Quest Diagnostics Incorporated (DGX) Earnings Call Transcript & Summary

Good morning, everybody. Welcome to Day 3 of the Healthcare Conference. I'm Tycho Peterson from the [indiscernible] team. It's my pleasure to introduce our next company this morning, Quest Diagnostics. Just a quick reminder, if you have questions, you can submit them through the website. And with that, let me turn it over to Steve.

Thanks, Tycho. Good morning, everyone, and thanks for joining us for our introductory presentation and be happy to be taking any questions during our Q&A. So as you see here in the title slide, we are poised for growth in our post-pandemic world and what we'd like to talk you through is what we see happening in our market and what we see happening with our company and what we see for our opportunities for growth going forward. Next slide, please. Safe harbor statement and disclosure of that. So what you're going to hear from us today is, first of all, is how we're positioned in what we define our market to be, which is Diagnostic Information Services. We have said for some time that yes, we are the world's largest clinical laboratory, but we find ourselves more so in the information business and the services business that provides us a nice opportunity for growth. Second is to give you our perspective on COVID-19 testing, clearly a different view today than it was not too long ago. Also talk about our platforms for growth, which we call our accelerate growth program. And then finally, talk about our perspective on '22 and beyond. So a little bit of an overview of Quest Diagnostics. We just preannounced our '21 earnings. And our revenues for the full year were roughly $10.8 billion, which is a record year for us, showing nice growth from 2020 and nice growth from the pre-pandemic levels. If you look at Quest Diagnostics, it's an incredible platform of capabilities and presence in the health care ecosystem. We serve about 50% of U.S. hospital systems, 50% of physicians throughout the United States. And amazingly, 1/3 of the adult Americans see us in the course of 1 year. And over the course of 3 years, we believe about 50% of adult Americans see us. We actually have about 56 billion patient data points, and we think there's a lot more insight and value that can be derived from that. While we have an amazing presence with our patient service centers, both in retail as well as physicians' offices. And we employ a lot of healthier workers. We have over 12,000 phlebotomists, but also, 10,000 other health care workers where we have health and wellness programs and programs for life insurance in our portfolio as well. And if you look at our share volume, we're processing close to 2 million tests per day, which is an impressive operational feat every day that we operate Quest Diagnostics. Next slide. This is our 1-page strategy, what we're up to is to empower better health with diagnostic insight. I believe that's never been more appropriate and right on point of where we are right now in health care and where we are in the world. When we do that, we believe we're going to deliver 3 things. First of all is we're going to deliver a healthier world. We're strong believers that in health care, it's important to make a contribution. And when we do that, 2 other things happen, we build value for all stakeholders. And clearly, that's for shareholders, but other stakeholders as well. And also we employ about 50,000 people and our 50,000 teammates at Quest Diagnostics are more and more inspired and engaged when we deliver on our promise. To do that, we have 2 strategies. First of all, is to continue to accelerate growth, and the second is to drive operational excellence, and they go hand in hand. We're not going to be able to grow unless we're delivering day in and day out strong operational performance. That's what's expected in health care. And we're, again, a good part of the health care ecosystem. We focus on 3 areas in our portfolio. First of all, the majority of our business is what we call general diagnostics. We see a good opportunity to continue to grow that. Second is we're investing in what we define as our advanced diagnostics business. And our definition of that is molecular and genetics and we want to expand that, and we're doing that with the investments we're making. And then finally, we see this opportunity to take our data, to take our information and develop services that could help the problems in health care. And therefore, we see an opportunity to extend our services business. We intentionally draw these 3 together in a Venn diagram because there's leverage and capabilities that we derive from all 3. And all 3 are part of what we define a market to be, which is Diagnostic Information Services. Now we believe we have a strong presence in health care and our job is to do what we're all up to at health care, which is to really deliver on the Triple Aim. And be a powerful force in affordable care. As you know, the Triple Aim is all about better quality at more productive levels. We believe we could do that through our innovation. We could do that by improving, we can with better diagnosis deliver better outcomes. Our experience at all the different points -- touch points over experience are quite important. And as we do that, we continuously need to focus on productivity particularly in the tight labor markets that we see right now where we need to be able to deliver more of the less labor resources. Our market is defined