Quest Diagnostics Inc (DGX) Q3 2021 Earnings Call Transcript

Quest Diagnostics Inc. (NYSE: DGX) Q3 2021 earnings call dated Oct. 21, 2021

Corporate Participants:

Shawn Bevec — Vice President, Investor Relations

Stephen H. Rusckowski — Chairman, Chief Executive Officer and President

Mark J. Guinan — Executive Vice President and Chief Financial Officer

Analysts:

Kevin Caliendo — UBS — Analyst

Brian Tanquilut — Jefferies — Analyst

Ricky Goldwasser — Morgan Stanley — Analyst

Jack Meehan — Nephron Research — Analyst

Ann Hynes — Mizuho Securities — Analyst

Ralph Giacobbe — Citigroup — Analyst

Matt Larew — William Blair — Analyst

Pito Chickering — Deutsche Bank — Analyst

Casey Woodring — JPMorgan — Analyst

John — Bank of America — Analyst

Mike Newshel — Evercore ISI — Analyst

Presentation:

Operator

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

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

Shawn Bevec — Vice President, Investor Relations

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

During this call, we may make forward-looking statements and will discuss non-GAAP measures. We provide a reconciliation of non-GAAP measures to comparable GAAP measures in the tables to our earnings press release. Actual results may differ materially from those projected. Risks and uncertainties, 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’s severity and duration; healthcare insurer, government and client payer reimbursement rates for COVID-19 molecular tests; the pandemic’s impact on the US healthcare system and the US 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.

Stephen H. Rusckowski — Chairman, Chief Executive Officer and President

Thanks, Shawn. And thanks everyone for joining us today. Well, we had a strong third quarter as COVID-19 molecular volumes increased throughout the summer. While our base business continued to deliver solid volume growth versus the prior year and 2019. In late summer, we experienced some softness in the base business across the country, but saw a rebound in September. Importantly, our base business continued to improve sequentially in the third quarter, which speaks to the ongoing recovery.

We have raised our outlook for the remainder of the year based on higher than anticipated COVID-19 volumes as well as continued progress we expect to see in our base business despite rising labor costs and inflationary pressures. The momentum of our base business positions us to deliver the 2022 outlook we shared at our March Investor Day.

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

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

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

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

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

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

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

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

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

Trends in our hospital reference business also remained steady with third quarter base testing volumes above 2019 levels. We also generated record consumer-initiated testing revenue through QuestDirect in the third quarter. While COVID testing has been the strong contributor to growth, we expect our base direct-to-consumer testing revenue to more than double this year. Recently, we soft-launched a comprehensive health profile on QuestDirect, similar to our Blueprint for Wellness offering for employers. This expanded health plan panel offers a deep dive into consumers’ health profile with a battery of test and biometric measurements to provide a personalized Health Quotient Score that can be used to track health progress over time. And then finally, our MyQuest app and patient portal now has almost 20 million users.

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

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

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

In patient services, we are seeing all-time high numbers of patients making appointments to visit our patient service centers. Now, more than 50% of patient service center visits are now by appointment versus walk-ins and this enables patients to be very satisfied and also improves our ability to drive productivity of our phlebotomists. Similar to our immunoassay platform consolidation, we recently procured a highly automated urinalysis platform that is expected to generate millions in annual savings once these new systems are standardized across our laboratory network.

And then finally, I’d like to recognize and thank all of our nearly 50,000 employees who have worked tirelessly to provide critical COVID-19 testing to our country throughout the pandemic and continue to serve the healthcare needs of patients who depend on Quest everyday. As a demonstration of our gratitude, we’re assisting our employees with a one-time payment of up to $500 designed to reimburse cost they incurred during the pandemic. Additionally, another year of pandemic pressures and travel restrictions have made it very difficult for many employees to take their hard-earned time off. Therefore, we are providing a payout of most unused paid time off for our hourly employees to ensure they don’t forfeit their earned unused time at year-end.

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

Mark J. Guinan — Executive Vice President and Chief Financial Officer

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

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

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

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

Revenue per requisition declined 5.4% versus the prior year, driven primarily by lower COVID-19 molecular volume and, to a lesser extent, recent PLS wins. Unit price headwinds remained modest and in line with our expectations.

