Welcome to the Quest Diagnostics Fourth Quarter and Full Year 2021 Conference Call. At the request of this company, the call is being recorded. The entire contents of the call, including the presentation, and the 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 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 and Chief Executive Officer and President; Mark Guinan, our Chief Financial Officer and Jim Davis, our Executive Vice President, General Diagnostics and Chief Executive Officer-Elect. 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' 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, governments 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 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 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. Over the past two years, our 50,000 quest employees have risen to the challenge of COVID-19, innovating, persevering, and remaining committed to the patients and customers we serve. While doing so, they also grew our base business by more than 19% in 2021, achieving record levels. I'm extremely proud of what we have accomplished as a team. So we have a lot of news to cover this morning. And I want to get into that so we can have your questions. So let's get started. So first, I'll start by sharing some color on the leadership transition we've announced this morning. Then we'll review our performance for the fourth quarter and the full year of 2021. And then finally Mark will provide more detail on our financial results and talk about our financial outlook for 2022. So as you have seen, in our announcement this morning, we've begun implementing a gradual leadership succession plan, under which Jim Davis, Executive Vice President of General Diagnostics will succeed me to become Chief Executive Officer on November 1, 2022. At that time, I will continue to serve on the Quest Board of Directors as Executive Chairman. Quest Diagnostics is a great company that is well-positioned to continue to deliver shareholder value. As I approached a decade in the role, the Board and I determined that now is the right time to begin to turn over the helm to a new leader. Jim Davis is extremely well qualified to be CEO, having managed a large part of this company in his role as Executive Vice President. He has deep knowledge of Quest, the healthcare industry and the corporate world, gained through more than 35 years of business experience. Jim is widely respected and will be…

Hey, thanks Steve, and I really look forward to working closely with you over the next eight months, and ensuring a very successful transition. It's a tremendous honor to have the opportunity to succeed you in Quest and lead Quest into the next stage of our growth. We have a very powerful vision in Quest of empowering better health and diagnostic insights. Our business strategy is straightforward and well understood. And our company has never been more central to patients and to the health care system, as we've seen during this pandemic. I really look forward to working with the management team and all 50,000 employees to build on the strong foundation that Quest has put in place. Quest's future is really bright. And we're extremely well positioned to continue to create value for shareholders, and all that we serve.

Thanks, Jim. Now at the same time Mark is planning to retire this year. Mark has been in his role for more than eight years, and helped navigate us to the strong position where it is today. We have begun a process in which I will be working closely with Jim to identify Quest's new CFO, and Mark will participate in the selection process. He will remain in the role through the transition. Mark, I want to thank you for your many contributions, your partnership and your friendship. You've been a key member of our leadership team and we have transformed Quest and accelerated its growth.

Thanks, Dave. I appreciate the kind words. I just want to take a minute to say that I'm proud to be part of an important company that makes a positive contribution to the country, and I've enjoyed being part of it. Now it's time for me to step back and retire. I'm looking forward to participating in the process to identify my successor who can support Steve and Jim in Quest's next phase of growth.

Now turning to our results, we closed out 2021 with another record year of revenue, earnings and cash from operations. Our base business recovered throughout the year, and we experienced strong demand for COVID-19 testing services. So for the full year 2021, total revenues grew by more than 14% to $10.8 billion. Earnings per share increased by nearly 49% on a reported basis to $15.55, and more than 27% on an adjusted basis to $14.24. Cash provided by operations increased by more than 11% to $2.2 billion. And for the fourth quarter, total revenues were $2.7 billion, a decrease of roughly 9% versus 2020 when COVID-19 volumes were surging. Earnings per share were $3.12 on a reported basis, and $3.33 on an adjusted basis, both down approximately 26% versus the prior year. So I'd like to share some perspective on the role of COVID-19 testing going forward. A lot of progress has been made in the battle against COVID-19. But we believe it isn't going away anytime soon. Our molecular product began this year strong, with volumes peaking in January. Testing will continue to play an important part of managing COVID-19, and we believe that molecular testing remains the gold standard. We continued to perform well throughout the surge, maintaining average turnaround times of two days or less for COVID molecular testing. We will continue to maintain appropriate testing capacities and staffing levels to be prepared for any additional surges throughout this year if they emerge. We also continue to believe there will be a bigger role for serology testing, and how we measure COVID-19 protection going forward. Ultimately we expect COVID-19 testing to eventually more flu-like and become a permanent part of our portfolio going forward. Now turning to our base business, we continue to make progress executing our…

Thanks Steve. In the fourth quarter consolidated revenues were $2.74 billion, down 8.6% versus the prior year. Revenues for Diagnostic Information Services declined 8.5% compared to the prior year. The decline reflected low revenue from COVID-19 testing services versus the fourth quarter of 2020, partially offset by continued growth in our base testing revenue. Compared to 2019, our base DIS revenue grew approximately 6% in the fourth quarter, and was up more than 1% excluding acquisitions. Volume measured by the number of requisitions increased 1.3% versus the prior year, with acquisitions contributing 1.1%. Compared to our fourth quarter 2019 baseline total base testing volumes increased by more than 10%. Excluding acquisitions, total base testing volumes grew approximately 5% versus 2019 and benefited from new PLS contracts that have ramped over the last year. The progress we've made in our base business throughout 2021 continued in the fourth quarter, and base testing volumes remained consistent with our prior outlook. As many of you know COVID-19 testing volumes moderated early in the fourth quarter, following the peak of the Delta wave in September, but then surged again in early December as the Omicron variant spread across the U.S. Together with our JV partners Sonora Quest, we resulted approximately 7.9 million molecular tests. Quest alone resulted roughly 7.3 million molecular tests and nearly 730,000 Serology tests in the fourth quarter. In January, our COVID-19 molecular volumes averaged approximately 120,000 tests per day, and over 139,000 per day, including Sonora Quest, with volumes peaking in the middle of the month. Revenue per acquisition declined 9.8% versus the prior year, driven primarily by lower COVID-19 molecular volume. In the fourth quarter increases in our base revenue per acquisition were more than offset by the impact of recent PLS revenues. Modest unit price headwinds remained consistent…

