All right, everyone, thank you for continuing to join us in the Health Tech and Services track. With me today, I have the whole Quest team. I've got Sam Samad, he is the CFO, and we also have Tom Bebek, head of IR. Thank you guys for joining.
Thank you for having us.
One of the most requested of the conference, so should be a very interesting session. I bet you're going to get a million questions today on providing.
Mm.
There's a lot of moving pieces, and I've had a lot of questions from investors on it. Do you want to kick it off with just a refresh of moving pieces?
Sure, yeah. So, we guided to revenues of $9.35 billion-$9.45 billion, EPS of $8.60-$8.90. And, let's talk a little bit about the, you know, the tailwinds and headwinds in so many moving parts, especially on EPS, which is important for the audience to understand. But on the revenues, first of all, about the, you know, tailwinds and also some of the things that are, I think, we see, you know, good momentum for. First of all, you know, utilization very strong in 2023. We saw strong growth and, you know, our expectation this year is on base revenues to grow in the three, you know, almost 2.7% at the midpoint.
You know, to the extent that there's more catch-up utilization, that's not included in our guidance, that could be potentially lift as well from those numbers. The pricing environment continues to improve. We think that could be potentially also a tailwind. We've included in our guidance, you know, the assumption that pricing is modestly accretive in 2024. Mix, test mix, payer mix, in our business, you know, what we call the revenue per acquisition is improving. That continues to be a tailwind as well. And then from an acquisition perspective, what we've baked in our guidance is roughly about, you know, 0.6%-0.7% of lift from acquisitions. We don't include anything that's not announced in terms of acquisitions.
So the impact that we've included in our guidance is really for acquisitions that are known, that we've announced, and, you know, those are basically Lenco, the independent lab, NewYork-Presbyterian , which is an acquisition that we did last year but has carryover impact into 2024. Steward Health Care, which is an acquisition that we did earlier this year, that has an impact this year as well. So, you know, those are the acquisitions that we've included, but there could be more depending on the pipeline.
Not so subtle.
You know, if we look at a headwind perspective, things that you need to take into account that are factored into our guidance. You know, Haystack, additional $0.20 of dilution. Last year, we bought the asset, we had half a year of dilution, so the additional $0.20 of dilution is really reflecting a full year of having the asset, as part of the cost. We've got an interest expense headwind. We raised some capital last year, and this is the impact of it. And the reason we raised, you know, fixed debt last year in November is to fund some of the acquisitions, some of which, as I said, which are not included in that. You know, the labor inflation market, still not back to pre-pandemic levels.
What, what I mean by that is, or the labor inflation dynamic, you know, that 3%-4% that we've included in our guidance is still higher than it was pre-pandemic when it was closer to somewhere between 2% and 3%. And, you know, to the extent that that improves to the upside, don't necessarily think it will be worse than 3%-4% inflation, but that's, you know, that's still a cost that we're offsetting in the base. So those are, you know, the key dynamics, but... And obviously, COVID is the last one.
I was gonna say you're missing a big one.
Yeah. Well, COVID, a $175 million year-over-year drop is still from 2023 to 2024, is still an impact that I think.
I have so many people ask about this, and just say, "Why are we still talking about COVID for this model? How did you have $175 million revenues off of that?
Yeah. Well, I mean, we had 223 in 2023, and, you know, we expect this year to be somewhere in that 50-ish range. So that's a $175 million drop year-over-year. And yes, COVID is, you know, we expect, like, 2024, the end of 2024, to be just another test in our portfolio, which is, you know, if you look at what we generate from some of the other respiratory tests, flu, RSV, $40 million-$50 million is in that ballpark. So it's been a factor, unfortunately, for 2024 because we still generated $223 million. A lot of that in Q1 of last year, so, and then we had a steep drop back after that. And, you know, 2024 is, is going to be a drop from 2023.
You're thinking about the underlying dynamics. Is that more folks are still going in in person getting the test, or was there any correlation somehow to the hospital relationship you have that was driving this tagline?
So, you know, there's part of it is the PHE also. I mean, back in Q1, when we had, retailers were still offering the test, like the relationship with CVS, where they were still doing the test. And then in May, when the price got cut, the PHE ended. We went from a $100 price to $50 price. But when the retailers stopped offering it, like CVS, I'm referring to, then testing did drop. So in Q1, we had a big push of COVID testing in Q1 of 2023, and then when the retailers stopped offering it, the PHE ended, we saw that really drop. And then it started to shift more into the hospital setting. So we started to see it more for us in our professional lab services, PLS setting.
When I think about the core business at, you know, Haystack and M&A and, and some of the urban trends that we talk about, I mean, it does sound broadly like it's trending positively for everything besides labor. Is that a fair assumption?