Reported operating income in the third quarter was $652 million or 23.5% of revenues compared to $718 million or 25.8% of revenues last year. On an adjusted basis, operating income in Q3 was $694 million or 25% of revenues compared to $831 million or 29.8% of revenues last year. The year-over-year decline in operating margin was driven by lower COVID-19 testing revenue, partially offset by the recovery in our base business.

Reported EPS was $4.02 in the quarter compared to $4.14 a year ago. Adjusted EPS was $3.96 compared to $4.31 last year. Cash provided by operations was $1.75 billion through September year-to-date versus $1.46 billion in the same period last year.

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

Before concluding, I’ll touch on some assumptions embedded in our updated outlook. We expect COVID-19 molecular volumes to continue to decline from Q3 levels throughout the remainder of the year. At the low end of our outlook, we assume approximately 50,000 molecular tests per day in Q4 and serology volumes to hold relatively steady at approximately 5,000 tests per day.

As you may know, late last week, the public health emergency was again extended another 90 days through late January. We expect reimbursement for clinical COVID-19 molecular testing to hold relatively steady through the remainder of the year. However, we continue to assume average reimbursements to trend lower in Q4 as our mix of COVID-19 molecular volumes potentially shift from clinical diagnostic testing to more return-to-life surveillance testing.

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

I will now turn it back to Steve.

Stephen H. Rusckowski — Chairman, Chief Executive Officer and President

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

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

Questions and Answers:

Operator

Thank you. [Operator Instructions] Our first question comes from Kevin Caliendo, UBS. Your line is now open.

Stephen H. Rusckowski — Chairman, Chief Executive Officer and President

Good morning Kevin.

Kevin Caliendo — UBS — Analyst

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

Stephen H. Rusckowski — Chairman, Chief Executive Officer and President

Hey, Mark. Why don’t you start and then I’ll follow?

Mark J. Guinan — Executive Vice President and Chief Financial Officer

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

The second thing is, we did assume that COVID will continue at a much lower level than we saw in ’20 and ’21 but still to be significant and certainly much larger than our current flu testing. And we’ve referenced in the past that at some point, COVID testing will still be here, but maybe more on the level of flu testing. At this point, we feel comfortable with what we had assumed back in March around continued need for COVID testing for PCR and we envision a stronger role for serology going into 2022 and that’s a potential. So we feel good about that.

And then, we did reference inflationary pressures. We certainly have longer-term contracts on a lot of our purchases, but things like fuel [Phonetic], certainly we’re subject to inflation in the near-term and going into 2022. And then, most notably, as many people have talked, there’s certainly inflation in wages and benefits and especially in wages, and that as we look at that we gave a range and we still feel very comfortable that when you put all those pieces together that the $8.5 billion baseline for revenue and the $7.40 to $8 is certainly still deliverable, maybe in a slightly different way but still very comfortable that that’s likely where we’re going to land and we do finally provide guidance for 2022.

Kevin Caliendo — UBS — Analyst

Just as a quick follow-up, can you in any way quantify the higher inflationary pressures, supply chain any of that? Is there any way to put numbers around that?

Mark J. Guinan — Executive Vice President and Chief Financial Officer

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

Kevin Caliendo — UBS — Analyst

Thank you.

Shawn Bevec — Vice President, Investor Relations

Operator, next question.

Operator

Yes. Our next question comes from Brian Tanquilut, Jefferies. Your line is now open.

Brian Tanquilut — Jefferies — Analyst

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

Stephen H. Rusckowski — Chairman, Chief Executive Officer and President

So, thanks, Brian, for the question. So, as you know and what I reiterated in our prepared remarks, we’ve been marching with our two-point strategy for some time. The second strategy is to drive operational excellence. And we have maintained and just reiterated that we do believe we can continue to deliver 3% efficiency or productivity gains going forward. And that 3% comes from a variety of programs across Quest Diagnostics and one of which is what we did in Clifton. And I actually also reiterated a couple other programs on the prepared remarks, are working with our suppliers for new integrated platforms, what we’ve done around immunoassay, what we’re doing around our immuno-urinalysis is — are two good examples of more work we can get the benefits from and there’s others.

