Quest Diagnostics Incorporated

Welcome to the Quest Diagnostics second quarter 2020 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'd like to introduce Sean Bevick, Vice President of Investor Relations for Quest Diagnostics. Go ahead, please.

Thank you and good morning. I'm on the line with Steve Roszkowski, our chairman, chief executive officer and president, and Mark Guinan, our chief financial officer. During this call, we may make forward-looking statements and we'll discuss non-GAAP measures. We provide a reconciliation of non-GAAP measures to comparable GAAP measures in the tables to our earnings press release. Actual results may differ materially from those projected. Risks and uncertainties, including the impact of the COVID-19 pandemic, that may affect Quest Diagnostics' future results include, but are not limited to, those described in our most recent annual report on Form 10-K and subsequently filed quarterly reports on Form 10-Q and current reports on Form 8-K. The company continues to believe that the impact of the COVID-19 pandemic on future operating results, cash flows, and or its financial condition will be primarily driven by the pandemic's severity and duration, the pandemic's impact on the U.S. healthcare system and the U.S. economy, and the timing, scope, and effectiveness of federal, state, and local governmental responses to the pandemic, which are drivers beyond the company's knowledge and control. For this call, references to reported EPS refer to reported diluted EPS from continuing operations, and references to adjusted EPS refer to adjusted diluted EPS from continuing operations. References to base testing volumes or base business refer to base testing volumes excluding COVID-19 molecular and serology testing volumes. Finally, 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 compounded annual growth rates. Now, here is Steve Roszkowski.

Thanks, John, and thanks, everyone, for joining us today. Well, in one of the most challenging periods of our history, Quest Diagnostics stepped up and expanded COVID-19 testing for the country and delivered stronger than expected performance in the second quarter. Second quarter results were driven by COVID-19 testing and a rapid recovery of our base testing volumes. I'm very proud of Quest employees who have been on the front lines of healthcare answering the call and fighting the COVID-19 pandemic. So this morning, I'll discuss our performance for the quarter, our role in the COVID-19 pandemic, and update you on our non-COVID-based business. And then Mark will provide more detail on the second quarter results and our financial position. We have reinstated our financial outlook for the remainder of the year with a broad range, which reflects uncertainty caused by the pandemic. Mark will talk about our outlook and underlying incentives just in a few minutes. Our financial performance in the second quarter was stronger than anticipated, also lower than the same period of 2019. For the quarter, total revenue declined approximately 6% to $1.83 billion. Earnings per share decreased by approximately 10% on a reported basis to $1.36 and approximately 18% on an adjusted basis to $1.42. These results were driven by a strong bounce back in our base testing volumes for March and April as the healthcare system began to resume non-urgent care and elective surgeries sooner than we had anticipated. Heavy demand for COVID-19 molecular testing helped partially offset the base volume decline as well. Demand came in from a number of areas. The continuing spread of the virus throughout much of the country. A pent-up need to test non-COVID-19 pre-surgical patients. People in high-risk populations like nursing homes and prisons. the proliferation of retail testing sites, and finally, employer interest in testing employees before they return to work. Quest Diagnostics has continued to play a pivotal role in bringing COVID-19 testing capacity to the nation. We've performed roughly 8.5 million COVID-19 molecular diagnostic tests, and more than 2.5 million antibody or serology tests. We now have the capacity to perform up to 130,000 molecular diagnostic tests a day, double the capacity since mid-May. Over the next couple weeks, we expect to have the capacity to perform approximately 150,000 molecular diagnostic tests per day. Intuitively, but has delivered nearly 20% of all the testing completed in this country. Working together with large national retailers like Walmart and CVS, we've built a new model for consumers to access testing. We're also supporting HHS and state drive-through testing initiatives across the country. I'm very proud of the progress we have made and rapidly scaling up capacity since the pandemic began. However, demand for testing has soared in recent weeks, and we are providing testing results in about two days for the