Thanks Mark. Well, the Sunrise had another record year providing critical COVID-19 testing for our country and delivered record revenues, earnings and cash from operations. We also grew our base businesses to a record level of 19% versus the prior year. Quest is well positioned in 2022 to deliver on its commitments. I'm proud of the incredible accomplishments of our 50,000 Quest employees throughout the pandemic. And finally, our team is strong, the business has never been better, and Quest's future is bright as we begin a gradual transition to new leadership. Thank you. Be happy to take your questions.

Thank you. We will now open it up to questions at the request of the company. We ask that you please limit yourself to one question. If you have additional questions, we ask that you please fall back into the queue. And the first question is coming from Jack Meehan, Nephron Research. Your line is open.

Hey, Jack.

Hey, good morning. First, I know this isn't the end. But congrats Steve and Mark on the retirement and Jim, congrats on earning the big feat. Agreed, it's very well deserved for you.

Thank you, Jack.

Thanks Jack.

Thanks Jack.

So first question. There's been a lot of anxiety around pressures on the lab industry, which I personally find very interesting, because historically, that's actually been the bull case for Quest. So it would just be great to get your thoughts on what you're hearing from hospitals around outsourcing. Have you picked up any new contracts and potential for share gain versus some of these regional independent labs?

Yeah, thanks, Jack, for the question. There is a lot of pressure in our industry, and particularly at hospitals. And so we are seeing continued interest and are working with hospital systems and helping them become more efficient and productive with their professional lab services business. That continues to be a big opportunity. You saw in our prepared remarks it grew nicely over the last couple of years. We have a half a billion dollar business, and therefore that moves, it moves our enterprise a significant level. So that's number one. Number two, is we are very strong, and we continue to drive operational excellence. As you all know, this is not new, it's institutionalized in Quest. We believe we have the cadence and the capabilities to continue to offset any inflationary pressure we have. And we've done that. We did it last year, we'll continue to do that going forward. And as I said, in my introductory remarks, our array included Invigorate. We talked about inflationary pressures on our cost of sales. By the Invigorate savings is a net number. So any increases, offset by the saving always been positive for us and getting more savings than cost increases. And so despite, some pressures that we see, because of the current times, we're offsetting that, and going forward, we do see that smaller laboratories will have a tougher time keeping up with some of these structures. And therefore, we do have an advantage. We saw the acquisition, we just did a flap jack in South Carolina; we are achieving that 2% growth from acquisitions. So therefore, we believe our strategy has positioned us nicely going forward to take advantage of the changes in front of us given this different times than we've ever seen. So Mark anything you'd like to add to that.

Yeah, I think the other thing that's evolving jack that you didn't mention, I'm sure it's on your radar is moves towards transparency in pricing, whether it's surprise billing. Now, certainly is complicated. So even for us, it's not simple, would depend which commercial insurance, depends on who your carrier is and so on. So it's not simple to tell people exactly what their cost is. However, it's absolutely an advantage for the national labs , specifically for Quest. So we're encouraged by some of this. It's kind of one of those secrets that a lot of people aren't aware how much better our value is compared to others. So we really see that together with some of the things you mentioned as another reason that we're going to continue to pick up share and really return to those historic rates we were having before the pandemic started, with greater access and the knowledge, tools and value that we bring well beyond our price, including our real time estimation tools, including our MyQuest app, and all the other things that really enhance the patient experience.

Great, and as a follow up on the disclosures around the fourth quarter detection testing system, $7.9 million total, $7.3 resulted by Quest, $600,000, through the referral network. Can you talk about just the profitability on the tests that accrue to referral network versus those resulted by Quest? Because I think people just trying to figure out the relative margin upside versus revenue and wondering if maybe that was a factor we weren't considering.

Yeah, so to be clear, except for referral network, we have a JV with Sonora Quest. So we wanted to make sure that people were aware that we're doing some math around referral on the testing volumes that we don't actually to record that revenue, because we have a minority ownership stake. So we get a proportionate share of the earnings from Sonora Quest, as we do with our other minority holdings, as we do with our majority holdings to equity earnings. So we just wanted to drive that transparency. But in terms of pricing, and so on, so forth, I won't comment specifically on Sonora Quest. But it's not dissimilar, it's not a totally different profit structure than the things that we do ourselves. In Jack, during this less than 5% of our total volume is sent out to a referral lab. At this point in time, its effect on zero. So it's only during a surge, that we have to rely on external partner labs to help us. Yes, what I did refer to Jack, and maybe that's what you were asking about was non-traditional channels. And so that's not where we're sending the work. It's actually how we're getting the specimens. So a lot of the work especially early was through traditional channels, or hospital partners, where we were going anyways, to collect specimens, and we would leverage all the Quest Logistics, in cases where we had people going to our ACE trauma centers, we're leveraging that. In this case, we're actually getting it from other providers, CVS is the most notable one. As we do that, we have to have an incremental logistics structure with that incremental logistic runs. Then we do pay a fee. You kind of think about it kind of like phlebotomy, but all the work they do to collect the specimen, to engage the administrative costs of the patient to give them the results, and so there is a cost that maybe people weren't aware of when we're not getting that specimen to our traditional infrastructure.

Great. Thanks for clearing that up.

Operator, next question?

The next question is coming from Ann Hynes, Mizuho Securities. Your line is open.

Good morning, Ann.