So, there is a lot more efficiencies and productivity we can continue to get. And as I said before, this isn’t cost-cutting, this is an improvement. And so every time we make an improvement in our operation, we expect our quality improves and our service performance improves and it has. So, we continue to make progress. You’ll see it in our numbers this year and you’ll continue to see it in our ’22 numbers as well. And that’s always been used to offset headwinds. And we do have headwinds, we’ve had headwinds from wage bill increases in the past, albeit maybe it could be a little bit higher going forward given what we see in the labor market. And then second is, we have seen headwinds from price consequences as well, which we’ve been able to offset. We’ll have some of those in ’22 as we’ve outlined before and then also any additional inflationary pressures we will be able to offset most of that, if not all of that, to be able to get the outlook and we just reiterated our confidence and our ability to do that. So, hopefully that’s helpful.

Mark J. Guinan — Executive Vice President and Chief Financial Officer

Yeah, I just wanted to add…

Brian Tanquilut — Jefferies — Analyst

Thank you.

Mark J. Guinan — Executive Vice President and Chief Financial Officer

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

Brian Tanquilut — Jefferies — Analyst

Awesome. Thank you.

Operator

Our next question comes from Ricky Goldwasser, Morgan Stanley. Your line is now open.

Stephen H. Rusckowski — Chairman, Chief Executive Officer and President

Good morning, Ricky.

Ricky Goldwasser — Morgan Stanley — Analyst

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

Stephen H. Rusckowski — Chairman, Chief Executive Officer and President

Mark?

Mark J. Guinan — Executive Vice President and Chief Financial Officer

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

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

Ricky Goldwasser — Morgan Stanley — Analyst

And then, just a follow-up on the direct-to-consumer point. Steve, you mentioned the soft-launch comprehensive health plan audit [Phonetic], directed and consumer, can you just share with us what has been the response to-date and maybe some data points about pricing?

Stephen H. Rusckowski — Chairman, Chief Executive Officer and President

Sure. So, as I said in my introductory remarks, we have a product that we sold for years to employers called Blueprint for Wellness, and we offer it to our Quest employees as well. It’s a fabulous dipstick reading on an annual basis for people to get an indication what’s going on with their health. And if we do it year upon year, you’ve got a good nice trending capability that I found beneficial since I’ve been here at Quest and I know many of our employees have as well and many of our customers have.

So we’re now using that as the product to introduce that through our direct-to-consumer channel, through QuestDirect. We’re very optimistic about the possibility that this has. We believe that it has a unique capability that few others provide. And we also believe it’s hitting the market at the right time where many people have not gone to their primary healthcare providers. And we believe that there’s a lot of opportunities now for people to directly engage with us as a consumer to buy this directly from us.

As far as pricing, marketing share, what we’re thinking about in terms of pricing even though this is a soft launch?

Mark J. Guinan — Executive Vice President and Chief Financial Officer

Yeah. So, it’s going to be couple of hundred dollars. And when you look at the individual elements that are contained in here, it’s a reasonable price for everything that you get. And I can also tell you that we’ve gotten a lot of feedback at the score that we give people, which really simplifies how to interpret the results, is a huge consumer positive. So, a lot of reason to believe that this could get some additional momentum for our consumer business. And we think the pricing is reasonable and we feel that the product we’re delivering is something that consumers really find interesting and valuable.

Stephen H. Rusckowski — Chairman, Chief Executive Officer and President

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

Shawn Bevec — Vice President, Investor Relations

Operator, next question.

Operator

Our next question comes from Jack Meehan, Nephron Research. Your line is now open.

Stephen H. Rusckowski — Chairman, Chief Executive Officer and President

Hey. Good morning, Jack.

Jack Meehan — Nephron Research — Analyst

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

Stephen H. Rusckowski — Chairman, Chief Executive Officer and President

Yeah. But let me start and, Mark, please add. Yeah, we’ve been on this march, as I said in my remarks, to continue to demonstrate to our health plan partners that we continue to deliver value. And I believe we’re making tremendous progress. One is that we’re picking up access in the number of lives, I mentioned 90% of insured lives. We’re in network with within the United States and we’re happy about the progress of picking some more up this coming year. So that’s moving along.

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

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

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

Mark J. Guinan — Executive Vice President and Chief Financial Officer

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

Now, you add inflation as you suggest and it’s absolutely part of the conversation we’ve been having over the last number of months. And I can tell you that although it’s not final, there is one national payer that we’ve been negotiating and it’s not final, but it looks like the first price increase we will have gotten from them in certainly my tenure in, I’m sure, more than a decade. So, we’ve been stabilizing, as we shared our commercial negotiations to go from a world of price declines every contract extension to getting it more flat. And we actually have shared, there is a handful of regional plans where we got increases over the last couple of years and now we have a national contract that I’m very optimistic we’re going to get an increase.

