind each year. Has that dynamic changed? And is it mainly because of these value-based arrangements?

Yes. So let me start, and then I'll ask Mark or Jim to kind of add to this. As we've said in our strategy, our health plan access change is a big opportunity for us, number one. Number two is we do plan on gaining share. And number three, we are gaining share. So our health plan revenues are growing faster than our overall revenues and, we believe, growing faster than the market. So we're making progress.

So in that regard, the second question is the environment, A.J., has gotten better. We've indicated in prior calls in prior quarters, and it's proven to be true as we go throughout this year, as we get into renegotiations with the plans, we believe we have a stronger position to negotiate, in some cases, modest price increases because we're delivering more and more value. Our quality is improving. Service performance is better, and we have an opportunity to help them narrow their network and narrow the number of providers they have with a number of these programs.

So it has gotten better. We indicated that's less than 100 basis points overall. I'll remind you, though, when we talk about price, there's a lot of focus around the plans, but we have price pressures in the hospital business, in our client bill business. But at least on the health plan side, it's gotten better, and we have gotten modest increases for some of the contract renewals that we've had.

In terms of value-based contracting, the biggest opportunity we have, which we indicated in the past, is around United. And United is a very different relationship for us than what we had years ago. It is clearly a relationship that we're working different aspects to be able to pick up share. And as part of that, as I indicated in my remarks, we do have shared savings opportunities, and we have opportunities together to do a better job with their membership and their clients.

And then beyond United, we have extended that thinking to other parts of our health plan portfolio with other concepts that are not all identical, but they have similar characteristics in general where we have better alignment between what they're trying to accomplish and what we're trying to accomplish. And in the end, we're all trying to achieve what's been described as the triple lane, which is better quality, better experience at lower cost. And that's resonating very well in the marketplace. Overall, as you know, there's an entirely focused organizations on that, not just the plant but integrated delivery systems as well.

So Mark, you like to add something too?

I think Jim wanted...

Yes. So A.J., first, when we think about value-based care and arrangements, that does not necessarily mean capitated. So as Steve indicated with both UnitedHealthcare and I add in Anthem, many of these value-based care incentives come to us through performance on leakage agreements where they provide a list of physicians that are using out-of-network labs. And when we move that work, there's a value base, there's an incentive for Quest. We proactively work with both payers on moving work at expensive health system laboratories. They proactively give us the list of physicians that are using that -- those labs, and we go after it.

Finally, we work hand-in-hand with both of those plans and others on approaching employers and getting employers to see the benefits of steering their employees to independent labs like Quest Diagnostics.

When we do enter into these capitated arrangements, I can assure you, going forward, we're going to have a much greater say in what we call the clinical pathways that are used by physicians to ensure that utilization makes sense for the clinical condition that the physician diagnoses.

Yes. The only thing I'll add, A.J., is there's elements in those contracts that Jim just described. But the one I'll add is also we talked about in the past when we do an acquisition of hospital outreach instead of the rates immediately dropping to our rates, there was a step down in a majority of our large contracts right now. So we kind of share the value of moving that work through an acquisition, which aligns our incentives.

And really, the greatest value of this is it moves the conversation around -- away from price being the way we create value and more towards steerage and leakage, which Jim talked about, and partnering and working together to get, not just the work to a lab like us to set a better price, but also, there's things that come with it that benefit the patients of physicians. It's our tools and our technology. It's our quality. I mean, you know that in United PLN, it's not about the price. It's really about a couple dozen metrics around quality and tools, and everything from what is their experience in the patient drop center to how we feed the data to the payer and the frequency and quality.

So there's a lot beyond price that determines value in the space, and that's where we've been successful in moving the conversation. And yes, then within the contracts themselves, there would be shared savings and these other value-driven parameters that can get us a better price or more value as we demonstrate to them we're creating value for them as well.

Our next question comes from Pito Chickering from Deutsche Bank.

Back to the guidance question. Previously, you didn't assume any share repo besides offsetting dilution. What does your current guidance assume? Going back into net income guidance -- from the previous guidance using 124 million diluted shares in the fourth quarter versus the current guidance at 121 million shares, backing into the midpoint of the range on net income, it's essentially flat despite revenues up $200 million here at the low end. So happened to do a margin compression of about 10 basis points. So a long way of saying is margin guidance down today versus previous guidance? And any color on why?