Good morning. Congratulations to Steve, Mark, and Jim.

Thank you.

I just want to ask about margins, because obviously, the stock's down or underperforming, year to date versus some peers. And I think there's debate on the street about the margin profile for Quest ex-COVID. I know you guy's saw lot of pressure in q4, it was at worse than expected. And a follow up to that is, again you just got to 2022. People are really focused on what your margin profile will be in 2023. In your prepared remarks, Mark, you did talk about growth initiatives that are in 2020 to $160 million, and I think you said $50 million for incremental costs. But I guess like, there's so many moving parts with extra labor costs, extra supply cost, you have these growth investments. I guess with -- if we look out to 2023, not giving guidance, like what do you think is repeatable and what is not? Maybe you can just comment on just the health of how you view your base margins, and the base business, that'd be great.

Yeah, so thanks for the question, Ann. It's important one. So first off, we're not deviating from our long term outlook. So we've shared a long term outlook in March of 2021. And while the CAGRs are going to change, because we're going to have a stronger year in 2022, and the carriers I quoted that that time, were putting 2022 forward, the absolute numbers we're not deviating from because they're largely the base fitness. So we still assume that COVID will materially decline, you know, time will tell. At that point, it's really all-round our base business. So when people are looking at the current profitability of the base business, and I can understand how this happens. One of the flaws of that is that there really -- you can't really do the two in isolation. So let me give some examples. Because we've had such a surprisingly strong year, this year relative to what we expected, driven by COVID, we're paying a significantly higher incentive performance bonus. And that's across the whole employee base. And, right now, that would not be expected to be repeated next year. So that, quote, inflated our costs. And so to assign all of that cost against the base business, which is what implicitly it's done, when you do COVID revenue times a certain margin drop through, and then you assume back against the base business, that is not accurate. The other thing is, we have significant incremental costs related to the pandemic, which I mentioned in the prepared remarks, around $50 million of cost. If COVID really goes away, we would expect those costs will largely go away. And those costs are really be assigned to COVID, not to the base business. We had quite a bit of overtime later in the…

No, that's very helpful. And just as a follow up, just to your growth initiatives, like the $9 million incremental in 2022. How should we view that for 2023?

Right, so some of those will ramp down, because there are discrete investments to get us where we need to get to. So for instance, a big piece of that is building what we need for our consumer is fantastic. And to move from where we were to a more Amazon like, not that we'll get completely there, but experience for patients who want to find tests and order it, pay their bill, et cetera is expensive. It takes a lot of work with marketing analytics to do the appropriate marketing and understanding of customer preferences, and respond to customers in appropriate way. A lot of IT investment in the near term to get us to that future state. Now as we're growing that business to a $0.25 billion, which is what we said we would get to by 2025, there are going to be some ongoing costs, because we're adding people to support that business. It isn't a grown up business. And there are going to be some variable costs with that. However, as we grow those businesses, we're going to grow fast. And so some of those ongoing costs are going to get paid for that faster growth. And then I would say similarly, advanced diagnostics, as we accelerate that growth, some of the resources we're adding today that we're calling out pre that growth are going to be in the run rate and profitability going forward. So the costs don't go away completely, but they will ramp down because some of this is kind of startup expenses. And then that revenue, obviously in the end, the margin is going to pay for those incremental costs over the next several years. Only it's after that . Remember, when we talked about this year, these investments really started in…

Yeah, just one point of clarification. So the 7% to 9% was when we thought we could do $7.40 $8 in 2022. And we said we'd be at the upper end of that. So you can pick your number between $7.40 and $8, carry forward $7 to $8, through '23 and '24. And that dollar level of EPS is what we're saying we can still do. Obviously, since 2022, is turning out based on our guidance, a lot higher than we said in March, the CAGR is going to be lower. But the absolute numbers we're still committed to at this point.

Operator, we're going to go to the next question. I just want to let everyone know, we won't go past the bottom of the hour. We have a lot of folks in queue. We want to get to all your questions. Operator?

And the next question is going to be from A.J. Rice of Credit Suisse. Your line is open.

Hey, A.J.

Good morning, A.J.

Hello, everybody. Best wishes on the transition to all. And maybe just to ask M&A pipeline. A, any update on what you're seeing out there, what the opportunity set looks like? B, does the management transition cause you in any way to pull back or to pivot in a different direction in organic growth prospects? And then just maybe finally on the Pack Health deal? That was obviously not a huge deal, but an interesting one. Does that suggest a pivot, and what's sort of the opportunity there with that acquisition?

A.J., thanks. We continue to believe that we can continue to deliver that 2% growth off our base business going forward. We've delivered that in the past, and we have every reason to believe that we will continue going forward. As I mentioned earlier, we continue to see hospitals looking at what we've done with other hospitals, and opportunity for them to rely on us as the testing and that product continues to build. And we continue to look at some outreach purchases with hospitals. And then, as I mentioned, Labtech was a good example of a regional laboratory and a good piece of the United States that we picked up as well. And we continue to look at acquisitions that build on our portfolio. Remember, we have this lens of focusing on general diagnostics. Jim Davis, runs that business, in addition to that advanced diagnostics. But the third pieces are those services that take the information that we generate, and we provide services, and we do this employer population health. And we built on that business to work with health plans, on helping them manage the risk with the data and providing services that help them do that. So Pack Health fits into that direction for the company. And we've done some other acquisitions that help us with that direction as well. And you're going to hear more about -- we will continue to invest in that space going forward. And also in your question, does the management change slow us down in any way and here what we might do an acquisition, I would say to the contrary, you know, Jim's been part of the management team for over eight years. He's highly engaged in all acquisitions. He's been instrumental in executing all of our acquisitions. And all the businesses that he participated in are always part of the funnel building that we have. So Jim any remarks about the 40 acquisitions we've done, and your team to find more opportunities.