highest priority patients, and the average turnaround time for non-priority patients is at least seven days. So we're doing everything we can to bring more COVID-19 molecular testing to patients, and speed the delivery of test results. We continue to add testing platforms and work with our suppliers to ensure access to testing equipment, reagents, and personal protective equipment. We're exploring a range of new technology options. Like last week, the FDA granted Quest, the nation's first emergency use for office emergency use authorization to use assessment pooling for COVID-19 molecular testing. This technique, which is commonly used with blood banking, will help expand capacity, especially among populations with low incidence. Through our lab referral program, we're partnering with other quality laboratories to expand our available capacity and in recognition of the magnitude of the current demand for testing, we have asked customers to help us prioritize patients we test for COVID-19 at this time. Quest Colleagues has stepped up in so many ways over the last few months to fight COVID-19 pandemic. Our company has been central to the crisis response, and I'm proud of our employees on the front lines who are serving patients, customers, and communities every day. In June, we offered financial assistance to about 23,000 of our frontline colleagues and their supervisors to encourage increased expenses during the pandemic. In April, we took a series of temporary workforce actions to manage our costs. These included furloughs, reduced hours, and pay cuts for salaried employees. And then today, I am very pleased to report the vast majority of these actions were reversed a month earlier to enable us to continue to respond to our customers' increased demand for testing. Since March, we've been fighting COVID-19, but we've also been focused on accelerating growth in the base systems. And as a reminder, the five elements of our strategy to accelerate growth are to grow more than 2% per year through accretive strategic line acquisitions, to expand relationships with health plans and hospital health systems, to offer the broadest access to diagnostic innovation, be recognized as a consumer-friendly provider of diagnostic information services, and then finally, support population health and data analytics and extended care services. Now let me take you through a few highlights from our strategy to accelerate growth. Through the pandemic, the M&A environment understandably slowed. But despite that, we were able to complete the acquisition of Memorial Hermann's outreach business in April and are pleased with early progress. We also recently announced our plan to acquire all of Mid-America Clinical Laboratories, or MACL, Once we complete this transaction, expected this quarter, Quest will wholly own Mackles Laboratory in Indianapolis and about 50 patient service centers across Indiana. Also, we'll provide professional lab services under a long-term agreement for 30 hospital labs owned and operated by Mackles founding hospitals, Ascension St. Vincent, and community health network. Our M&A pipeline remains strong. Given the many challenges that hospitals will face, we expect many more to be open to discussions about how Quest can help them achieve their lab strategy. At the same time, we know that smaller regional laboratories have had their own challenges. This could also produce more opportunity for tuck-in acquisitions. If anything, the pandemic could be an additional catalyst to help drive industry consolidation. Some transactions in the pipeline that were paused because of the pandemic are being revisited based on the new realities that the healthcare system is experiencing at this time. We also continue to make progress on our health plan strategy. We entered our second year of being a member of United Health Care's preferred lab network, and we're pleased with the results to date. We have met or exceeded key quality metrics, such as electronic ordering and resulting, and patient service center appointment rates. We've also secured business for more than 180 out-of-network UHC labs, saving money for patients, and lowering the overall cost of care. We look forward to making continued progress with the preferred lab network in the second year. Over the last few months, we've seen a remarkable surge in the sign-ups of our MyQuest patient portal. Today, more than 11 million patients have a MyQuest account to make appointments, and receive the results through their smartphone or computer. Since late April, we've seen a more than three-fold increase in weekly registrations, which accelerated at the end of the second quarter. We believe that our patients see and appreciate the ease and convenience of our consumer experience. Now I'd like to turn it over to Mark, who will take you through the results. Mark.