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

Stephen H. Rusckowski — Chairman, Chief Executive Officer and President

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

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

Operator

Our next question comes from A.J. Rice, Credit Suisse. Your line is now open.

Stephen H. Rusckowski — Chairman, Chief Executive Officer and President

Hey, A.J.

Jack Meehan — Nephron Research — Analyst

Hey, thanks. Hi, everybody. Just trying to maybe ask you a high level question about how the pandemic is maybe impacting your business for the long-term. It seems like in the pandemic we’ve seen people move away from just traditional physician office visits and some at some level virtual care other alternative sites to get their primary care. Are you seeing and does that help you or hurt you if people go to these other avenues which may generate testing volume? Do you think you capture a disproportionate share of that?

And then, the other thing I was going to ask about the pandemic was related to the — you’ve said that as you have outperformance because of COVID testing, you’ve worked — you accelerated some of your programs for cost savings and other efficiencies. Should we think of that as just enhancing the visibility on the 3% cost reduction annual goal or are there things you’re doing that might even present some upside in ’22 and beyond?

Stephen H. Rusckowski — Chairman, Chief Executive Officer and President

Yeah. So, thanks, A.J., for your question. Let me take the first one and I’ll ask Mark to comment on the second part of your question. First of all, telehealth, as we all know, have — has really increased considerably during the pandemic and has really hit an inflection point. And patients and consumers are now very comfortable with getting a portion of their health care delivered through telehealth networks, whatever that might be. And as we have watched it initially, a lot of the telehealth visits started with mental health and behavioral health and have now transitioned to more general health and primary care and even specialized care.

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

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

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

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

Mark J. Guinan — Executive Vice President and Chief Financial Officer

Yeah. Actually A.J., could you repeat the second part?

Stephen H. Rusckowski — Chairman, Chief Executive Officer and President

It had to do with accelerating our drive program because of our enhanced performance. And I think you speaking to some of the acceleration and capital purchases that we’ve made and spending some additional money to get more improvements than what we would have realized if you didn’t have the pandemic. A.J., is that correct?

Jack Meehan — Nephron Research — Analyst

Savings in all. [Phonetic]

Mark J. Guinan — Executive Vice President and Chief Financial Officer

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

But, yeah, as we looked at some of the things we did during the pandemic, we had an opportunity to update our molecular equipments and into more efficient — more state-of-the-art probably faster than we normally would have cycled. So that will give us some efficiency that maybe wouldn’t have otherwise. So, I wouldn’t, at this point, suggest that we’re ready to commit to more than the 3% productivity because obviously that’s a large number unit of itself and small basis points changes are really significant. But directionally, I would say, yes, A.J., that this pandemic goal is of value creation and additional cash has enabled us to accelerate some investments, most of it on the top-line growth, but certainly some on the productivity side as well.

Operator

Next up is Ann Hynes, Mizuho Securities. Your line is now open.

Stephen H. Rusckowski — Chairman, Chief Executive Officer and President

Good morning, Ann.

Ann Hynes — Mizuho Securities — Analyst

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

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

Stephen H. Rusckowski — Chairman, Chief Executive Officer and President

Okay. Thanks, Ann. Mark, why don’t you start with giving the numbers on base business performances?

Mark J. Guinan — Executive Vice President and Chief Financial Officer

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

So, in June, the organic base volumes ex the new PLS deals, we’re getting close to back to the 2019 levels. And then it kind of stabilized in August — in July, it took a little bit of step back in August. And then as we see where we are through September and into October, it’s getting back again very close to being fully recovered to 2019. And that’s why I said earlier that we would expect certainly by the end of this year and going into ’22 that we’d be fully recovered.

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

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

Stephen H. Rusckowski — Chairman, Chief Executive Officer and President

And the last question Ann asked for the breakdown of what we describe as, first of all, the clinical portion of our PCR volumes versus the return to life portion of our clinical volumes. And as you can expect, it’s tough for us to know exactly particularly which bucket we can put those in. But I can tell you that the trend line is trending towards more the return to life. We see the infection rates coming down and we see programs that we’ve worked on going up. Examples are the return-to-school programs, we mentioned 20 states and five more coming.