No, A.J., as Steve said, I've been part of all 40 of those acquisitions. And it's not going to slow down. We're not going to do -- we're going to do smart deals. We're going to be selective, but we're going to continue to build our base business. We're going to continue to find niche applications to build out our events diagnostics portfolio, and we're going to continue to focus on hospital outreach deals, those that are willing to get out of business. We're right there ready to help out.

Okay, great. Thanks so much.

Hey, A.J.

The next question is coming from Patrick Donnelly of Citi. Your line is open.

Hey, Patrick.

Hey. Two questions. Maybe just one on some recent payer negotiations. Obviously, you guys have talked a lot about inflationary pressures and supply chain things. How much does that come up in kind of the negotiations with payers? Are you able to pass that along? I know you guys are in a pretty good place, with payers relative to historic levels. So maybe just talk through some of those conversations and ability to pass price along and price increases in those payer contracts.

Yeah. Thanks Patrick. Well, so there's a lot of attention these days on inflationary pressures. And we think we've handled those questions. We think it's all very manageable for us, in terms of our operational excellence programs, and finding the productivity, we need to offset it. So that's one piece of the equation. The other piece is what you're bringing up, is around pricing. And we feel good about what we delivered in that regard. Matter of fact, if you look at the results for '21, what you find is that their unit price changes, and this is freezing everything from volume in meds, and just looking at unit price changes is below that 100 basis points that we typically are guiding you to dial into expectations going forward. And that's not just for our commercial insurance contract. It's all our businesses, our hospital business, it's our client business, independent of what whose clients might be, physicians or some other organization we work with. So we continue to make progress on that. And we're particularly encouraged by the discussions we're having with our plans. We've shared in the past that actually, in the past, several negotiations, we've actually introduced price increases. And it is actually helping us that in fact, there is inflationary pressure across all of healthcare. So therefore, we're not alone, since we're a labor based business to pass along some of those costs to them. So we're making good progress. And I say that the other piece of this, Patrick is, we continue to deliver great value. Our quality gets better, our service gets better. And we do that in a very competitive price already. And many of these plans believe that's in the best interest of them and their membership of growing share, is to make sure they rely on a handful of top flight laboratories, in the case of United Healthcare, they call that for labs network. And we had applied to that. And we had to demonstrate with evidence that, in fact, we have great quality. We have great service, and we're doing at very competitive prices. So that trend will continue. When you talk about that, we're going to eventually keep on pushing us to deliver more and more value, which helps you in terms of managing your network. We, in many cases are going to start looking at some price increases going forward. So good progress there. Thanks for asking the question. Mark, anything you want to add?

Yeah, I just want to remind people of what we talked about, over our tenure. We have this Invigorate program, drives about 3% productivity. We call it productivity, because some of it is top line enhancing. It's not all around costs. And we've mentioned the fact that we have these pay fors . And one of them has been priced stretched. One of them has been annual labor inflation. And then we talked about the fact that as we got priced in a better place that actually was helping with margin expansion. So we have enough productivity to do more than the pay fors. So now we look at where we are today, and as Steve mentioned, a much better position. I can't specifically say it's related to inflation. But I can assure you that that is part of the conversation in addition to PAMA, and the value that we bring in, so and so. We've really moved the conversation dramatically from when we started here, to more about value. And fortunately for us, I can share that in the last three national payer contracts, all three of them, we got an increase. That was modest. But you compare that to where we've been historically, great news. And that also means that even if we have a little more inflation, and I think we talked about this quite a bit, we've got plenty of Invigorate. And that Invigorate now, doesn't need to cover as much of the price erosion that we have historically. And that price erosion that Steve shared is really heavily in the clientele. And as we've talked over the last number of earnings calls that comes from the hospital clients who are under tremendous pressure, and we shared the reasons for that. And also in some states where physicians can do clientele markup, we have that pressure as well. And really with the commercial payers, we're in a really good place on prices lately.

That's really helpful. I appreciate it. And then just a quick follow up on COVID. Maybe pricing and volume, you mentioned no expectation for the PHE to continue to be extended in the second half or at least is not baked in, sorry. How do you think about the pricing piece both commercial? Will they follow -- kind of wait for the PHE? And then the volume side, you are expecting it to be endemic. A lot of the diagnostic players have obviously talked about multiple years of COVID revenues going out. Just curious on your take there. Thank you.

Yeah. So what we're assuming in our values is getting some ranges of what we think COVID testing will be. Obviously, it's going to start higher in the first quarter, it's going to go down, as we're hopeful that this current surge will decline throughout the spring and into the summer. And as you mentioned, we did get the 90 day extension. And then we're not planning in the guidance that that will be extended, but we just don't know. So therefore, we're always assuming the worst case. And that if that were to come down, yes, we do believe there will be some price changes, if you will, with some of our partners. But again, what we've implied in the guidance is kind of volumes and some decline in pricing. And also the assumption that we're not going to get a renewal of the emergency order. But again, we don't know that. So Mark anything you'd like to add?

Yeah, just to remind you -- not that I need to remind you all that, the rates that CMS determined at $51. And so while we don't assume post PHE that everything falls immediately there, there's a pretty steep ramp down. And then so for the volume that is in our guidance beyond the PHE in late April, we're assuming a significantly lower reimbursement than we've experienced to-date and that we're expecting to get till late April.

Next question?

The next question is coming from Ricky Goldwasser, Morgan Stanley. Your line is open.

Good morning, and best wishes to all of you. Jim you are going to be my fourth Quest CEO I'll be working with. So very excited.

Thank you.