here, is divided in 3 ways. First of all, if you look at the total market, it's about an $82 billion market. We believe we're roughly 2% of overall health care cost in the United States. The majority of that is in what we call the physician market, which is about $52 billion of it. And you see independent labs being the majority of that. However, we do continue to have a very fragmented marketplace with a number of hospitals, having their own outreach business and also position office laboratories competing with us as well. And then to the far right, what you see is our presence in an independent lab market. We are the market leader. We continue to see work on gaining share, and we believe there's a big opportunity for us to gain share as well as to grow with the market. And what we believe prospectively will happen is this market will grow 2% to 3%. It's been a busy couple of years. COVID-19 clearly has changed us all, and that's certainly true for Quest Diagnostics. So I would argue that we're more agile than ever as Quest today than we were 21, 22 months ago. If you look at this montage with different pictures, it's been a remarkable 2 years where we've had to continue to deliver on what we do every day, day in and day out, deliver that diagnostic information for the presence of health care that we have, but equally bring up our presence in COVID testing, and we've been a significant force in doing so. We've actually had 21 emergency use authorizations delivered on. We had a strong presence at the federal level. We have a strong presence in working with partners. And you see some examples of us working with drones with a partner, us working with Walmart and leveraging our capabilities to be able to deliver what we needed to do to fight this pandemic with our logistics team and also with our clinical resource team. What we believe is this virus as well, I believe, now know, is not going away anytime soon. We believe that testing volumes in '22 will decline versus what we saw last year in '21. We also believe with our serology testing to test for the antibody test for despite protein and other capabilities will play an increasing role of how we manage immunity going forward. And we also believe that COVID-19 testing will eventually become more flu-like in a portion of our portfolio and will become a permanent part of our portfolio going forward. Now we can't do this alone. We continue to say health care is a team sport. We've taken the liberty of putting a few teammates on this slide. We have strong partners with integrated delivery systems. We have strong partners with health plans, UnitedHealthCare, Centene to name a few. We have strong partnerships with the government organization, as you see on this slide, which have been an important part of the COVID fight. And then finally, as we have made relationships with retail partners, notably CVS and Walmart. Now while we're up to as part of our strategy, as I outlined in our 1-page strategy, is the focus on 3 growth pillars. And secondly is to focus continuously on that operational excellence portion of our strategy. So let's talk about these 4 growth pillars. First of all, we continue to see a big opportunity around health plans back when we introduced this in 2018. We've said our access to our health plans has never been better. And we have got 1 billion dollars' worth of opportunity of growth, and we'll go through exactly where we believe we'll get that from. Second is we have focused on hospital health systems. We have done that by looking at where we could add value, and we've delivered on building a significant presence over the last 5 to 7 years in our strategy. Third, we continue to focus on advanced diagnostics. We believe there's an opportunity for us to invest, which we are investing to accelerate growth and get up to that high single-digit growth level and a substantial portion of our portfolio. And then finally, clearly, the direct-to-consumer and consumer in general, has become much more significant presence in our portfolio because of the pandemic, and we're investing in that opportunity as well. With all that, we believe that we will continue to grow both organically and through acquisitions, and we believe the acquisition growth that we've seen will continue to be greater than 2% per annum. We're always looking for accretive strategic acquisitions. And if you look at our history, we have grown that 2%. And then you couple that with our organic opportunities, and that will deliver the growth we expect for the company. And that's underpinned with strong operational opportunities. So I'll walk through each of those growth pillars, what's the opportunity in health plans. Well, fundamentally, we have access that we have never seen before. It's the best that we've experienced as a company. And so therefore, it is an opportunity for us to work with health plans to prevent leakage, make sure we redirect the laboratory services work into high value-added providers like ourselves. We're working proactive with some of our partners or what we call shared savings and the opportunities with every one of our partnerships we expect to get at least 25%. On the hospital side, hospitals are continuously having pressure, no different now within the pandemic, but post-pandemic, we believe the same will be true. There will be continued consolidation that we'd be pressured on margins. We think there's going to be a problem with labor and therefore, affords us an opportunity to