Welcome to the Quest Diagnostics Fourth Quarter and Full Year 2023 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. I’d now like to introduce Shawn Bevec, Vice President of Investor Relations for Quest Diagnostics. Please go ahead, sir.

Thank you, and good morning. I'm joined by Jim Davis, our Chairman, Chief Executive Officer and President; and Sam Samad, 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 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. 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 Jim Davis.

Thanks, Shawn, and good morning, everyone. For the full-year 2023, we delivered strong revenue growth of 7% in our base business and met our earnings commitment as we transitioned away from COVID testing. The results we announced this morning reflect a strong fourth quarter and full year for our base business, in which we made substantial progress on our strategy to drive top-line growth across our core customer channels and improve profitability. Throughout the year, we advanced our growth strategy with innovative testing solutions, new and expanded relationships with health systems and a robust pipeline of M&A and professional lab services opportunities. We also delivered double-digit revenue growth in several clinical areas, including advanced cardiometabolic, prenatal and hereditary genetics, and neurology. We also strengthened our oncology offering with a strategic investment in higher growth, minimal residual disease testing. In addition, our efforts to improve quality and productivity delivered our invigorate goal, which helped us offset the cost headwinds we faced throughout the year. This morning, we issued guidance for 2024 that reflects a return to overall revenue growth while balancing the earnings tailwinds and headwinds we see for the year. Looking beyond 2024, we are well positioned to deliver our long-term financial outlook to drive mid-single-digit revenue growth and high single-digit earnings growth. I'm grateful to our dedicated Quest colleagues for making this happen. Every day, they bring our purpose to life, working together to create a healthier world, one life at a time. Before discussing highlights from 2023, I'd like to share some recent regulatory updates. First, as you know, Congress once again delayed Medicare reimbursement cuts and the next data collection process under PAMA that were scheduled to take place in 2024. While we are pleased with the delay, we continue to work closely with our trade association to seek a permanent fix to PAMA through SALSA, the Saving Access to Laboratory Services Act. ACLA's highest priority this year is to secure passage of SALSA. Second, ACLA and nearly 7,000 other individuals and groups submitted comments last quarter on a rule proposed by the FDA to regulate laboratory developed tests as medical devices. Lab-developed tests are essential medical innovations that are already highly regulated under federal legislation known as CLIA. In addition to the oversight by states, accredited bodies, and Medicare as it makes coverage determinations. If enacted, the FDA's proposed rule would compromise patient access to central lab testing. It would also slow diagnostic innovation and add unnecessary healthcare costs. We agree with ACLA that the FDA does not have the statutory authority to unilaterally regulate LDTs and believe that resuming discussions with the FDA, Congress, ACLA, and other stakeholders on a legislative solution is the most prudent path forward. Now I'll recap our strategy and discuss highlights from the fourth quarter. Then Sam will provide more detail on our financial results and talk about our financial guidance for 2024. Our strategy to drive growth is focused on delivering solutions that meet the evolving needs of our core customers: physicians, hospitals, and consumers. We enable growth across our customer channels through advanced diagnostics with an intense focus on faster-growing clinical areas, including molecular genomics and oncology. In addition, acquisitions are a key growth driver with an emphasis on accretive hospital outreach purchases as well as smaller independent labs. Our strategy also includes driving operational improvements across the business with strategic deployment of automation and AI to improve quality, efficiency, workforce experience, and service. Here are some updates on the progress we have made in these areas in the fourth quarter. In Physician Lab Services, we delivered mid-single-digit base business revenue growth. We attribute this growth to a return to care, overall market growth, and share gains driven by the competitive strengths of our scale and innovative offerings. We continue to execute hospital outreach and independent lab acquisitions, which generate volume for our physician channel. In January, we entered into a definitive agreement to acquire select assets of Lenco, an independent New York-based laboratory company, and expect to complete the transaction later this quarter. In addition, we acquired outreach assets of Steward Health Care, which will deepen our reach to patients in Massachusetts, Pennsylvania, and Ohio. As we said earlier, our acquisition pipeline is very strong, and we expect to complete additional transactions in 2024. Our strong relationships with health plans were also a key driver of growth in 2023 as we grew revenues from health plans by high single-digits compared to the prior year. As we've indicated, we successfully completed negotiations for all our strategic health plan renewals that were scheduled in 2023. Health plans and self-insured employer clients recognize the clinical and economic value we deliver to them and their members. To date, more than half of health plan revenues now come from value-based contracts, which enable faster growth compared to our traditional health plan contracts. In addition, working with health