Dating all the way back to Ken Freeman's days. So I just wanted to go back to sort of what the 2022 baseline is. Since this has got like really the bulk of the questions we're getting from investors sort of how should we think about the 2022 normalized baselines that we can build off for 2023? I know that you kind of said in response to one of the questions that in terms of absolute EPS, you are where you expected to be last year. But if maybe you can give us the range, right? We're getting to somewhere between kind of like $7.60 to $7.80 is a normalized based on for $4.2 as a starting point. Just wanted to kind of like see if we're in the ballpark. And then off that maybe just qualitatively what are the headwinds and tailwinds that we should think about as we think about modeling out to 2023.

Go ahead Mark.

Yeah, so. I'm sure you understand Ricky, even if I was willing, I can't really give you an EPS number on the face. So I think the best thing I could do is, point you to pre-pandemic, revenue and earnings and tell you that if you look at the growth in the base business based on what we're giving in guidance, the profitability is not dissimilar. So you can kind of directionally place where that business might be. And the reason I can't really give is back to what I talked about earlier. So where do I assign the $50 million of pandemic expense? Arguably, if we didn't have COVID testing, we would still have that cost. And you'd say, okay, let's go about your base business. But the truth is that we also have the COVID testing in revenue. So again COVID revenue is going to go into the base business. And then importantly, when you talk about headwinds and tailwinds, we would expect that cost to go away and should be temporary, because it is specifically tied to CDC guidelines and other things. We talked about some of the others, you know, some things including there, like supply disruptions. I don't know how long that's going to last. And we all know, it's not just in our business. It's across all aspects of life today, and it's modeled to go away in 12 months, not sure. That's certainly something we want to absolutely make sure that we have what we need. And so we are paying premium costs right now, relative to what we did pre pandemics in insurance, get to our patient service centers, our laboratories have everything they need. And that's really kind of our insurance, which fortunately, we can afford to do right now. Because we also do have that COVID revenue and COVID margin. So really, I think that's the best color I could give you which is the base business is in good shape. We activate Q4 organically back to where we were in 2019. We've done significant M&A over the last couple of years, we've built the PLS business. So beyond the organic clinical business, we're hundreds of millions of dollars higher. And while the profitability and all that may not be precisely the same directionally people could feel confident that the profitability has moved at least to that growth .

So to remind you, our base business in '21 was larger than what we had in 2019. So it has grown. So it has recovered. And we're going to grow on top of that. And that's implied in our guidance for base business. And we intentionally broke out basis from COVID assumptions for '22. So you can kind of dissect who or what's going on with that business. And I keep on reminding you of investments that we're making are part of our base business. And we started those investments in '21. They continue in '22, and therefore, that's going to help us accelerate growth. And as Mark said, we feel very confident about the profitability of our base systems. And by the way, when I said in my introductory remarks, is we do not believe COVID is going to entirely go away. It's going to be part -- a permanent part of our portfolio. So you should assume there's some COVID testing in '23 as well. We will continue to still play a role with our PCR testing. And we believe there's a growing role for serology particularly related to our ability to be able to provide some insight around the protection that individuals have in their bodies. And we're going to have more on that to come. But you put it together is -- and we believe the prospects for '23 and beyond are quite bright. So thank you.

Ricky, I would add one other thing. And that's as probably Mark stated at the pace business has recovered in 2019 levels are still not going to interject in terms of a headwind. There's still pent up demand for routine clinical care. If you look at the studies around HIV infection rates, hepatitis C infection rates, the data still indicates that there was a lack of routine clinical care during the pandemic. And we do think that should provide some headwinds going into the later part of this year and next year.

Operator, next question.

And the next question is coming from Brian Tanquilut of Jefferies. Your line is open.

Hey, good morning, guys. And congratulations all around. I guess I'll follow up to that last answer that you gave. Yeah. So as we think about COVID becoming more endemic, rather than what it is today, is it probably more correct to think of this opportunity or this part of your business as something like say, the flu -- the flu test where some of it's -- or most of its point of care, and then a big -- a small chunk of it sent over to you guys? And then how should we be thinking about the economics if that was the case?

Yeah. Well, let me start, and then my colleagues will round it out, I'm sure. So this isn't going away anytime soon. I think obviously, that we're going to have COVID in '23. And we're going to provide testing around that. And as you know, because you're living with it everyday, like the rest of us, when somebody has some symptoms, you're ruling out COVID. In many cases, that is a PCR test, and that will continue. So therefore, you don't think about just being flu, but it's any type of respiratory illness, and it could be a common cold or another respiratory illness. So there'll be continuation of that, going forward. And also, we keep on highlighting the value of serology. There is going to be increased role for us to provide insight on how much protection people have from vaccines or from natural immunity. And as we know, that's changing over time. And people want to have that insight to, manage the risk and work with their physician on that. So we think there, there's going to be increased value in that. So we do believe, in '23, this is going to be a permanent part of our portfolio. It's hard right now to scale that and we'll learn more as we get into '22. But when we think about it, we actually think of this as an additional portion of a product line that we didn't have before the pandemic. So we actually decided that it was helpful to, achieve the value we think we have. And then as Jim said, base business continues to be in really strong shape. We crossed the growth of '19 sooner in '21, we're entering '22 in . Our growth prospects, there continue to be ones that we continue to work. So that should continue to be a good opportunity for ourselves. So we're filling our chips together well, and COVID is going to products provide more fuel for us to make these investments in our base business that help us and 23. So we Yes, we're focused on what the costs are, but we only make these investments if in fact, we expect to get the returns and you'll see those returns, both in '22. But also in '23 and beyond. So Mark anything you'd like to that?