Yes. At this point, the share repurchases that we've done pretty much offset our equity program. So it's not as if there's a huge decline in WASO based on what we've done. And in terms of going forward, it'll be dependent on M&A opportunities versus buybacks. So there's no material change in our WASO contemplated in our guidance relative to what we gave back in February.

And as you see in our results, we exited Q1 with about $700 million worth of cash, okay? And obviously, we're going to put that to use in a good way. We're looking at acquisitions, as we've talked about, and we'll handle that in due course throughout the remainder of the year.

I mean, just as we're drilling to that, backing into previous guidance versus current guidance with the share count you had before versus current share accounts, I guess a net income of about $1.1 billion for both the current Quest -- the current guidance versus previous guidance despite revenues going up. Is that the right math? Because that would imply a margin compression about 10 basis points.

Yes. So I would not want to take away an implication of margin compression, Pito. And remember that we don't point estimates. We do ranges. So there's a lot of moving parts, everything from top line mix, clinical mix, exactly precisely how much COVID testing we get going forward and share, obviously, deployment of cash. So that's why we give a range.

So we feel very good about the margins. We would expect that the margins would improve on the base business going forward. Certainly, the COVID elements and everything from the PHE to the amount of volume we have could impact margins as well.

I'll give you one example. If you're looking at net income margin, certainly, some of the JVs were -- specifically Sonora Quest, we're -- they have done a lot of COVID testing. We have no revenue, but we get the earnings contribution from that.

So there's a lot of things that can kind of skew margins. But I think what people really want to understand is the base business. So what's going to happen going into 2023? We're very comfortable that the base business will be at or above prepandemic levels, and we'll have a larger base business in 2023 with some level of COVID testing. And the margin performance that you saw in Q1, we're not expecting it to erode even despite the fact that we've been talking about ramping up some of our CIC investments in Q2. So it's all been contemplated. It's all in that range of guidance. And so it's kind of hard to pin down a specific margin at this point, but it's not bad news.

Our next question comes from Kevin Caliendo from UBS.

Want to follow up on the guidance question just a little bit. So you beat in the quarter by roughly $0.25, and you raised your COVID revenues by $150 million or so, which, depending on what margin you use, could almost equate to that same sort of $0.25. Was the guidance range raise related to the first quarter beat? Was it related to the COVID increase? Is there an overlap there? How should we think about that?

So the guidance range was related to the totality of the business. And again, if you look at Q1, as we shared, the base business, while performed extremely well, didn't do as well as we had expected when we entered the year because of Omicron. So some of the raise in COVID for the year and the performance in Q1 was really offsetting a slightly softer base business. Now the good news is that base business came back. So that softness in the base business was temporary.

The other dynamic is that we do have the PHE being extended, but we also have this change in HRSA, which is not insignificant. So we mentioned there was over $20 million of lost opportunity to bill to get paid for the uninsured from some work we did in late March.

So there's a lot of moving pieces here. And so it's really hard to parse precisely what is driving the rate. It's really our greater confidence in the business performance for the year in totality with all of those pieces. And so again, while a lot of people focus, as I rightly understood, on the midpoint, I'd say just in general, the business is in better shape than in total than we would have expected 90 days ago, and that's why we're comfortable raising both the top line and the bottom line.

Yes. And as we entered the year, what we indicated for COVID, it's around $700 million to $1 billion. And obviously, we're delivering $600 million in the first quarter. We have more certainty around what is left within that initial guidance. Obviously, going into the year, there's a lot of uncertainty on what would happen and now kind of how fast it would decline and how much testing would go on in the back half of the first quarter.

So the tightening up of the range that was set as Mark indicated, there's puts and takes of this in terms of the impact on our bottom line. But I'll just reiterate, we feel good about our start with our base business, and we're tracking well for a strong year based on our initial guidance.

Okay. Just a quick follow-up on the $160 million in investments. You said part of it would be temporary, part of it would be permanent. I think one of the things we're all trying to figure out here is sort of what the base margins look like in a non-COVID or a COVID that is flat year-over-year or whatever, which seems like we're moving into, what the base margins normalized would look like. So if we think about how much might linger, any help on that. And maybe the question would be, what would -- what do you think base margins will look like in 2023 or exiting when COVID becomes endemic versus where they were in 2019? Like is it possible that those base margins are higher going forward, that you guys have figured out a way to be more productive and so forth.