plans, we continue to reduce so-called lab leakage to high-cost out-of-network labs, partly by redirecting the volume to Quest. Importantly, this is good for both patients as well as employers, who pay for the majority of healthcare costs. In hospital lab services, we drove high single-digit base business revenue growth in the fourth quarter with strength in both reference and professional laboratory services. Hospital reference testing, in particular, grew much faster than historical trends and well above our estimated growth for the market. Increasingly, health systems recognize that our innovative laboratory testing and collaborative lab management solutions can help them improve quality, productivity, affordability, and care. They also continue to face labor and cost pressures, prompting more of them to reach out to us to help with their lab strategy. Our professional lab services help manage a hospital's lab, supply chain, and workforce. We also provide insights from our analytical solutions to help hospitals manage utilization to deliver the right test to the right patient at the right time. In the fourth quarter, we completed two professional lab services relationships that will contribute modest growth in the first quarter of this year. We also provide health systems the opportunity to transition their non-core outreach laboratory assets to us through acquisitions. By selling their outreach assets to Quest, these hospitals are better able to redeploy scarce capital to areas of their business that have a greater impact on patient care. Our consumer-initiated testing service, questhealth.com, generated revenues of approximately $45 million in the full year 2023, with strong base business growth. Our return on ad spend and customer acquisition costs remained favorable in the fourth quarter. Another element of our consumer-initiated testing strategy is to drive revenue growth through channel partners. In 2023, we generated more than $30 million through this channel. We are also excited about new product releases in 2024, including blood testing for PFAS or forever chemicals via questhealth.com. PFAS chemicals have been used in industrial and consumer products for decades and may contaminate food and water. In late January, the CDC issued new guidelines that recognize the value of PFAS blood testing for individuals that may have elevated exposure levels, which can increase the risk of kidney cancer, high cholesterol, and other health conditions. According to a study in the Journal of Endocrine Society, PFAS chemicals accounted for approximately $22 billion in U.S. healthcare costs in 2018. In advanced diagnostics, we experienced double-digit growth across several clinical areas in the fourth quarter, including advanced cardiometabolic, prenatal and hereditary genetics, and neurology. Growth in neurology was driven largely by our Alzheimer's disease portfolio of tests, which is among the most comprehensive in the fast-evolving field of Alzheimer's care. Our innovations include our AV detect blood test for early risk assessment based on amyloid beta proteins and ApoE genetic risk. This week, we also added P-Tau181 to our AV detect blood test line to complement insights from amyloid beta testing. In addition, our Alzheimer's disease test portfolio includes several CSF tests for diagnosis and monitoring based on amyloid beta, P-Tau181, and ApoE. We intend to add additional biomarkers later this year and continue to expand our menu. In molecular genomics and oncology, we are on track to launch our Haystack minimal residual disease test to physicians later this year from our Oncology Center of Excellence in Lewisville, Texas. We also believe Haystack MRD can help support clinical research and recently announced clinical trial collaborations using this innovative technology with the Rutgers Cancer Institute, Alliance Foundation trials, and TriSalus Life Sciences. In the fourth quarter, we announced a collaboration with Universal DX, which has developed an innovative blood test for screening for colorectal cancer, including precancerous lesions. We look forward to supporting Universal's effort to gain regulatory approval for this test. Through our collaboration with Scipher, we are expanding patient access to the PRISM-RA test for aiding treatment selection for rheumatoid arthritis. Turning to operational excellence. Our Invigorate program delivered our targeted 3% annual cost savings and productivity improvements. Here are three examples of how we're improving operations. First, we continue to make progress in using front-end automation to enhance specimen processing. In 2023, we completed front-end automation upgrades in our Pittsburgh and Dallas laboratories, which will improve quality and productivity. This year, we'll add five additional sites. Second, we also expanded the use of AI to improve quality, efficiency, and workforce experience in several clinical areas. AI can quickly identify patterns that signify possible disease in digital images of patient cultures and slides. In 2023, we expanded the use of AI in microbiology to help identify bacteria as well as in cytogenetics to identify chromosomal abnormalities. Looking forward, we are encouraged by the opportunities to use AI in several additional clinical areas, including cytology, pathology, and parasitology. Third, in 2023, we deployed an AI tool at our Clifton lab that helps laboratory staff continuously identify ways to be more productive in their daily routines. And we look forward to introducing this AI job helper in other labs and support processes. Finally, we made significant progress improving the margins of our base business in 2023. I'd like to personally thank our Quest colleagues whose efforts have helped make this possible. With that, I'll turn it over to Sam to provide more details on our performance and our 2024 guidance. Sam?