Yeah, thanks. Brian, it's a great question. And we can't predict with any certainty what's going to happen. I think the two unknowns are, how comfortable will physicians be with taking the specimen sample themselves in the office going forward? And maybe they'll be very comfortable like that with the flu where maybe they'll be like, no, I'd rather I'd rather not handle that. I'd rather not do that point of care test and all the risks that come with that. I'll just send it to a lab. But then the other one, really importantly, the economics. So the payers are going to have a lot of influence on whether this is done. Now yes, point of care testing, arguably, some people do it for faster turnaround times. But a lot of it is done because they make money off of it. So depending on what the payers decide around point of care reimbursement that will have a large influence on how much of this work comes to us and how much that of it stays in the office. Then let me just stop and ask Jim to comment on this.

If you look at our volumes are impressive. We've had a challenge this year, because of the infection rate, and therefore our ability not to be able to fail to deliver on cooling , which is more capacity and lower costs. But that will come back with infection rate, which dropped. But as we go forward with this, we start to see this becoming more of an epidemic and less of a pandemic, then there's a lot of players in this marketplace, and Jim and his team are entirely focused on what we have for sure today, and what we could do going forward to gain some share going forward. So when you think about the opportunity around COVID, if you look at that market, you think about Quest Diagnostics, you think about the dynamics of the short run, where there's been some opportunistic players. We're not optimistic. This is going to be part of a permanent part of our portfolio. And therefore we also are pushing hard, and making sure that we get what we believe what you have to share in the short term. But also in the long term, we think there might be an opportunity as well to pick up some share. Jim, you'd like to add to that.

Yeah, what we did find during this last surge is we had a series of 10 default partners that we've referred work out to, when we couldn't handle the volume, especially during peak days during the work. And at least 50% of those partners had gotten out of business and decided they just didn't want to rebrand for capacity. So while there may be the physical capacity out there, some of that physical capacity, especially on the PCR side has returned to the clinical kinds of work that those firms were doing, other molecular work. So that is, I think advantages us in the future, if there is another surge here.

Operator, next question.

And the next question is coming from Pito Chickering of Deutsche Bank. Your line is open.

Hey, good morning, guys. Thanks for taking my questions. Steve and Mark it's been a pleasure working with you over the years. And congrats to you, Jim, on this promotion. A lot of questions thrown around the space business. So let me ask this a different way. I believe you general guide from an $8.50 EPS range for 2023 was from limited COVID earnings. Can you talk about EBIT margins in 2023 versus the 17% range seen in 2019 without COVID? So I believe are within that guidance range are implying essentially flat margins, with Invigorate offsetting inflationary pressures? Is that just the right takeaway, that we should be leaving today's call with?

Yeah, so we intentionally don't really target or comment on margins, because we believe value creation can come at different levels of margin. Then we talked about specifically on PLS, where it's great growth, great return on invested capital. And those are the two biggest correlators to shareholder value creation. But they come at a lower margin. So we don't worry about margin Pito per se, but I understand others do. And so to answer your question, there's a pretty broad range, you know, obviously, one year less than over multiple years when you put a CAGR with a couple 100 basis points differential on the top line and bottom line. So there's a lot of different combinations. So what I would say is, your EPS number that you mentioned, is not unreasonable. And you can figure out the revenue based on what we said, at Investor Day, and then what we're guiding to this year in terms of the base business, and yeah, at this point, we're not counting on COVID to be significantly larger than maybe a flu business or something like that. But certainly, we don't know. And there's a chance that it could be larger than that. And that will be determined over the next 12 months or so. So that's about strongest color I can give you right now, is back to what we said. If you're really good about our base business going forward, we're going to adapt to that growth level. And I want to remind everybody that when we grow organically, the drop down is much higher than that 17% or, the 19.5% that we delivered in Q4, and so on. It drops down at a level, you know, 50% or more depending if it's an existing customer, where we're expanding the menu, or it's a new customer, where we do have to invest a little maybe in logistics and in IT for the interfaces. But growth brings with it margin expansion, in addition to Invigorate. That's why we're confident we can grow earnings faster than top line, from that period forward.

Okay, so just if I ask the question just a different way, not on the margin side. Let me -- I just sort of think about 2023 EBIT versus 2019 sort of a cleaner non-COVID numbers, we should be modeling to sort of a low teens EBIT, increase in '23 relative to 2019.

Yeah, I mean, you can -- yeah, I mean, you can do the math. Yes. I mean…

about earnings per share.

Okay, good. So what we -- Mark just said what we said is, we've always provided our outlook and guidance for our mix per share, because we do have a mix of business, we do have some lower margin business, that might be a good value creating opportunity for us, we're going to go after it like a PLS business. So our guidance for EPS would be expansion of EPS over time, rebasing it, if you will, for these changes that we've seen for the last two years. And Mark has reiterated our belief that our base business will fuel good opportunities for us to continue to deliver against that. By the way, as we continue to gain share, variable gross margin is quite good. And as I said, we also believe there's going to be some COVID in '23. And it's hard to size it right now, but it's not going to go away soon.

Yeah. And then the other thing is that, I'm not in any position to provide guidance in 2023. So that's why we're focusing every one of the things there. However, when you think about what can happen, COVID can be larger. We don't know, we're not counting at this point. And then we did mention we've got a -- we expect a billion dollars of cash this year. So between opportunity to quite a bit of M&A, and we'll see, or do share repurchases, those also aren't specifically contemplated. So that's why like locking down to a specific number is really difficult and probably not productive. So I would point you to what we said at investor day, and kind of assuming that that's reasonable if these things don't play out significantly differently from our current view of what 2043 might bring.

Great, thanks so much guys.

Operator, next question.

And the next question is coming from Matt Larew of William Blair. Your line is open.

Hi, good morning. The 3% Invigorate target has been aided in recent years as you've consolidated volume onto your two new labs and consolidated into one amino acid platform. I'm curious, what are the keys going forward here to keep driving those gains? And then maybe the second piece on cost would be separate from some of the extra costs you've called out today related to COVID, clearly, you've built up some infrastructure, both personnel and instrumentation for COVID. I'm just curious how much of that you think goes away as COVID moves to an endemic perhaps you need less extra capacity?