It is a fair assumption, and labor is stabilizing.
What do you think the investment environment is saying about the business?
Well, you know, let's talk a little bit about the revenue dynamics first of all. Important, and I'll talk a bit about the investor aspect. I don't think it's not appreciating, I think it's they want to see, they kind of want to see more in this post-COVID stage. But on the revenue dynamics, there's an upfront aspect, Stephanie, because we had, you know, 7% roughly revenue growth last year. A banner year for us, right? So really, really strong year. The volumes were up 6.5%. When you look at it across the board, we believe that we gained share in the physician office space, in the reference space, the hospitals, and definitely in the PLS space. So across these three business, we gained share.
But we also think of that 6.5% volume growth that we saw last year, that about 1/3 of it was really what we call catch-up demand. Utilization that was caught up because of COVID, people's first year came back, the testing, and we saw that in 2023. Our assumption in 2024, again, and this is, by the way, the numbers that I'm giving you are all pretty business growth, so that's 10% or 6.5% is base revenue, base volume, excludes the-
It's an unheard-of growth, right, in the last-
Exactly. Exactly. It's, it's much higher. I mean, we used to be in the low single digits of growth, so that base business, 7%, base volume, 6.5, is way above the norm. If you look at 2024, our guidance, as I said earlier, base revenue is somewhere between the 3.5 range and, organically base. We're not assuming in our guidance, you know, the real significant impact from additional catch-up demand. We have assumed that basically the utilization has played itself out across 2023. To the extent that we still see additional utilization, you know, increases because of people that have deferred care coming back, you know, there could be upside. So you asked me, you know, what are investors not appreciating?
I mean, I don't want to speak on behalf of investors, but I would say 2023 was a noisy year in the sense that it had a lot of movement. We did a lot of things around base margins to improve them, but that's not entirely visible because of the fact that we had a $1.2 billion drop from COVID, 2022 to 2023. It's hard to show margin appreciation across the business when you have a $1.2 billion revenue decrease. But our base margins that we don't necessarily report, we just report total margin. Our base margins really improved markedly.
Now, utilization has been a pretty hot topic for the start of the year. Would you then qualify what you have set out as maybe just some conservatism because you didn't want to set the bar [guess] for all the utilization?
I wouldn't say it's conservative. I would say it's really setting the expectation again, with that base revenue growth of 3.5, approximately, of the things that we know, right? You know, basically, that we can't assume additional catch-up utilization if we don't have the facts to support that, because we saw a lot of that from back in 2023. And again, we're assuming that that played out. The other part, you know, and it's a smaller part, but it's worth discussing as well. You know, we had a tough rest of the year in January because of the weather. The first two weeks were really tough from a weather. A few of you maybe that are less familiar with Quest might say, "Well, how does two weeks of weather really impact the group?" It does.
You know, you've got a lot of requisitions that get impacted by weather. When you have snow events, you have massive rain events on the West Coast, ice events in the South, and they don't come back. Some of them do come back, some of them don't.
You guys don't have snow days either, and your locations stay open.
They do stay open, but, you know, patients-
Exactly.
-don't come back.
You have the same cost.
Actually, you have the same cost, but you don't have the volume. Now, the second half of January, we actually saw a good rebound from those negative weather events. But, you know, as we set guidance for the year, you know, it was also with the knowledge that January, and we did try in our guidance to $0.07 impact, negative impact from weather point.
Now, I'm going to jump all the way to the question I wanted to ask at the end, but this just makes me think. You talk about how this, this growth is very high, and that historically, your growth has always been more low single digits.
Yeah.
But the long-term guidance doesn't say that. So help me bridge to how you're getting to that high range.
Again, I think the 7% is the norm going forward. Now, as I said, there's some catch-up demand in that, more normalized, but probably from a volume perspective, closer to around four, you know, somewhere like that. So let's bridge the long-term guidance. You know, what we said back at the Investor Day last year and what we still stand behind, is that we think this business can grow organically by approximately 3%, which, by the way, where our guidance was before. And we think that inorganically from acquisitions, we can generate an additional almost 1.5% of growth from acquisitions. So basically, we think the long-term steady state of this business over a certain period of years, for the next few years, let's say, is about 4%-5%. And we stand behind that.
I think that's still very much attainable. We've got a very healthy acquisition pipeline to support that as well, support that 1%-2% growth. Now, from a margin perspective, we think that we can grow margins 75-150 basis points over a three-year period, you know, from the 2023 starting point or the 2023 annual starting point where we finished. And we still stand by that. We think we generate that margin appreciation of about 150 basis points over the three years. So we still stand behind these projections. If you look at EPS, and I think if you're talking about long-term guidance, punctuate that a little bit.... You know, EPS this year, our guidance calls for about 0.5% of EPS growth in terms of EPS. It's these are kind of things that don't repeat, right?