Thanks, Jim. In the fourth quarter, consolidated revenues were $2.29 billion, down 1.9% versus the prior year. Base business revenues grew 4.7% to $2.25 billion, while COVID-19 testing revenues declined approximately 80% to $37 million. Revenues for Diagnostic Information Services declined 2% compared to the prior year, reflecting lower revenue from COVID-19 testing services versus the fourth quarter of 2022, partially offset by strong growth in our base testing revenue. Total volume, measured by the number of requisitions, increased 1.9% versus the fourth quarter of 2022, with acquisitions contributing 50 basis points to total volume. Total base testing volumes grew 5.2% versus the prior year. Revenue per requisition declined 3.5% versus the prior year, driven primarily by lower COVID-19 molecular volume. Base business revenue per requisition was up 0.2%. Unit price reimbursement was positive and consistent with our expectations. Reported operating income in the fourth quarter was $267 million or 11.7% of revenues compared to $135 million or 5.8% of revenues last year. On an adjusted basis, operating income was $338 million or 14.8% of revenues compared to $330 million or 14.2% of revenues last year. The year-over-year increase in adjusted operating income is related primarily to growth in the base business, actions taken in 2023 to reduce support costs, and lower performance-based compensation, partially offset by lower COVID-19 testing revenues, wage increases, higher employee health care costs, and higher deferred compensation expense. Reported EPS was $1.70 in the quarter compared to $0.87 a year ago. Adjusted EPS was $2.15 compared to $1.98 last year. Cash from operations was $1.27 billion for full-year 2023 versus $1.72 billion in the prior year, driven primarily by lower COVID-19 testing revenue. Finally, our Board of Directors has authorized a 5.6% increase in our quarterly dividend from $0.71 to $0.75 per share or $3 per share annually effective with the dividend payable in April 2024. The company has raised its dividend annually since 2011. Turning to our full-year 2024 guidance. Revenues are expected to be between $9.35 billion and $9.45 billion. Reported EPS is expected to be in a range of $7.69 to $7.99 and adjusted EPS to be in a range of $8.60 to $8.90. Cash from operations is expected to be approximately $1.3 billion, and capital expenditures are expected to be approximately $420 million. We have posted a presentation on the Investor Relations page of our website that includes an adjusted earnings bridge, which shows some of the key elements to bridge from our 2023 adjusted EPS to the 2024 adjusted EPS guidance we shared today. Our 2024 guidance reflects the following consideration. We are no longer providing detailed base business and COVID revenue guidance. However, note that we are assuming that COVID revenues will decline at least $175 million in 2024, which will partially offset the growth we expect from the base business. Most of the COVID headwind in 2024 will occur during the first quarter as we generated $119 million of COVID revenue in Q1 last year. In terms of M&A, our guidance only contemplates acquisitions that have been announced or closed to date, including the outreach acquisitions from NewYork-Presbyterian and Steward Health Care, as well as Lenco, the independent lab Jim mentioned earlier. We will absorb the full year of dilution from our acquisition of Haystack Oncology with an incremental impact of approximately $0.20 to adjusted EPS in 2024. We made strong progress improving our base business operating margins in 2023 and expect margin expansion in 2024. We anticipate net interest expense to increase to approximately $190 million in 2024 as a result of higher borrowings following our debt issuance in November. We assume a roughly flat share count compared to the end of 2023. We are expecting adjusted EPS in Q1 to be roughly 21% of our full year earnings. This is slightly below the typical seasonality and reflects the significant amount of weather disruption we've experienced in January. At this point, we anticipate a weather headwind of $0.05 to $0.07 in Q1. And finally, as Jim mentioned earlier, we are well-positioned to deliver our long-term financial outlook to drive mid-single-digit revenue growth and high single-digit earnings growth.