Great, thanks for the question. I'll weigh in and turn to Jim to add to the answer. We've been working on operational excellence for over a decade, and it has become institutionalized in our company culture, and embedded in how we do things. And it is, is a platform for how we're going to continue to grow. So your comment was around costs. We don't talk about cost, we talked about productivity, because there's a lot of aspects of what we do around Invigorate and some actually helps the top line, some actually helps getting more output with less labor. And yes, some helps us to become more efficient by less input from some of the materials that we use. So we looked at an aggregate, and we continue to be bullish on our prospects. We believe that it is the ingredients for us to continue to deliver great value. That is when we do this we improve our quality, or service gets better. And oh, by the way, we become more and more productive to be able to make investments to fuel the growth. So it all fits together. And when we talk about this, and we talked about at Investor Day. We see an enormous opportunity for us to continue to digitize and innovate in operational excellence. And so some of you have had the opportunity to tour through our latest lab of the future and that's our new facilities -- facility in Clifton, New Jersey. Sometimes if you come in, you'll see what we've done and take some of the learnings out of our Marlborough facility up in the Boston area. We brought that down to Clifton and we built on it. And that also gives us advantages of some consolidation with some of our new platforms. But Jim and the team are now taking that, and thinking about okay, what's next? Okay, so we think about innovation in our space, yes, there's innovation in terms of testing, and as far as diagnostic information services. But we equally think there's a lot of innovation and opportunity for us to move forward. So we continue to invest. And we talk about investments, we talk about the use of cash. As you notice, we've been putting about $40 million a year into our capital budget, which is investments and frankly, a lot of our innovation that allow us to fuel this productivity game. So Jim?

Yeah, I think Steve has touched on three key themes, automation, use of artificial intelligence, and the continued digitization of so many products. So Marlborough and Clifton are terrific examples of that. But as you know, they're all brand new laboratories. We've got 20 plus other laboratories in our network. And there's opportunities in every one of those laboratories without building new Greenfield sites to continue that automation journey. In particular, in our processing area, and what we call our fluid handling system, handling of blood and urine. On the artificial intelligence side, you're going to see us move in pathology, psychology, microbiology, we've got some great examples of each of those departments today. We're deploying artificial intelligence systems that help with the readout of those images. And then Steve mentioned just the continued digitization. Now beyond the immunoassay platform where we consolidated around the , there are still other opportunities like that in our laboratories. We recently ran a competition in your analysis, so likely to new vendors is next for that platform. And are rolling out those two platforms across all 23 Plus laboratories, it's going to generate a lot of productivity year over year. So as long as we have healthy third party vendors that continue to innovate, those innovations will come to our labs. And we'll continue along that 3% productivity journey.

So we're bullish on the prospects of continuing to drive productivity. I always react to this as a cost cutting goal. And this is not all about cost cutting goal. This is about working smarter. And this has been a key part of our strategy. And it fuels growth. And Jim mentioned some of the areas. I picture my internship also digital pathology, which revolutionized our ability to diagnose and treat and to do that more productively. And this week, Jim is going up another laboratory to take a look at where we're going to make our next investment this year. So we're going to invest in the space. And we have a lot more opportunity in front of us. So it's exciting.

Yeah, I just want to add that, remember, this is not just in the lab. So there's a lot of productivity that's driven outside. And specifically, I'll give two examples, logistics. So we really have an incredible ability to be efficient with logistics, and continue to improve. So we have some cases where we have empty pickups, where we have some customers that don't give us specimens all the time. It's periodic. Now we have the ability and technology to not do that empty pickup. So that's an efficiency. We also get requests for what we call staff pickups, where somebody needs something quick turnaround, et cetera. And so the ability to most efficiently get one of our vehicles there has been enhanced through our technology. The other one is in our patient draw centers. We really can increasingly move the administrative burdens off the phlebotomist, allow them to do phlebotomy by getting people to go to our website, put in their insurance information, everything. And so the phlebotomist spends a couple less minutes with each patient doing administrative doing phlebotomy. We drive up the productivity in our draw centers. So those are just a couple examples of productivity gains that aren't really cost reductions, but enhance our ability to do more with the same resources and drive up our quality and everything else outside the laboratory.

Operator next question please.

The next question is coming from Tycho Peterson of JPMorgan. Your line is open.

Hi, guys, this is Kapian for Tycho. Congratulations to all. Can you maybe talk towards the percentage of COVID testing that was consumer initiated you know whether it's through MyQuest direct or other non-traditional avenues and how do you see that trending in 2022? You mentioned that there are different costs associated with non-traditional avenues of testing. So maybe can you quantify the difference margin profiles between traditional and non-traditional?

Yeah, so what I can share is, go back to what we said in the prepared remarks, our consumer business was about $70 million last year, between the base and COVID, we did $2.7 million of COVID revenue. So the consumer initiated COVID testing was very small, at this point, and, it's strengthening. And again, as I said, we continue to enhance our website, when people go for that ordering, and testing and so on. But there's still more to come in terms of enhancing that experience for consumers and driving awareness for people. As you know, we're competing with a lot of people who see these stand up operations in parking lots, and so on and so forth, which draw their attention. So we're working on making sure that they know we can do this and initiate themselves as opposed to going to a doctor or hospital for this. And we expect to get stronger and stronger moving forward as we enhance our overall consumer business through these investments we just mentioned. In terms of the margin profile, it's really not -- it's not all that different between the consumer and consumer can add in different ways. They can come to our patient draw center and have it done there. We do have home collection kits where they can be sent to their home. So a little different structure, but not materially different in profitability. Operator next question.