So one is Haystack because eventually, EPS is accretive. Next year, it's actually a bit of a tailwind because it's less diluted, and in 2026, we think it's accretive. So that was—if you back that out from 2024, you back out the impact of COVID, and I hope we don't have to talk about COVID after 2024.
If we're here at the conference next year talking about it, I'm, I'm just excited.
Exactly.
You have questions.
I wouldn't think about it. I'll promise you then. But, you know, if you back those two pieces out, our EPS growth is closer to 8%. So again, I don't want to normalize too much and keep going, you know, like, detailing the moving parts. But it's important for you to realize that those two items, COVID, Haystack, if you back them out, EPS growth would have been 8% in 2024, and so that's why we're still confident about the long-term guidance that we gave about high single-digit EPS growth.
So is the way to think of the, the bridge, that EPS growth is like a Nike swoosh, like 2024 is just kind of-
Well, you know, I think about it as look at it for the long term. It is over the three-year long-term guidance. I think that the EPS, we're still confident.
When I talked with you guys back in the day, I remember that the hospital outsourcing business, and I'll give you, it looks a little different, but at the time, didn't sound like it was the most attractive part of the world for what you were doing. Now it sounds like a very attractive part of the world. So just talk to me about what changed.
Sure. Yeah. Maybe a couple of facts to support or to at least preface that, first of all. You know, we started this business, we call it the PLS business, the professional lab services business. We started it around 2015, 2016, and by 2019, right before the pandemic, this became a $300 million business. But to your point, Stephanie, it wasn't as much a factor back then. Now, this business is about just in excess of $700 million. So we've more than doubled it since 2019. As I said earlier, this business grew by 13% last year. The reason we're seeing traction in that business is, think about it from a perspective. And by the way, these are not acquisitions.
This is an outsourcing relationship that could be either a, you know, supply chain relationship or, a full-scale outpatient or inpatient lab. So basically saying, "Yes, we want you to run it for us," take on the employees, from the supply chain-
Outbadge.
And rebadge and do everything yourself. And the reason is because the hospitals are stretched. You know, they're stretched from labor standpoint, cost standpoint, and the, and the lab business is not for them. They know that we can do it at scale more efficiently, and we can generate for them up to 20%, if not more, of savings as we run. So that's why it's important. That's why it's become much more, I would say, a big driving factor behind our growth.
That wasn't always the case, but I remember hospitals used to view this as a source of margin.
They did, yeah. But I think progressively, as you talk, especially, you know, whether it's academic medical centers, other health systems, they will tell you they've got a list of priorities, and maybe COVID has played into it. And lab, you know, this been, I would say, probably seven, eight on that priority list. Yes, but to make margin, they'd much rather focus their resources on the things that drive more, you know, profitability for them, procedures, you know, patient and other things that they do.
I was going to say, looking in the rearview mirror, is this maybe a benefit out of PAMA only a few years?
PAMA has changed a lot of things, and I think,
But PAMA hasn't changed.
Yeah. PAMA hasn't changed.
Yeah.
Maybe, maybe part of it, maybe part of it is the dynamic.
So as long as you're talking about regulatory going on, would you have the final action, right, for these LDT?
Yeah. So, a lot to unpack here. There's a lot of moving parts, you know, so these regs, which could come as late April of this year, you know, I would, the simple way to look at it is there are five stages to it. You know, the first stage is basically medical device reporting, so having the labs stand up medical device reporting. The second stage is really introducing quality systems. Third stage is good manufacturing practice, good federal manufacturing practices. The fourth stage, which really gets us into late twenty-seven, that's an important one here, which is really the approval or the requirement for the approval of high-risk LDT. So that's three and a half years out from when the regs first hit. And then the fourth and final stage is to reevaluate the manufacturers of LDT.
So those are kind of the five stages. Yes, you know, the impact is looking at the fourth stage, the fourth stage, I should say, which is end of 2024.
Right.
Yeah, where, you know, you have to look at that. If you have LDT, high-risk LDT in the market, you have to get them approved by that deadline, which is, at this point, we think it's 2027. A lot of moving parts. Is there a project that's going to be introduced for LDT that's currently on the market? We don't know. The regs currently don't specify that, but it could happen. Is that period of three and a half years, by which time you have to get the highest LDTs approved, is that going to be longer? We don't know. By the time the regs get introduced, we'll see what it looks like. What's the impact to us? You know, I would say the impact for us, first of all, is that roughly 5%-... of our requisitions are impacted.