Thanks, Sam. Finally, I'd like to take a moment to remember Dr. Paul A. Brown, who passed away in January of this year. In 1967, Dr. Brown founded MetPath, the predecessor company of Quest Diagnostics, providing basic lab services from his apartment in New York City. Dr. Brown was a pioneer who invented the blueprint for our industry that today is recognized as essential to quality healthcare, and we are grateful for his vision and leadership. To summarize, we delivered strong base business revenue growth in 2023 and achieved our EPS commitments. Our guidance in 2024 reflects a return to total revenue growth while balancing the earnings tailwinds and headwinds we see for the year. Looking beyond 2024, we are well positioned to deliver our long-term financial outlook to drive mid-single-digit revenue growth and high single-digit earnings growth. And I'm grateful to our dedicated Quest colleagues who bring our purpose to life every single day, working together to create a healthier world, one life at a time. Now we'd be happy to take your questions.

Thank you. We will now open it up to questions. At the company's request, please limit yourself to one question. Our first question of the day will come from Patrick Donnelly with Citi.

Probably one for Sam, just on the margin outlook for '24. Can you just expand a little bit on expectations there, including maybe the cadence for the year? And then just on the margin front with PAMA, obviously, the push out, it's not a function of you getting any windfall by any means, but just that potential headwind being alleviated. Were there investments that you guys were kind of holding off on until you got more clarity on the outcome there? And then as you plan the budget, you green lit with some more of those as PAMA got pushed out. Just wondering how you thought about that expense piece there and a bit more color on margins?

Yes. Thank you, Patrick. So listen, we made a lot of great progress in 2023 in terms of expanding our margins and offsetting the COVID headwind that we saw in '23. In terms of '24 expectations, as we mentioned in the prepared remarks, we're looking to expand margins, to continue to expand margins in '24. The key drivers will be volume growth, which we have in the plan; that's going to have the biggest impact on driving margins. We'll continue the great work that we're doing on Invigorate and offsetting any cost headwinds. We're assuming labor inflation to be in line with what we saw in 2023. So somewhere in the 3% to 4% growth range, we do not expect it to get worse, but neither do we expect it to improve significantly. In terms of your question on PAMA, Patrick, you're absolutely right; it's not a positive. It's the absence of a negative. The delay now gives us certainty for '24 that we will not see a decline. Had PAMA occurred or had PAMA come back in 2024, you're right in the sense that we would have had to potentially defer certain investments. We would have had to make some potentially difficult cuts to offset some of that impact. The fact that we have a delay affords us the ability now to make certain investments and to avoid some of those difficult cuts that I referenced. But I think the key punchline for 2024 is that we continue to expand operating margins. Jim, do you want to make a comment?

Yes. Patrick, you heard me discuss in our prepared remarks. We're going to continue to invest in our Alzheimer's portfolio of tests. There's still one important blood-based biomarker that we will bring up later this year. And that will complete our investments in our Alzheimer's testing from a blood-based standpoint. You heard me mention that PFAS testing. We're bringing that test up, and we'll be launching that here in the first quarter. We have received significant consumer and physician demand to bring that test up. And finally, we're upgrading some of our laboratory information systems in a couple of our esoteric labs. The lack of this PAMA cut gives us the ability to continue to make those investments.

The next question comes from Elizabeth Anderson with Evercore ISI.

I have a sort of unrelated two-part combo question. One, can you talk about the progress you're making on Haystack? I know you ended up on the higher end of the dilution. Is that because you're sort of accelerating test pushout or have you seen incremental progress on that side? And then secondarily, can you remind us of your thoughts about share repurchase for the year? I know that's not in your current base guidance assumptions, but just wanted to hear your updated thoughts on that for capital deployment.