I got it. I got it. So remember, we're investing $160 million, and we're investing $160 million because we have a strong business case to get the returns. And what we've indicated, we're ahead of our plan to get the returns in advanced diagnostics, and we feel bullish about the opportunities on the consumer. And the results on both of those fronts have been good news.

And so when we talk about the second quarter, we mentioned that we're putting in place a new platform. Also with the consumer business, we're investing in some marketing to get the growth we expect, and we are getting the results so far, and we'll continue to see the results in the back half of the year.

What we also said is that, as we come out of '22 into '23, when you talk about the year-on-year compare, with the returns we expect from advanced diagnostics and returns we expect from the consumer, that the year-on-year improvement in those businesses will be tailwinds for our margins in '23, okay?

So again, we're investing to grow. We're investing to get a return. We feel good about getting those returns actually quicker than expected. And next year, the year-on-year compare related to that $160 million will be a net tailwind for us in terms of our earnings in '23.

Mark, anything you'd like to add?

Yes. So just a reminder that we share a view that we could grow our consumer business to $0.25 billion by 2025. And remember, especially if you strip out the COVID testing revenue, this was a business that was small millions not that long ago. So there is significant growth projected in this business, and we feel very, very comfortable and confident. We just talked about the performance in this past quarter, and we don't have our new customer experience IT capability that we think's really going to make a difference in terms of the ease and use of that site.

So as Steve said, we'll create tailwinds because we'll be investing less relative to the revenue. But in terms of the margin, what I'd say is, on the business ex consumer, the margins will be as good or better than you're used to when talking about prepandemic. But we will have a sizable consumer business that is still in investment mode because we're still looking to grow. So the overall enterprise margin you should not expect to be expanded. The good news is we would expect stronger growth. And if, for some reason, that consumer business doesn't deliver, then we can turn off the marketing expense. So it's not as if we're adding tons of people or infrastructure costs.

But we're very confident in our ability to grow that business. We want to invest to optimize that growth. For a period of time, it is going to improve its bottom line next year relative to this year. And then certainly, over the years beyond that, we would expect to have a nice healthy margin on that business as well, and it'll be quite sizable.

And as Mark said, we obviously go through thinking about what we indicated at our Investor Day, and we're not going to give you '23 guidance, but what Mark indicated is, when we think about '23, we're still, believe me, we're comfortably in the range we would expect in '23 in terms of EPS and growth. And the second half sets us up nicely. And what we've implied in our guidance for the full year implies a setup to be able to deliver what Mark indicated in '23 and the view that we indicated at our Investor Day in spring of '21. So we're consistent, and we believe we're on track to delivering what we expect and what you would expect in '22 and '23.

Our next question comes from Jack Meehan from Wolfe Research.

And happy to say still at Nephron Research. So Steve, on 2023, I know still premature to give a specific number, but at the Analyst Day, you talked about 7% to 9% earnings growth kind of off of an $8 number you were gearing us to at that point, now talking about some tail of COVID here too. Can you just like make sure we're doing the math right? Can we take 8%, grow it, add some COVID on top? There's obviously some other moving parts. But is that the right way to think about it? Or where am I wrong?

No, we're going to refresh all of your memories on what we said at Investor Day. Mark, take us through.

Yes. So at that point, we said $7.40 to $8 and a 7% to 9% CAGR from 2022 and beyond. And then as we got further along past Investor Day, we started to signal that we would expect it to be closer to the $8 or in the upper end of the range. And because 2022 had some more COVID revenue, I just want to remind everybody the growth rate in '23 is going to be below that CAGR, but the absolute number we're saying should still be where you would have calculated it back in March of '21. So it just happens to be that the pandemic hung around for a little bit longer.

I also mentioned at Investor Day that we did not assume COVID would go away. So in that outlook, I had a level kind of sustained COVID testing. We do expect that COVID testing will be around part of our portfolio and certainly nowhere near the levels of '20 and '21 or even what we're projecting this year but not insignificant. So I would not take COVID as upside to that. We certainly have some COVID built into that also.

Yes. What we said, remember, this is the spring of '21, we expected '22 to be able to grow like we indicated, both top line and bottom line, but we also said -- and it continues, too, to this day, we expect that COVID will continue to be part of our portfolio of tests going forward.