implement new lab strategies that will help them become more productive at the same time, become more effective, again, going back to powering affordable care. An example of how we do that is what we built over the last 5 to 7 years, which we call our Professional Lab Services business. This is now about $500 million business. It's been an opportunity for us to work with clients throughout the United States, the biggest of which we just announced about a year ago with Hackensack Medical Center. We're delivering a large portion of their laboratory capabilities through a partnership that we have established. So this affords us a nice opportunity for our core business, which is our general diagnostics business, leveraging that to be able to grow our advanced diagnostics business as we typically get the advanced diagnostics reference testing when we have a relationship like that. And then finally, we do think about this as a portion of our services business because it is really a consultancy engagement. Advanced Diagnostics, again, affords us a big opportunity -- opportunities we saw with more resources in '20, and that continued in '21, and will continue in '22. We are making investments more aggressively than we had going into the pandemic. We believe the opportunity by doing that is to increase our growth rate from the low single-digit range to high single-digit range. We also have been investing in sequencing. We see an opportunity for us, again, to deliver sequencing that break through cost points or price points that will afford us a big opportunity in the consumer marketplace. The consumer is an enormous opportunity. This has been accelerated because of the pandemic. We believe it's about a $2 billion opportunity. It sits on the whole capability that we see throughout health care of digitization of how we engage with health care, the delivery of that, both in retail presence, but also wherever you are, and that could be in the home. And we think about this as an opportunity to increase the brand presence. We have this Quest Diagnostics with consumers, which has grown considerably throughout the pandemic. Now with those 4 growth pillars, this only can be delivered if we have a strong operational platform. We've been focused on this for over 10 years. We believe there's an opportunity to increase our productivity about 3% per annum. And we do that by focusing on these 4 areas. One is when we look at what we get back from what we deliver in the marketplace and we're teaming up with Optum, UnitedHealthcare to deliver a better performance there. Second is we look at every touch point, look at every workflow in the company and we digitize it and that affords us nice productivity. We're engaging our 50,000 people on continuous improvement. And also by doing so, we're focusing on making sure that we standardize and optimize and automate everything we can do in a reasonable period of time. So when we do that, it does cost us money and we are investing in the business. And if you look at our deployment of capital, which has been about $14 billion since 2012. Remember, our capital deployment strategy is to return the majority of our free cash flow to our shareholders. And if you look at the right-hand side of this slide, we've delivered on that. Roughly -- roughly $7.8 billion has been given back to our shareholders in the form of share repurchases and dividends over the course of the last 9 to 10 years. That leaves us room to execute our strategy. We executed our M&A strategy, which is spending about $2.8 billion, which is to deliver that 2% growth from acquisitions that are accretive and strategic. And it also allows us plenty of opportunity to invest in the business. You see about $3 billion worth of capital spend to deliver on those operational excellence programs and those productivity programs. So a balanced approach to capital deployment, and we've delivered on what we've committed to our shareholders. Now if you look at where we were before the pandemic, what we wanted to do when we did this in Investor Day is to show you, despite what happened in pandemic, if you go back to 2018, and you look at what we provided for an outlook, which has grown top line around 3% to 5% and bottom line in that 4% to 6% level. When you go through the math, what you see is that we are going to be on -- in '22 above those ranges in '22 for revenue as well as for EPS. And obviously, when we get into Q&A, when we announce earnings, we'll be sharing more insight at what we perspect -- our perspective on '22. But despite the pandemic, we feel, as we've navigated COVID, it's delivered good shareholder value. So what we just shared with you is what's happening with COVID testing in '21. We do expect it will continue in '22. So it will be a significant portion of our '22 revenue base. Secondly is we believe that the pandemic has affected us in many ways, but it has made us more agile and it allows us a great opportunity to invest in growth, particularly around those 4 growth platforms that we've outlined. We also believe that our base business is now fully recovered as we exit '21, which affords us a nice opportunity to grow in our base business coupled with the opportunity we have around COVID. And then finally is we do see a big opportunity to continue to gain share to focus on those growth drivers, to accelerate growth in our base business going forward. So with that, I'd like to turn back to Tycho and see what kind of questions you might have. Tycho?