Okay. Let me address the progress on Haystack; Sam will take the second question. So Haystack is proceeding as we expected. There's no incremental investment versus what we thought. We said last year, $0.15 to $0.20 for the half year. Likewise, $0.15 to $0.20 incremental this year. We are bringing the assay up in our Lewisville, Texas Cancer Center of Excellence. It's proceeding as we expected. We announced in my prepared remarks discussions of three clinical trials. So we are doing testing right this moment. Obviously, we're not getting paid for that testing as we continue to validate the assay. However, we expect to launch it here in the first half of the year for commercial purposes.

Yes. I'll address the second question, Elizabeth. To clarify, the Haystack dilution in 2023 met our expectations and was between $0.15 and $0.20, which aligns with our prior forecast. Regarding share repurchases, we executed $275 million in share buybacks in the fourth quarter. Our current outlook is aimed at offsetting equity dilution in 2024, targeting a similar amount for repurchases as in Q4, approximately $250 million to $275 million. This is our baseline assumption to counterbalance equity dilution.

Our next question will come from Pito Chickering of Deutsche Bank.

There are a lot of moving pieces in the 2024 bridge you provided. If we look at operating margins, excluding Haystack dilution, how are operating margins in 2024 compared to 2023? And then 4Q margins missed the street by a decent amount. Can you help us bridge the 4Q margins to what you're guiding to for 2024?

Sure. I'll address that, Pito. To start, the guidance at the midpoint indicates an expansion of operating margins for 2024. We aren't specifying the exact operating margin rate, but there will definitely be an increase in both the operating margin rate and operating margin dollars in 2024 compared to 2023. This is implied in the guidance we provided. Regarding the factors that affected us in Q4 and how they relate to 2024, three main issues impacted our operating margin rate, which came in at 14.8%. Despite a decrease in COVID revenues, we still saw significant year-over-year growth. We did miss our operating margin expectations for three key reasons, each accounting for a third of the miss. First, employee healthcare costs were higher than anticipated in Q4. Second, we made additional investments towards the end of the year, including some higher costs not related to labor, particularly in IT. Lastly, deferred compensation expense also came in higher, although this does not affect EPS, it impacts operating margins. Looking ahead to 2024, we have already factored employee healthcare costs into our guidance and have taken steps to reduce these costs as we've had to pass some of the previous freezes back to employees. We also expect volume growth to contribute to margin expansion. The deferred compensation is considered minor; it simply offsets on the non-operating line and remains neutral in terms of EPS. Additionally, we have accounted for potential investments we’ll be making in 2024. We are confident in our growth for operating margins this year.

Yes. Pito, let me just go back to Q4 to discuss the progress we made year-over-year. As Sam indicated, our revenue in Q4 versus '22 was down $45 million. If you look at the mix of that revenue, COVID was down $145 million year-over-year. Remember, we were getting paid $100, which was a record at that point. Our base business offset $100 million of that, which is why we were down $45 million. Despite the drop in revenue and the lower mix, we still improved our operating margin by 60 basis points. We made significant progress in that quarter, and that progress will continue as we move into 2024.

The next question comes from Jack Meehan of Nephron Research.

Thank you. Good morning. Jim, I was hoping to hear from you about your assumptions regarding core utilization and revenue outlook. You've had elevated rates in the last couple of years coming out of the pandemic. Do you think that can be sustained? Or are you seeing moderation in certain areas?

Yes. For the fourth quarter, Jack, we saw volume growth of 5.1%. For the total year, we had volume growth of 6.5%. I would tell you that at the very beginning portion of this year, in the first two to three weeks, the weather across the U.S. somewhat stunted volume growth. However, in the last week or so, we’ve seen volume recover to normal rates and expectations we have for the year. Several health plans have reported higher utilization in the fourth quarter. We know there was higher utilization among our own employees in their healthcare costs. We expect volume growth to continue at slightly above normal market rates, although the first month of the year has been tempered a bit by weather.

The next question will come from Brian Tanquilut of Jefferies.

Sam, considering all the comments from Jim on how the revenue outlook looks promising, especially with new tests and whatnot, could you help us bridge to getting back to that EPS or earnings growth in the long-term outlook that you've provided? Because obviously, '24 appears to be an aberration. Are there some one-time items? But how do you feel confident in that long-term earnings growth for '25 and beyond?