What we consider in that category, high-risk LDTs, a little bit more than 20% of that, usually, these vary a bit more valuable to them. There will be some costs. I think there's been some cost estimates that have been stated about, they are too, too high, but there will be some costs that we'll have to incur, just like others will, as other labs would have to do the same thing, the lab providers. The one thing I think that some people don't quite realize, though, is that for smaller labs, the ones that don't have the scale that we have, including many hospital labs and academic medical labs, they don't have to stand up all of these people. You know, we already have a lot of rigor.
We have labs, we do validation, you know, and, and we already do a lot of this. Now, we will still have to increase costs. I'm not saying, but some of these-
We just scale it off that.
We'll observe it, then we'll find out what exactly the requirements are. The other smaller providers, including hospitals, might have to send a lot more reference our way because they don't have the capability to get the LDT validated and approved. Now, again, there's a lot of speculation here based on what we know and don't know, so I think we'll get more clarity when the labs get introduced.
Given the amount of regulation that has maybe gone and that's very disruptive to the lab business model, have you thought of maybe involving lobbyists or getting more involved in a way where things like PAMA don't come up, or it doesn't come up, which is very destructive to the lab and your competitors?
We work through, right? I mean, ACLA is the lobbying body here, through the industry association. We're very active in terms of, you know, educating the FDA, educating, you know, members, educating, you know, our constituents about what this means. I mean, like I said, this is across the broad spectrum of the market, not just impacting us. And I think, again, if there's a silver lining, it just means, you know, the scale providers, the ones that then can, you know, navigate through this. And I wouldn't say it's easier than the vast majority of others.
With that in mind, during what may be a very contentious election year, what is your thought on SALSA?
So PAMA, earlier, PAMA right now has been delayed four times. We think we'll probably get delayed again in 2025.
Is there a risk it's a lot later because it has to be after the election?
Is there a risk that it gets implemented?
It usually depends on the number.
Oh, yeah, I mean, last year we got certainty on that in November. Be a bit different than that, maybe, but I think it's going to be more. But remember, you know, the whole SALSA, you know, also specifically was a bipartisan bill, so I don't think it's going to be impacted that much by the election. Could the noise of the election delay PAMA certainty? Potentially. And I think the odds are, we think that PAMA gets delayed another year. Now, going back to the question, so first of all, again, bipartisan bill, with support from both sides of the house, but, you know, it has a cost to it. So exactly why hasn't it been implemented as well? Why hasn't it replaced PAMA?
The CBO scored SALSA, and the reason they scored SALSA as well, is that they expect once the complete schedule comes out, which, you know, the earliest it can come out is 2029, prices will go up because the data collection method was flawed, the way that PAMA was done. So this new schedule is going to mean a price increase, which would mean higher cost to the government. That's SALSA. Now, on the other hand, PAMA, the reason it's been delayed now, at least half year, some year-
You've got to do something if you want to implement it, right?
Exactly. But also what it means is that, PAMA, CBO scored the savings to the government. But again, because they believe that the schedule, pricing will increase, so let's keep delaying, let's keep kicking that can down the road. So, and the CBO scored that as a $600 million-
They cancel each other out?
Not really. I don't think they work that.
So, other than changing your business, I do want to touch on one last: the value-based business, and that's been pretty unique.
Yeah.
60% of the hospital now, how did it get there? And what's the, what's the high end of what it could be?
So the value-based contracts that we work with payers on in the health plan portion of our business, but about 60% today of our health plan volume go through what we call value-based. About, you know, some time back, it, it was about 40%, it's grown to about 50%. The reason it's grown so much, the reason it's important, first of all, is it's helped us preserve and actually increase with payers. So incredibly important to our relationships with payers. Why has it happened? It's because, simply put, we work on value-based with payers, shared incentives, saving, you know, where we're shifting work and volume from high price, out-of-network labs and certain or just higher price labs to our labs, which are, you know, better quality, lower cost.
And so we're moving that, you know, and saving the payers a lot of money in the process. On top of that-
No longer contention, there's a relationship.
It's putting us on the same level platform in terms of lab and a good partnership and collaboration with the payers. There's shared incentives on both sides. And in some cases, you know, we get incentives, and other incentives, in other cases, we have incentives for us if we achieve certain savings. Now, you know, we've been able to also, with our outreach acquisition, reduce costs for the payers because we reimburse the cost, you know, basically on schedule now, which is much lower than what we were able to offer. So that's another factor that has helped us pivot to that, you know, new relationship on value-based contracts. Now, you ask the question, get to definitely about 50%. We still see a runway here, which is, by the way, allowing us to have increases on average with the year.
But to get to 100, I don't know. I mean, we've got a lot more payers that, you know, are not worth the effort to do value-based contracts with new payers, but we can get to maybe north of 50.
Well, I look forward to seeing the next Nike swoosh . Thank you so much for coming.