Great. Thanks, Steve. So maybe jumping into a couple of questions we got on the quarter. Based on the release, it looks like COVID and base business volumes improved sequentially. EPS down sequentially. Can you talk a little bit about the drop-through, why we didn't see more drop through to the bottom line?

Yes, sure, Tycho. Well, first of all, as we all know, when we look at Q3 versus Q4 historically, Q4 margins always come down some based upon the cost base as well as what we have in the business, number 1. Number 2 is we are continuing to make investments in the business. And so some portion of that entered into Q4 as we go into '22, we continue to put our accelerator on those growth platforms I've outlined. So that's there. And we're starting to see some of the inflationary pressures with labor and with supplies. But what I would also say it's not aligned what we share with the marketplace. So what we deliver in the fourth quarter is in line with what we expected and broadly in the market what was expected as well.

Okay. I mean, are you doing things to offset some of the wage inflation in terms of pricing or any other actions that you would point to?

Yes. Two things. One is to continue to focus on what I just outlined, our operational excellence. And sometimes people ask me the question, you've cut so much cost, is there more cost to cut? This is not a cost-cutting exercise. It's a productivity exercise. Now that's a fundamental difference. We're always looking at smarter ways to getting more work out with less labor and less consumables. And so by doing so, it's helping us with the pressure we see in the [ retail ]. And we're also looking at accelerating that, particularly in the area of automation, where we could get all the different touch points with our customer experience from the front end to the back end and where we can get more and more productive, and potentially address areas where we're having a tough time frame the labor to do our job. . Secondly is on the price side, we continuously push on the value we bring to this marketplace. We think we have a great value proposition. We've shared in the past that with discussions with some of the health plans, we've actually had some modest price increases, which should -- is moving in the right direction. But I'll also say there continues to be pressure from our client bill business where we bill hospitals and also bill positions. So overall, though, we think that's quite manageable going forward. But our productivity program has been with us for over a decade. We've called it Invigorate, and we continuously drive operational excellence. So I think we're in a very good place in this new environment. Since we've been working on this for some time, we've got a lot of them and know how to do it.

And then maybe 1 last 1 on just the outlook here. The 2022 guidance, you're talking about EPS exceeding $8. The Street is at $8.78. I'm just curious if you're willing to talk about comfort with consensus numbers?

Well, we're going to announce earnings on February 3, and we're going to come back to more details around that. We thought at this point it was prudent for us to announce our '21 beat and give an indication that we're at the high end of the range. And we'll come back in the third -- February 3, we'll give you more visibility around that.

Maybe jumping into some of the recent trends then. Obviously, Omicron, there's a lot of focus on testing volumes. Can you maybe just talk on where you exited the quarter on volumes and turnaround times for PCR and serology and any drop-off in base volumes given the re-prioritization around Omicron?

Sure. So we've seen a steep increase in our volumes in the back half of the fourth quarter, particularly the last 2 weeks of December and it continues into January. And we published and shared those numbers with all of you. We are hitting our capacity levels in terms of the ability to get volume out. We're north of 100,000 tests per day. Some of that has been rate limited by 2 factors. One is the infection rate we see throughout the country is the highest level we've ever seen. And when we see that, it limits, Tycho, our ability to do what's called pooling to get efficiency around the number of tests that we made giving each well. And then secondly is we have been pressured to get our capacity where we believe it can be because of the labor problems we see. Some of this is just getting the labor to do our work. But secondly is because of call outs because of the virus have been considerable over the last 2 weeks. So that we believe will continue throughout the first quarter, which affords us a bigger opportunity than we imagined as we entered '22. But secondly is what we just said, we expect as we get through the Omicron wave is that testing will go down in '22 versus '21.

And, Tycho, I would just put a few numbers around that. We did about 100 -- a little over 120,000 PCR tests per day in the last couple of weeks of the year. And so far at the beginning of this year, we're running just north of 150,000 over the course of the last week.

Okay. And obviously, there's been a lot of scale-up of antigen at home. How do you think about that trade-off with PCR as we get through, hopefully, the tail end of the pandemic came?