Yes. Thanks, Brian. So first of all, let me state definitively that we are absolutely still confident about our long-term growth guidance, which is essentially to grow revenues in the mid-single digits and EPS in the high single-digits. So our long-term growth outlook is unchanged. As you mentioned, there are headwinds in 2024 that are expected to be transient or temporary. We have a projected decline in COVID revenue of approximately $175 million or roughly $0.50 year-over-year. We also have Haystack dilution, which is now full-year dilution as opposed to half-year dilution we saw in '23. Additionally, there is interest expense expected to increase to about $0.25, mostly due to the additional debt incurred and higher borrowing costs attributable to the macroeconomic environment, which we acquired to fund growth in our business and acquisitions. Our pipeline for acquisitions looks strong, and we feel confident about the M&A landscape and the opportunities ahead of us. We upsized the debt issuance in November to help fund the acquisitions made in '23, including Haystack and to some extent NewYork-Presbyterian, but also to support future acquisitions that are not included in this guidance. The punchline is we are definitely still confident about the long-term growth of the business and the EPS guidance we've provided.

The next question comes from Kevin Caliendo of UBS.

It's Andrea Alfonso in for Kevin. I'm unfortunately in the enviable position of asking yet another question around margin expectations. My question is about the expected expansion of margins and the various factors that will contribute to this year. Can you specify what areas might improve? I assume there's an M&A component you've absorbed so far. Will that be mildly accretive or just in line or below the margin expectations? In one of your slides, there was mention of GAAP charges related to workforce reductions, etc. Is that stemming from 2023 or is there a new tranche? I'd like clarification on those two items.

Yes. Thank you for the question. Regarding margin expansion, as I mentioned earlier, volume growth will be a significant driving factor for margin improvement in 2024. That's really key. We're also continuing with the Invigorate initiatives expecting 3% cost reductions across our entire cost base. We met that target in '23 and slightly exceeded it. In '24, we aim to sustain those initiatives. Regarding any workforce reductions, there aren't any planned right now. Typically, when we look at the GAAP to non-GAAP adjustments, we use a placeholder for potential workforce reductions or restructuring charges. However, there’s currently no specific relation to any headcount cuts. We do have cost reductions planned; for instance, we should see benefits from cost reductions in Q1 that we didn’t see in Q1 of last year, along with maintaining discipline in our P&L throughout '24. That’s the key driver for our margin growth.

The next question comes from Lisa Gill of JPMorgan.

You've talked a lot about volume growth this morning, but I'm curious about the price side. If I look back at the last couple of quarters, you've mentioned stabilizing pricing with health plans. Earlier, you discussed health plan leakage and the opportunity there. Can you combine these two pieces for us regarding your growth outlook for next year in terms of how much comes from volume versus price?

Yes. Let me recap '23 and then we’ll go into '24. In 2023, price alone provided a slight lift year-over-year. Our base revenue per requisition reported was up 1.2%, with price being a positive contributor. As we look into 2024, we expect pricing to remain flat to slightly up for the year. We have concluded all significant health plan renegotiations in '23. Of course, there will always be new renewals, approximately 25% to 33% each year. However, we feel confident that prices will remain flat to slightly up as we enter 2024.

The next question comes from Derik de Bruin of Bank of America.

Shifting topics a bit, the LDT legislation appears to be making more progress than in the past. Can you quantify your exposure to LDTs and elaborate on your thought process here? You're introducing a range of new tests that would qualify as LDTs. How do you envision incremental investments if that comes to fruition? Would you discontinue testing in that area? Also, there has been some recent legal movement regarding the MRD space. Has Haystack secured freedom to operate given the recent changes in the IP landscape? How do you regard your IP portfolio for Haystack in preventing lawsuits?

Yes. Let me address your second question first. We have no risk associated with the IP for the underlying technology used in Haystack. We feel very confident about it. A lot of that IP comes from Johns Hopkins University, so we are solid there. In terms of LDTs, we have previously mentioned about 10% of our tests are considered LDTs. We'll wait for the FDA's announcement in April regarding the final rule, and we'll make decisions as an industry from there. I will add that we perform significant work for the pharmaceutical industry today and for four international laboratories. Meeting their requirements necessitates ISO certification, and there's already regulatory oversight tied to the pharmaceutical industry, especially concerning companion diagnostics. This is not radically different from what we know we need to do. Yes, we will require additional investments to have all of our laboratories that perform LDTs accredited. However, that’s not an overwhelming challenge for Quest Diagnostics.