So that was '21 thinking about '22. The same is true for '22 going into '23. So we're going to come out of '22 with some COVID testing. You see the volumes we indicate, which is about 10,000 to 15,000 per day. Obviously, we're assuming right now, we're a lower price. We will continue to have COVID testing in '23, and we've always assumed in our outlook going forward for growth of top line and bottom line, there'll be COVID testing in our portfolio. And frankly, we think it's a good opportunity because, if you go through the math, even at lower price points, this is a sizable market, and we have a good-sized share right now. We think there's dynamics in the marketplace, and we're working on plans to actually gain share in the COVID testing marketplace that this could be with us for the foreseeable future.

Great. As a follow-up, I wanted to ask you about the consumer-directed testing. You talked about the growth rate. How much revenue did that area generate in the quarter? And can you also talk about interest beyond COVID? Is there any specific areas of menu that you're targeting or you think are resonating and where that investment is getting directed?

Well, first of all, Jack, we're not going to give you specific numbers for the quarter. What we shared with you, it grew nicely double digits on both base business as well as on COVID. Jim, why don't you talk about the portfolio and what we're seeing growth in?

So Jack, as we've talked in the past, there's various segments to this consumer-initiated testing business. I'll touch on two. One is we call them watchful warriors, people that have chronic conditions like diabetes, like cancer, but their insurance company may only pay for, let's just say, 2 A1C tests a year. And these people worry about the disease, and they may come in once a month, once a quarter to get testing. So it just makes more sense that they do it through us directly rather than have to go to a physician office, pay an expensive bill just to get an A1C test. So there's a lot of demand for -- from these types of patients.

The second is we've talked about privacy seekers, people who don't want their insurance companies to know they're getting tested. They may not want their doctor to know. They may not want their spouse. They may not want their mother or father. Some of this is related to STD testing. So it's a big segment for people that value privacy.

Finally, there's a generation, a much younger generation, that may not want to go to the doctor. They don't have a doctor, but they may want to get lab testing done once a year just to check the underlying health of their body. And so call it the 20- to 26-year-old segment that they don't have primary care physicians, but they are concerned about their health, and they come in and get these once-a-year comprehensive lab panels done that assess their overall health.

There's others there as well, Jack, physical fitness offset, check hormone levels before marathons and things like that, but those are the primary ones.

Yes. I'd add that, Jack, we've talked about this previously. We've moved this what we call Blueprint for Wellness, which was an offering we gave to employers. It's a battery of diagnostic testing that gives you a good blueprint for how your body, your important [image], obviously your glucose and other important metrics. And we're actually offering that now on our kind of consumer testing website, and people really find that interesting. So an opportunity to get a full run of diagnostic testing, like people have gotten -- who had employers that sponsor -- including us, we do it for our employee base, and it can be very, very valuable. And then obviously, if there's anything that's out of range, then you go to the doctor instead of going to the doctor first to get the script.

Yes. As Mark said, too, it's a smaller business, particularly on the base business, and that number is growing strong double digits. And what we said is we're committing to the business needing about $250 million in size by 2025. Well, needless to say, with the investments that we're making, the new leadership we brought in that Jim indicated and, really, a very focused organizational model that we have in place, we're getting good traction, and we believe you're going to start to see acceleration of the revenues we get from it, which should be a net tailwind for us where our growth overall, as we go into '23 and beyond, tracking to that $250 million number in '25.

If you just kind of go through the math, you can see this is going to be accretive to our growth in '23 and '24 beyond what we've seen so far because the numbers get much more substantial year-on-year to give us a nice lift in our growth rate going forward.

Our next question comes from Brian Tanquilut from Jefferies.

Just one question. Mark, I know you don't give quarterly guidance and you've given us some color for the guidance for the year, but just any considerations we need to be thinking about as it relates to Q2?

And then maybe just on that $30 cost you mentioned that goes away related as COVID volumes go down per test, how quickly does that go away? I'm guessing some of that's payroll and head count. So just curious like how does that stair-step function progress over the course of the year in terms of like eliminating that $30 number?

Yes. So that's payroll. It's actually a fee we pay to a partner, and that relationship that we have is only permissible during the PHE. So there's absolute guarantee that when the PHE goes away, that, that payment goes away. So it's directly 100% correlated to that in addition to some other costs. I mentioned like logistics and so on and so forth. And obviously, if we stop the relationship and stop the payments, we don't have the logistics cost as well because we're not making those special runs to areas that normally we wouldn't go to pick up specimens.