Yes. So it's interesting. We've been watching what's going to happen with the antigen. And as you know, there's all different areas of the supply chain, right? The production, the delivery to retail, the purchase of those kits and then how much is all those kits intervening stock up in people's houses are going to be used. And what you see from the testing volume, which is published every week, the testing volume for PCR, the demand side of it hasn't been really affected so far. And as we said from day 1 around antigen testing. It actually is a stimulus and a catalyst for more PCR testing just from a confirmatory test. If you have a positive, typically, we'd like to confirm it with the PCR, which is still the gold standard. So we're watching it. We believe there is a place. We have it as part of our portfolio, but we believe the PCR test, particularly when you're going into the physician's office with symptoms, you like to rule out COVID or rule in COVID, but also have a test for influenza as well as other respiratory viruses. So there is a place for that central lab for continuously managing this pandemic, we're managing health long term.

Yes. That makes sense. A couple of follow-ups, just digging back to the guidance for a minute. What's the expected wage increase you're expecting in 2022? It used to be 2% to 3% per year? Is 2022 5% plus? How do you think about the magnitude of the wage inflation?

Yes. We brought it up some. We see pressure in particularly our frontline forces of our workforce. If you look at the 50,000 people that we have. I would characterize about 25,000 -- about half is being frontline phlebotomists and specimen processors in the lab and then our couriers. And we believe, overall, our inflationary pressure on wage bill will be more in the neighborhood of 3% to 4%. But the other interesting factor that we're managing our way through is just what I was referring to is the turnover is harder than we've ever expected, a lot more churn in people. And so you have this tenure change as well as in your distribution of cost. So overall, we said it will be more headwinds, but it's definitely manageable going forward.

Okay. And then are you able to give us a split of base versus COVID in that kind of $8-plus EPS guidance for '22. Or is it a little premature?

Yes. Shawn, do you want to talk through what we said so far and what we're saying on February 3?

Yes, I would say it's a little premature, but we will -- we do intend to break out -- give you some more visibility into what we're guiding to for the base and then what we're thinking about for COVID at least as we've seen this surge right now.

Okay. Another 1 that came in was just on actions. You have plan to grow and hopefully achieve fair value for advanced diagnostics?

Yes. We're making really good progress. We took the opportunity we had in '20 and '22 with more resources to make investments in growth. We've shared at our Investor Day, it was about a $75 million spend plan in '21. Some portion of that is for advanced diagnostics, and we've been investing in all elements of the value chain, more money in the front end. We mentioned a new test with our development team, their sales force capabilities, better customer presence. And because of that, we're seeing growth, particularly in the portion of our portfolio, Tycho, that is growing faster than all of advanced diagnostics. If you look at advanced diagnostics as a category, molecular genetics, there is some portion of that $1.2 billion spend, that's growing substantially greater than at 8%. And when we share more visibility around that, but we believe we've really made some nice progress, and we're looking forward to the opportunity in '22.

I touched on this a minute ago with kind of the at-home dynamic. Customer initiated testing is, obviously, central focus you've noted, I think in 3Q, you saw record revenues from QuestDirect and you've highlighted MyQuest is driving decent patient flow. Can you just talk about how you sustain utilization from these customers kind of post-pandemic? And how much of this do you think is kind of a permanent shift?

Yes. So we have invested in our direct-to-consumer market long before the pandemic. We saw an opportunity back 3 or 4 years ago to invest. And so therefore, we have a nice platform when the pandemic hit to put on top of that COVID testing and serology testing. And we've seen 2 things. One is the faster growth rate in our base business of what we offer on direct-to-consumer. And Tycho, the biggest opportunity is, particularly on the pandemic, as we know, people were less likely to go to their physicians or go into health care presence. And therefore, they look to options of serving themselves for getting an indication what's going out with the lipids, when they're taking their statin or what's going on with the glucose A1c, what's happening with infectious disease, especially transmitted diseases. And so we saw that, and we believe that's not just temporary, we believe there's a permanent shift in patients and consumers engaging in health care in a different way going forward. And then you couple that with COVID, and we've brought up on that platform, the ability for you to get access to PCR testing for that platform and access to serology testing with that platform, and that's grown nicely as well. So as we come out of '21 into '22, big investment that we're making and a portion of that $75 million, and it will continue into '22. We'll be around the opportunity to get to that $250 million consumer business in a market that we believe will continue to grow, and we'll have our fair share.

Another question that came in was just around the deployment of the balance sheet. You've got so much cash, it seems like you can't deploy it fast enough. Can you talk about an acceleration of organic investment relative to the $75 million in 2021?