The next question will come from Andrew Brackmann of William Blair.

I want to return to the Alzheimer's offerings and the investments you're making in that area. Can you elaborate on the opportunity you see for that category? Should we consider this market akin to oncology, encompassing aspects such as screening, therapy selection, and monitoring? Or does it take a different trajectory for you?

Yes. That’s a great question. There is an increasing level of awareness regarding testing options available to both consumers and physicians. This is partly due to the introduction of new therapeutics creating widespread recognition. Currently, the majority of Alzheimer’s testing is conducted via PET-CT, which comes at a cost of $2,500 to $4,000, or CSF testing, which, while not an expensive lab test, involves an expensive procedure to extract CSF from the human body, bringing its total cost to roughly $1,000. We have introduced blood-based assays for ApoE, which is a genetic risk factor for Alzheimer's, as well as for AB42/40, which is considered an early indicator for amyloid plaques—the earliest indicators of dementia and/or the onset of Alzheimer’s. We've also introduced one of the two Tau markers, P-Tau181, and plan to launch a second one, P-Tau217, later this year. This effectively completes our blood-based offering, and I think consumer interest and physician interest are high. We have seen double-digit growth throughout the year in our blood-based assays and CSF testing, and we expect that double-digit growth to continue in 2024 and beyond.

The next question comes from Stephanie Davis of Barclays.

I'd like to delve a little deeper into the AI initiatives you mentioned during your prepared remarks. Could you provide more detail on your investments in this area and how the rollout of the AI job helper is expected to benefit your operations? As a follow-up, is it safe to assume that more IT investments will be required as you develop some of these AI solutions that will yield greater margin opportunities in the future?

Yes, that's a good question. The AI tool we referred to concerning our Clifton lab analyzes workflow within several departments, looking at simple processes such as movements between equipment, loading/unloading certain racks. We’ve been able to identify areas that can simplify and enhance operations. More broadly, we have deployed AI in two critical areas. First, in microbiology, we use AI to evaluate digital images of what grows in a dish, providing initial assessments of negative or positive results. While we still review positive results through high standards, it does accelerate the process because the system accurately indicates potential positives. We’re also digitizing pathology so that pathologists can read off a monitor rather than under a microscope. Once we’ve digitized slides, we can apply algorithms to identify regions of interest, aiding pathologists in making accurate diagnoses.

And the last question for today's call will come from Eric Coldwell of Baird.

I have a couple of questions here. First, what was the M&A contribution to revenue growth in the 2024 guidance?

So it's about 50 basis points right now is what's in the guide, Eric. And it reflects, as we mentioned in the prepared remarks, the carryover that we have from the acquisitions we made in '23, which includes NewYork-Presbyterian, Steward Health Care, as well as Lenco. That's really it.

So if I take mid-point revenue guidance at $1.6 million, remove the COVID headwind, you get to about 3.5% on the base and then take out 50 basis points from M&A, you're at 3% organic on the base.

Yes, that's correct.

In general, our reference testing, which is more LDT-like than routine testing, carries a higher test margin and gross margin. Generally, we're not drawing specimens derived from hospitals, which means very little phlebotomy costs are tied to reference work. Consequently, the operating margin of our hospital-based tests is higher than our business average. This type of business grew at a faster rate than our overall book of business, both in Q4 as well as for the total year. It was beneficial.

And that was our final question for today.

All right. Thank you, everyone, for joining our call. We look forward to further updates throughout the year. Everyone, have a great day.

A replay of the call may be accessed online at www.questdiagnostics.com/investor or by phone at 203-369-3391 for International Callers or 800-934-9421 for domestic callers. Telephone replays will be available from approximately 10:30 a.m. Eastern Time on February 1, 2024, until midnight Eastern Time, February 15, 2024. Thank you for your participation, and you may now disconnect.