And the next question is coming from Derrick Brown with Bank of America. Your line is open.

Hey, great, thank you for squeezing me in. I'll just make this quick. Can we talk a little bit about, sort of like the real -- PAMA outlook? So you would assume $80 million that again comes back in '23? I mean what are the chances that this actually does get resolved, and that the lobbying efforts pay off and gives the current administration a little bit more or Congress a little bit more willingness to listen to this, and sort of do it? I mean, there's a chance that it gets -- that there's actually some reversion, just given what happened. Thanks.

Yeah. Before Steve addresses that I just want to remind everybody that that $80 million was built into our long term outlook. We just assumed it would happen this year. So again, although it would be a year on year get to us, you know, incrementally in comparison, in the long term outlets, it was assumed that we would get that in 2022. So it's already built that.

So thanks for the question. And as we said, we were thankful that it was delayed, again, the one year offset, as Mark indicated to 23. We think that's good for us, because it will gave us some time this year, to keep on working on a permanent fix with Congress. And we have been very active working with Congress last year. And as you know, Congress was very busy with the Infrastructure Bill, and other business and therefore we're fortunate enough to get in the postponed it, but it allows us time this year to keep on working on this to get a permanent fix. We're encouraged by the level of support, brought up the importance of testing and the importance of having a strong industry. We're getting strong, bipartisan support, both from the House and from the Senate. We made a proposal of what we think should be changed to improve the data collection process, the sampling of market based data. We continue to support the notion and the philosophy of PAMA that is we should be paid a commercial rate. But we believe that CMS has it wrong . And in parallel with the Congress, we continue to have our lawsuit against CMS and the trade association. The judge has heard the arguments we'll see if we get some indication on a decision on that. Hard to call that, but that's still in the works as well. So our work right now this year is to push for permanent fix to PAMA. And we're better positioned now because the pandemic than before the pandemic because of the strength of this industry here in global awareness and appreciation of what we've done and the need for strong laboratory industry going forward.

Operator last question please.

And our last question is coming from Eric Caldwell of Baird. Your line is open.

Hey, good morning. Thank you. Masterful job clearing up some of the overriding concerns on core markets today. So thank you. When you went through your list of things that don't repeat or go down significantly as COVID incremental cost overtime staffing challenges, et cetera go away. You mentioned bonuses. And I think it was the one number in the list of call outs that I didn't hear you quantify. I'm curious if we could get the incremental bonus, due to the COVID, upside profitability in '21. How you think that bonus will normalize, whether it's '22 or '23? And then my follow-up, I'll just stow it in here. I was hoping we could get average way to reimbursement in the fourth quarter. I know you said it would be relatively similar through the PHE. But if you could give us a little more specificity on where AWR came out, in 4Q on COVID PCR testing, that would be helpful. Thanks.

Sure, so let me start with that one. Because I think there was some questions around maybe with their turnaround time suffered, and we didn't get the $25 fee that comes with some of the government payers couple the current pairs. And actually, not really, AWR in Q4 was absolutely similar to what has been in the previous quarters. And our turnaround time performance was outstanding. We did in January when the surge came, we did a little bit, we did have a little bit of a hit to our turnaround time. But obviously, that's all contemplated in the guidance that we just provided and it wasn't a huge amount. When you -- back to the early question, bonuses, and the bonuses, when we look at the bonuses, you know, most of it is really our 50,000 employees. So people think about bonuses, must be senior management. Most of the cost is really, we pay 3% bonus to even our wage workers. And then obviously, we have other staff members that you know, at higher targets. And every year we budget for what we call, one x whatever that target is. So for most of the people do 3%. And based on performance, and we feel we've had reasonable stretch performances, when we had historically, we have not paid significantly above 1x. And we've had a number of years where it's below 1x. But the COVID, unpredictability and the surge in revenues, enabled us to pay our employees significant bonuses, in 2020. And again, in 2021. And so if you look at, without getting too specific, and we've shared a number in the past, a $3 billion wage bill, that's gone up in the last couple of years as we've grown the company. So you can kind of as a floor, say 3%, obviously a little higher, because if people want a higher bonus, that's about 1x. And then, we're paying a bonus that's substantially higher than that, in 2021, like we did in 2020. The other thing is, we did pay out a $500 payment to the majority of our employees to compensate them for COVID expenses. In 2020, we adjusted it out of our adjusted earnings, because we were seeing COVID as temporal and extraordinary. But once you get to your second time doing it, even though I still think it's extraordinary, we just decided not to adjust it out. So we did have over a $20 million payment, late in the year, $500 to our wage employee and some of our lower compensated professionals as well. So those are a couple of things that would go away and not be repeated like somehow, we had another surprising COVID year in 2022 like we had in 2021

That's a great response. I'm not sure I'm smart enough to do 1x 3% plus and insignificant increases there. Any chance you could frame that as incremental $50 million, incremental $100 million just directionally can we get a little closer?

Yeah, let's say it's less than $100 million, but substantially more than $50 million.

Okay, that's about what I thought. Okay. Thank you very much, guys. Congrats to everyone.

Thank you. Very good. Well, thanks, it's been a great session with you all. Thanks for all the great questions. And again, thanks for joining the call today and we appreciate your support. You guys have a great day.

Thank you for participating in the Quest Diagnostics fourth quarter and full year 2021 conference call. A transcript of our prepared remarks on this call will be posted later today on the Quest Diagnostics website at www.questdiagnostics.com. A replay of the call may be accessed online at www.quest diagnostics.com/investor or by phone at 1-800-839-9317 for domestic callers or 203-369-3605 for international callers. Telephone replays will be available for approximately 10:30 am Eastern Time on February 3 until midnight Eastern Time, February 17 2022. Goodbye.