Yes. So we've said that we're going to invest that $75 million. We felt that, that was a good place to ramp up as we realized in '20. It was real because we had get through '20, understand what we're in the back half and then put our foot to accelerator and putting some portion of that cash to work to accelerate growth. And when you survey our shareholders, that's where they want us to invest, invest in organic growth, and we've done that. Now obviously, that $75 million will turn into a bigger number in '22 because we'll be running out of '21 at a higher run rate spending. And some of these costs are not just period cost, the run rate costs, more resources in R&D, more resources in the sales force, more resources in our software engineering related to our consumer platform. And so those 2 investments in '21, [ 12 ] or '22 will be an opportunity for us to accelerate the growth rate that will indicate when we talk about guidance for '22 and going beyond.

Okay. Steve, you mentioned churn, employee churn earlier. What are you hearing from hospital customers around their own label -- labor force and potential for heightened levels of outsourcing in '22?

Yes. It's across the board. We're seeing it at every place. Our suppliers are having issues with getting the labor they need to have to get the job done. Our hospital customers are having a hard time getting their clinical workers and obviously, nonclinical workers, the cafeteria staff, the orderly staff, it's just very difficult to get the people we need to do the job. And the same is true at Quest Diagnostics. We're perpetually looking for good individuals. We're trying to reduce that attrition rate that we particularly see in the front end. And so this is going to put more and more pressure on the system. And as when I talk about the hospital systems, I think our strategy that we've been executing for 5 to 7 years is actually going to be enhanced by the pressure the hospitals see and what they need to do to focus on their core. And rely on partners like us, for instance, in their lab strategy because they're going to be pressured in their lab because we're competing for the same resources.

Yes. Prior to the PAMA announcement, I think you talked about 100 basis points of pricing decline. Obviously, with that pushed out to 2023, what's kind of the current assumption around pricing for 2022?

Well, we typically have said, again, we haven't provided guidance, but what we've been running at is about 100 basis points worth of price erosion outside of PAMA. And so that includes whatever kind of churn we might have contractual churn in our health plan negotiations. But it's fair to remind everyone, our erosion is not just with health plans. It's with hospital customers, with other client customers, and it has the price pressure on the past. But I can tell you, Tycho, we're continuously pushing on increasing prices where we can because we believe we deliver a lot of value. So that's number one. And then secondly, as we go forward, with PAMA, we've got another year to work through a legislative fix. And we're going to keep on working on this. The hearing is happening right now for the suit we have as a trade association with HSS. We'll hear those arguments as we speak, and we'll see what happens with any potential decision in '22. But equally, we're working with members of Congress on a permanent legislative fix to get it right during '23. And so essentially, what they gave us is another year to work on this. And obviously, people were preoccupied in '21 on a lot of topics. And we're encouraged by the response and also the support we're getting for that fix. But at the same time, what we've always said is plan on that next cut in PAMA to happen, and that would be in '23. And what's planned on that, but if there's good news, then that would be good news, but let's plan on that cut in '23 as well.

Makes sense. If I go back to the March Analyst Day last year, you bumped your kind of long-term guidance by 50 basis points at the midpoint. Can you just talk a little bit on the organic piece or what the largest driver of that increase? Is it the health plan relationships and the increased access that's kind of fueling confidence in better and longer-term outlook?

Yes. Tycho, so if you remember, when I went through the market slide, we said the market is growing 2% to 3%. That market growth accelerating is that we don't have the headwinds of PAMA going forward. So if there is another year that's 1 year, if there is a legislative fix, we no longer to have the headwinds PAMA, and that's been a considerable headwind in the market growth. So if you think about that perspective we have a marketplace that's growing 2% to 3%. And then you couple that with the 4 growth platforms, all of which say we're going to gain share. So by gaining share with those 4 growth platforms in a market that's growing at 2% to 3%. And you think about that 4% to 5% growth in our base business, 2 from acquisitions and 3 organically, it's very reasonable given what we're investing in and also we believe the marketplace is that we can deliver on that.

A follow-up on advanced diagnostics that came in over e-mail. Just can you highlight the areas of growth for that business going forward?