We’re also doing some testing for employers if they have mandates in place where they’re requiring vaccination or testing. So we see some increase in testings related to, again, employers bringing people back to the workplace and requiring testing or vaccination for that. So, I would say, trending-wise, it is a larger percentage than before, but it’s very difficult for us to give you exact numbers on that because we just don’t get it through the orders that we’ve received. But we think what we provided for guidance is clearly, what’s going to happen in ’22.

Operator

Next up is Ralph Giacobbe with Citi. Your line is now open.

Stephen H. Rusckowski — Chairman, Chief Executive Officer and President

Hey, Ralph.

Ralph Giacobbe — Citigroup — Analyst

Hey, good morning. Thanks. First, just a quick follow-up on the comment you made. Can you give us a sense of how much flu testing you do a year if that’s what you’re anchoring for baseline COVID testing going forward? And then separately, I was just hoping you could talk about COVID reimbursement and the outlook of that for next year. Obviously you mentioned PEG [Phonetic] got extended at least for the early part of next year. If that continues to extend, would you expect reimbursement to be better than what you assumed in that $8 EPS for next year?

And then, also what about commercial pricing specifically for COVID? Is that tied to PEG or help us understand sort of how that’s negotiated and if there is a step down there for next year? Thanks.

Stephen H. Rusckowski — Chairman, Chief Executive Officer and President

Mark, you want to start with the flu?

Mark J. Guinan — Executive Vice President and Chief Financial Officer

Yeah. So it’s quite a bit there, Ralph. We’ll see if we can touch on all of them. So, we don’t generally share the precise revenue for any given test offering, but it’s significantly lower than our current levels of COVID and what we would anticipate. So, the flu is not the baseline for 2022. We still expect COVID testing to be multiples of our flu revenues in 2022. And the reason flu testing is smaller than would be otherwise is, there’s not a ton of molecular testing done. Physicians have become very comfortable with doing point-of-care. Even though molecular is more precise, they feel like it’s good enough in the office and they have an opportunity to make money on it. So, we will probably be several years, although I don’t have the ability to call it precisely before we would expect COVID to be at our flu level.

And then, in terms of the pricing, we have either specific agreements or general agreements that as long as in the commercial rates — that as long as the federal health emergency continues that the pricing will reflect what we’re being paid by the federal government. So, it’s not mechanistically tied to every contract but we know that the expectation would be when that goes away and, again, there’s still always possibility they can decouple that $100 reimbursement rate from the health emergency. So there is some other risks as well. But as long as that continues, we would expect most of our commercial pricing to be at the same rate. And then, obviously when that goes away that we would expect a — negotiations to take it down to more the NLA level.

So when I talked about 2022 at the Investor Day, I talked about a reimbursement rate around $50, which is what the NLA is. And so, again, when you put all these pieces together, I want to be clear, we still fully expect to be in the upper end of that $7.40 to $8. I just wanted to caution against upside to that given everything that’s going on with inflation and so on because we do have some positive things that have developed over the last six months or so. And some of that is probably going to be partially offset, if not largely offset, by labor inflation.

So, we’re still pretty much where we were back in March, so in the higher end of the $7.40 to $8, and then certainly at least $8.5 billion of revenue, which importantly ties back to the 2018 CAGR that we put — that we shared with you at Investor Day. And so, just getting there in a little different way but still getting to where we said we would be.

Operator

Next question comes from Matt Larew, William Blair. Your line is now open.

Stephen H. Rusckowski — Chairman, Chief Executive Officer and President

Good morning, Matt.

Matt Larew — William Blair — Analyst

Yeah, hi. Good morning. So, a number of questions around labor issues. Actually wanted to ask about supply chain and just curious if you’re starting to see any challenges in sourcing anything either for your PSCs or labs [Phonetic] either longer lead times and then if you’re having any issues with the sample transport logistics?

Stephen H. Rusckowski — Chairman, Chief Executive Officer and President

So far, Matt, we’re keeping up. We always have battles here and there even despite the pandemic with suppliers, got a complicated business and a lot of pieces have to come together to do what we do, but not a meaningful disruption so far, but we’re watching it carefully because we’re not through this yet. So, the last part of this is around logistics. And again, logistics have become a little more complicated, given we do use commercial carriers for some portion of our logistics, but we’ve been managing our way through that.