So I think you probably have all the pieces, Brian, but I'll go through it. So we talked about a level of testing that's been averaging about 30,000 here early in the quarter. We talked about a lower level in the second half. So that's one consideration for COVID. You know the PHE is during the full second quarter. Certainly, that's much more of a revenue impact in dollar margin versus percentage margin, a change from Q2 to the back half of the year.

And then, most importantly, we're back to growth mode. And every week, every quarter gives an opportunity to go out and do what we're doing before the pandemic, win over more work with offices grow organically, and all of that will benefit the back half relative to where we were in Q1 and certainly expect to be in Q2.

So COVID revenues continue to ramp down. The base business continue to grow. PHE, likely to go away, at least that's in our guidance but then also importantly that those incremental costs with the COVID testing will go away with the PHE ending.

And just to remind you what we've told you is this $160 million that we're investing. We said we spent about $30 million so far. And what we said is in Q2, we've got some investments we're making, particularly we're releasing a new platform, okay? So think about that. Some of this is period expense. It's one off, okay, but some of this is repeatable that we'll see in the back half of the year. So some headwinds in the second quarter will be with this investment that we continue to make, we think, and a real great opportunity for us to grow long term. So think about that as well when you think about the timing of what will happen when throughout the remainder of the year.

Our next question comes from Derik De Bruin, Bank of America.

So I want -- a little -- a couple of questions on advanced diagnostic testing. First of all, one of the other public labs that does a lot of oncology testing talked about weaker volumes sort of coming out of the pandemic. Could you talk about what you're sort of seeing in oncology testing and sort of that market? And are you gaining share there?

And then as a follow-up to that, your other main competitor has been doing a number of acquisitions and things like with a biopsy and some of the other ones. How are sort of you thinking about building out your pipeline for the advanced market? Are some of your booking for potential acquisitions to build that area to enhance it? Or is it all natural build?

Well, absolutely. So we shared with you strategically what we're doing, okay? Last year, we indicated that our business and our definition of advanced diagnostics is internally defined around genetics and molecular. And last year -- excluding COVID, because that is molecular, it was about $1.3 billion in size, number one.

Number two is what we have done is we have focused on 4 areas that I've indicated in my prepared remarks that we're putting the additional investments in, and that investment -- those investment dollars are throughout the entire value chain. It's investment upfront in new tests in the organic convention. It's also in our experience that we work with our physicians and the patients that they serve. And it's also around the services that we have to provide, which is in the counseling and with our sales force to be able to have better reach within the markets that we serve. So it's through the full value chain.

And what we have been running at historically is about 3% to 4% growth in that business. And what we said in our '21 Investor Day is we're going to accelerate growth, and we're going to get to high single digits. And we indicated today that we're making good progress against that, and that number is about 8%, okay?

Now in that, majority of the assumption is we're doing that organically with the investment we're making. However, as you know, in the past, we've made some selective acquisitions, one, particularly Blueprint Genetics, which gives us a bioinformatics capability that enhances our capability around genetics. And what we indicated last year is that strategy is working. Those areas of growth, okay, are growing strong double digits, and that strong double digits in '21 versus '20 and also in '21 versus '19 at prepandemic levels. So we feel our organic strategy of investing is working out.

And then finally, what I'll share is we continue to look at acquisitions that would make sense to enhance our portfolio. But remember, we've been very disciplined about doing acquisitions. We have very tight criteria for acquisitions where they have to be accretive to our earnings in a reasonable period of time. They have to be accretive to our belief around our earnings opportunities, around ROIC. They have to be accretive to our growth. And therefore, when we look at potentially buying things versus investing or investing ourselves, we're always considering the tradeoff of how we continue to build value. So that's been our strategy, and our strategy that we put in place is working. It's ahead of schedule, and we feel good about it going forward.

Jim, anything you'd like to add to that?

Yes. And Derik, you asked about our oncology performance. And when we think about our oncology business, it's obviously a solid tumor [compounding] to that basic pathology work that then throws off molecular attacks when needed. That business is doing well and has recovered from 2019 levels. And then there's a core hematology business, which has always been a real, real strength of Quest Diagnostics, and that business continues to expand.

So our oncology portfolio is in good shape. You mentioned liquid biopsy. There certainly is a market and what we refer to is the MRD size. That's minimally residual disease size. We're working on an assay. There's also commercially available assays from our suppliers, and we're considering both.

In terms of precancer and cancer-screening assays, that's a bit more out there, something we watch. As you know, there's 63, 65 start-up companies with the name liquid biopsy that received $1 billion of venture capital money last year. And we're certainly keeping an eye on the space. And as Steve indicated, if we find one that meets all of our criteria, we'll look closely at it.