Well, hereditary genetics, clearly an opportunity. I would just say consumer price point sequencing. We have worked on automation, and we believe we could deliver our capability to the marketplace that allows us to offer genetic testing, a completely different price points than before and which, I think, affords us an opportunity. We also believe there's a lot more opportunity on molecular and oncology, and we're investing there as well. So we will give you more visibility going forward. But we are particularly focusing these investments on specific areas and where we're investing in those specific areas, we're seeing an acceleration of growth. In a growth rate that's substantially different than what you see overall for our advanced diagnostics portfolio.

Obviously, a lot has changed over the past few years during the pandemic. One of the questions that comes up is as you think about kind of your footprint and the migration to our work from home. I mean how do you think about your kind of real estate and your footprint and maybe geography shifting around from kind of corporate offices to more at-home work. Do you need to kind of reconfigure your logistics?

Sure. Well, the majority of our real estate is for a portion of our value chain that we need it for, despite what's happened with working from home and working remotely with our office-based employees. If you think about our 50,000 people, about 40,000 people have never left work. If we were 24/7, our laboratory operators, our logistics drivers, our phlebotomists are still going into patient service centers. And if you think about that real estate, we need that real estate to how is our patient service centers, how is our laboratories and how is those processing centers where we have building operations or in some cases where we have back office, back office call centers. But with our office-based employees, we're obviously been flexible throughout the pandemic, and we'll continue to be flexible. We're looking at what we really need for that office resource and the capabilities, but it's a very small portion of our overall real estate that we have within the company.

Got it. Maybe just a couple on the capital allocation. Priorities are obviously centered around M&A. Can you just talk a little bit about the current environment, both on hospital consolidation as well as other businesses in different verticals you may look at?

Yes. So our portfolio is quite strong. We've been delivering on that 2% per annum that we said. And prospectively, we're saying that we will continue to do that. We look at 3 areas. We look at acquisitions. One is hospital outreach, and we've landed a number of good relationships. And again, Tycho, comes back to you. It's not just about buying their outreach, but its forming a relationship around the reference testing, which is a large part of advanced diagnostics growth as well. And it's also focused on what we can do around helping to become more efficient in their hospital laboratories, for instance, what we've done with Hackensack Meridian Health care, as an example. So that continues to be a big opportunity for us. Secondly is we're looking at regional acquisitions where we believe there is a fragmented marketplace where we can consolidate in the course of the last 5, 7 years, we always have a few regional acquisitions that we made. We just announced 1 recently in South Carolina with Labtech, and that's a regional consolidation play. And then finally, we believe there's opportunities to bring capabilities and we can see those capabilities primarily the information services portion of our portfolio where we need to bring in new capabilities to deliver in value because we do see ourselves with the data we have, what the capabilities we have. We're buying more value with that information and the services, but we need some new capabilities and we're making some acquisitions there as well. So if you look at those 3 portions of the portfolio, the funnel for that is as strong as we've ever seen, and we have the capital to be able to deploy it on those opportunities. So bullish on the opportunities for continued growth and delivering that 2%.

Great. I know we're at time. Two quick ones before we hop off. One, somebody just asked us for a clarification on what was embedded in the original $7.40 to $8 guide from the March Analyst Day around COVID?

Shawn, you like to hand that one.

Yes. What we said is that there were some COVID testing revenues in there. We had assumed back in March that the reimbursement would be going back to that $51 range. We had no visibility obviously into how long the PHE would continue to get extended. So the margin contribution that we originally expected for COVID testing in the 2022 outlook that we shared back in March was a lot lower than what you've seen over the last couple of years. But we were not specific about exactly how much was in there. Again, when we provide guidance in a few weeks, we'll give you some more visibility into that.

All right. And then last one, Shawn, just as we think about that medium-term guidance 2024, what's a good operating margin target to be thinking about?

So we don't have specific margin targets. If you looked at the outlook, that long-term outlook that we had shared, it did assume that earnings were going to grow faster than revenues. So as you think about that, it assumed that margins would expand from that 2022 level. Obviously, 2022 is shaping up to be a much different story than it was back in March, given some of the moving pieces that we've had over the course of the last 10 months. So we'll let you know going ahead.

Great. Well, we're just a minute over. So we'll leave it at that. Good to see you guys. [indiscernible]. Thanks.

Thank you.