Fortunately, we have our own network of couriers. We have about 3,500 couriers and automobiles to the Quest employees. We have a fleet of small airplanes that do some of the connections between our collection locations and our laboratories and they are employed by us. And so we’re happy we have those in these uncertain times. And we continue to have strong relationships with the national carriers as well. So, so far so good.

Operator

Next up is Pito Chickering, Deutsche Bank. Your line is now open.

Stephen H. Rusckowski — Chairman, Chief Executive Officer and President

Hey, Pito.

Pito Chickering — Deutsche Bank — Analyst

Hey. Good morning, guys. I follow up on Ann’s question around the base testing business. Once you exclude M&A and PLS, can you give us color on where the tests are coming in from specifically looking at primary care visits, [Indecipherable] hospital visits, just curious if hospital slowed down in fourth quarter with the COVID surge, does it impact anything on your fourth quarter growth?

Mark J. Guinan — Executive Vice President and Chief Financial Officer

Yeah. So first up, Pito, to be clear, the utilization trend that I talked about being nearly fully recovered doesn’t exclude all PLS. It’s just — since we’re comparing to 2019, it’s excluding some of the really large deals that we’ve done recently so that we don’t cloud what we think utilization is. So we had a PLS business of size back in 2019, I’m not taking that out, because obviously that’s part of the trend as well.

So when you look at the sources, we’ve shared that the recovery has been pretty broad-based. There is not a lot of differences, especially now. Early in the pandemic, there were some. We talked about for certain drug monitoring, certainly being one that was lagging, a lot of that was policy-driven — some of that not all of it, but a lot of it’s been addressed. And certainly, we’ve seen the toxicology of prescription drug monitoring business coming back in the same ballpark as some of our other clinical areas.

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

Operator

Next up is Tycho Peterson, JPMorgan. Your line is now open.

Stephen H. Rusckowski — Chairman, Chief Executive Officer and President

Hey, Tycho.

Casey Woodring — JPMorgan — Analyst

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

Stephen H. Rusckowski — Chairman, Chief Executive Officer and President

Yeah. I’ll take the first one, Mark and you can take the second. This is on a req density, that is the number of tests per requisition. We assume there’s a lot of different moving parts, as you know, for our business, one of which is the mix of test, the second is number of tests per requisition, we have channel mix changes. So, all of that is [Indecipherable] in our outlook that we’ve provided. So we assume that that’s in there.

And Mark, you want to talk about [Phonetic] capital deployment question?

Mark J. Guinan — Executive Vice President and Chief Financial Officer

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

Operator

Next up is Derrick Brown, Bank of America. Your line is now open.

Stephen H. Rusckowski — Chairman, Chief Executive Officer and President

Good morning, Jim [Phonetic].

John — Bank of America — Analyst

Hi. This is John [Phonetic] on for Derrick. I wanted to dig into the base business growth, specifically within your advanced diagnostics business. Was there any notable trend for cancer and genetic testing? If you could comment on the growth trajectory that would be great.

Stephen H. Rusckowski — Chairman, Chief Executive Officer and President

John, in our remarks, we’re pleased with the recovery we’ve seen in advanced diagnostics. And remind everyone that our definition of advanced diagnostics are entirely molecular and genetics. And when I say recovery and I did say molecular, it does not include our COVID testing. So, it’s our base, if you will, molecular and genetic testing. And we saw very good growth in — beyond recovery for our prenatal testing and feel good about that. And we are seeing nice growth for our genetics business. And as you recall, we did an acquisition of Blueprint Genetics last year and that’s progressing nicely and give us some nice growth and strength in that business. So we feel good about the recovery and growth we’re seeing in those areas that we’re really focused on. And genetics in general is one of those areas.

Operator

Next up is Mike Newshel, Evercore ISI. Your line is now open.

Stephen H. Rusckowski — Chairman, Chief Executive Officer and President

Hey, Mike.

Mike Newshel — Evercore ISI — Analyst

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

Stephen H. Rusckowski — Chairman, Chief Executive Officer and President

Mark?

Mark J. Guinan — Executive Vice President and Chief Financial Officer

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

Operator

There are no more questions.

Stephen H. Rusckowski — Chairman, Chief Executive Officer and President

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

Operator

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