Our next question comes from Ann Hynes from Mizuho Securities.

So one more margin question. I think the issue is maybe we are overestimating the margins on COVID back into your base business. And you refer to your partner, which I'm assuming is CVS, that you have to pay that $30 fee. Can you tell us what percentage of your test is CVS so just to make sure that we are estimating just kind of the consolidated margin for COVID correctly?

Mark, could you then give the percentages on...

So we -- yes, but that's not our only partner. So when we talk about nontraditional channels, you know, it's not limited to one partner. And what I would -- what I can share is that it grew before the HRSA change to where it was almost up to half of our volume that was coming from the nontraditional channels, and a higher proportion of the nontraditional volume was uninsured. And since the uninsured volumes have dropped off, that proportion has dropped off as well as we go, but it's still significant. And I would not want to comment specifically on any partner. And certainly, the one you mentioned is not our only partner.

Yes. And the range, the percent of our volume that comes through these retail partners actually varies. During surges, I would say it's less. It reduces because we start to then get a lot of specimens from physician offices, urgent care centers and hospitals. When COVID subsides, then that becomes a slightly larger percentage of our mix.

Right, but then during surges, we can do less tooling, and we can take a little bit of a hit on the turnaround time, $25 that you -- within a lot of the contracts and certainly in CMS's payments. So there's a lot of dynamics that can offset each other. And that's why we really want to focus people that we can make a reasonable margin on the CMS reimbursement rate on COVID going forward. And it's not as if the price change will all drop to the bottom line.

And going back to what's in our numbers and what's base and what's COVID. I'll keep on reiterating, remember, we took advantage of the opportunity we had in '20 and '21 to invest in accelerating growth. And those investments take time. They're ahead of schedule, and that's going to help us next year, year-on-year. So think about that, too, as it kind of goes through the plan for this year into next.

Our final question comes from Rachel Vatnsdal from JPMorgan.

So could you just elaborate on the PLS contract momentum that you've been seeing? Especially as the hospitals return to normal, how should we think about the cadence of those wins and revenue contributions for this year?

Yes. So I mentioned in our prepared remarks three that we've announced, and our relationships are strong and continue to demonstrate that we can bring real value to these integrated delivery systems.

Remind you all what it is, is one is, yes, we help them run their labs and you see one, you see one, but they save money. And a lot of hospital systems are struggling, as you know. Volumes, yes, in some cases, of recovery but the acuity level of patients in the beds are higher and they have fixed reimbursement. And then secondly, is they're having inflationary pressure in hospital systems, which has been tough for them to offset. So that's the first view.

The second is when we have a relationship, our advanced diagnostics business and our overall sophisticated testing business, which we call reference set with hospitals also, is an opportunity. So we typically bring in a larger share of that with hospitals.

And then finally, we have an opportunity, in some cases, to buy their outreach business, which has been nice opportunities for us to build value, which helps us with the acquisition target but also helps us because, eventually, they're accretive because we know how to integrate these quite well. So it's worked, right? Yes.

And going forward, the funnel continues to build. We have a dedicated team. We've invested in that as well. Jim and I are entirely engaged together, working a large number of these accounts. We personally do a fair amount of travel and spend time with the management team engaged on these opportunities. So we do believe it continues to yield us a nice opportunity going forward to continue to accelerate growth.

So Jim, anything you'd like to add to that?

I would just say that the follow-up opportunities is very strong right now. Contracts save a long time. You negotiate. Obviously, inviting in someone that run your health system laboratory during COVID is not something health systems are trying going to do. Now that COVID is subsiding, health system, ICUs and taking care of COVID patients is under control, I think you'll see the deal activity pick up.

Okay. Great. So thanks again for joining our call. We appreciate your continued support, and you all have a great day.

Thank you for participating in the Quest Diagnostics First Quarter 2022 Conference Call. A transcript of prepared remarks on this call will be posted later today on Quest Diagnostics website at www.questdiagnostics.com. A replay of the call may be accessed online at www.questdiagnostics.com/investor, or by phone at (800) 583-8095 for domestic callers or (203) 369-3815 for international callers. Telephone replays will be available from approximately 10:30 a.m. Eastern Time on April 21, 2022, until midnight Eastern Time on May 5, 2022. Goodbye.