Thanks, Dave. In the second quarter, consolidated revenues were $1.83 billion, down 6.4% versus the prior year. Revenues for diagnostic information services declined 5.7% compared to the prior year. Although revenue declined year over year, our second quarter results were stronger than we communicated back in June. reflecting a stronger than expected recovery in base testing volumes, as well as growing demand for COVID-19 testing services. Volume, measured by the number of requisitions, decreased 17.7% versus the prior year, with acquisitions contributing approximately 50 basis points. Testing volumes in the company's base business declined approximately 34% versus the prior year, In April, base volumes declined in excess of 50% compared to last year. As stay-at-home measures were implemented across the U.S., hospitals began to limit elective procedures, and many physician offices were temporarily closed for business. Base volume trends began to improve in May, down more than 30%. As stay-at-home measures, many hospitals reintroduced elective procedures, and some physician offices reopened. The base volume recovery continued in June, down less than 15% as the trends in May gained momentum. Throughout the quarter, the strongest recoveries were observed in the states that opened more quickly than others, such as Texas and Florida. As we exited June, base volume declines had moderated to approximately high single digits. However, due to the recent spike in COVID-19 cases across the country, and the rollback of several state reopening plans, we have seen a slight softening of our base business in early July. While base testing volumes remained down year over year, COVID-19 testing was a meaningful offset in the second quarter. We exited the second quarter averaging approximately 110,000 and 26,000 COVID-19 molecular and serology tests respectively each day. Over the next couple of weeks, we expect to have the capacity to perform 150,000 molecular diagnostic tests a day. Revenue per requisition increased 15.3% versus the prior year, primarily driven by reimbursement for COVID-19 molecular testing. Unit price headwinds were slightly less than 2% in the second quarter, in line with our prior expectations. This includes the ongoing impact of PAMA, Reported operating income was $283 million, or 15.5% of revenues, compared to $307 million, or 15.7% of revenues last year. Reported operating income from the second quarter includes $65 million of proceeds from the CARES Act. On an adjusted basis, operating income was $294 million, or 16.1% of revenues, compared to $352 million, or 18% of revenues last year. The year-over-year decline in operating margin was due to the significant decline in revenue associated with our base testing volumes, partially offset by COVID-19 testing and our cost reduction actions. Adjusted operating income does not include proceeds from the CARES Act. Supported EPS was $1.36 in the quarter compared to $1.51 a year ago. Adjusted EPS was $1.42 compared to $1.73 last year. Cash provided by operations was $602 million year-to-date through June 30th versus $596 million in the same period last year. Cash from operations in the second quarter included the $65 million of provider disbursements under the CARES Act I just mentioned. Our financial position remains very strong. During the second quarter, we amended a revolving credit facility, allowing us greater financial flexibility. We completed a 550 million debt offering in May, which may be used to redeem or repay our senior notes due in 2021. Given the better than expected second quarter results, our debt to EBITDA ratio was only slightly above where we ended Q1. We ended the quarter with nearly a billion in cash on the balance sheet. Finally, our Board of Directors remains committed to the company's quarterly dividend at this time. This morning, we reissued our full-year 2020 outlook as follows. Revenues expected to be between $8 and $8.6 billion, an increase of approximately 3.5% to 11.3% versus the prior year. Reported EPS expected to be in a range of $5.66 and $7.66, and adjusted EPS to be in the range of 660 and 860 per share. Cash provided by operations is expected to be at least 1.25 billion, and capital expenditures are expected to be between 375 and 400 million. We continue to operate under extremely uncertain conditions due to the COVID-19 pandemic, which is evident in the wider-than-usual outlook ranges we shared in our quarterly press release today. As you consider our new 2020 outlook, I'd like to share the following considerations and assumptions. First, regarding base testing volumes, we expect base testing volumes to remain below prior year levels for the remainder of the year. While the magnitude of the year-over-year decline is likely to fluctuate geographically as states throttle reopening phases, our current outlook does not contemplate the magnitude of base volume declines observed in April and May. And the low end of the outlook assumes an average 20% decline in base testing volumes through the remainder of the year. Regarding molecular COVID-19 testing demand and capacity, we continue to drive towards molecular COVID-19 testing capacity of 150,000 tests per day over the next couple of weeks. Keep in mind, this represents peak capacity operating under optimal conditions. Due to various factors such as routine maintenance and planned downtime, we generally operate at somewhat under peak capacity. We expect demand for molecular COVID-19 testing to remain high at least through the third quarter. Please note that the low end of our outlook assumes recent molecular COVID-19 testing volume trends continue at a similar level throughout the third quarter and then step down in the fourth quarter. Regarding Medicare reimbursement for molecular COVID-19 testing, the existing $100 Medicare reimbursement for molecular COVID-19 testing is tied to the public health emergency declared by HHS. HHS officials have recently indicated they plan to extend the public health emergency for an additional 90 days beyond the current expiration of July 25th. Our outlook assumes this level of reimbursement continues through late October. To be clear, we believe HHS should continue the public health emergency while the crisis continues, and we are not aware of any plans for it to end. Regarding COVID-19 serology testing, COVID-19 serology testing also continues to help offset declines in base testing volumes. We continue to believe there is meaningful potential in serology testing, but rising customer demand remains in front of Regarding the cost actions we've undertaken, as Steve mentioned, we've rolled back many of these cost actions we took in April, with most remaining actions expected to end in July. Finally, as we develop this outlook, we contemplated a range of potential outcomes in the second half of 2020. The low end assumes the variability and uncertainty I just described. We have greater degree of visibility into the third quarter, and there are far more unknowns in the fourth quarter. Therefore, we currently expect third quarter results to be stronger than the fourth quarter. I will now turn it back to Steve.

Thanks, Mark. Well, to summarize, in the second quarter, Quest Diagnostics stepped up and rapidly expanded COVID-19 testing for the country and delivered stronger than expected performance. Looking forward to the rest of the year, we will continue to expand COVID-19 testing capacity. while also serving the unmet needs of the healthcare community and drive our strategy to accelerate growth. We reinstated our financial outlook for the full year of 2020 with a broad range, which reflects the continued uncertainty caused by the pandemic. And finally, I'm very proud of our Quest employees who have been on the front lines of healthcare, answering the call and fighting the COVID-19 pandemic. Now we'd be happy to take any of your questions. Operator?

Thank you. We will now open it up for questions. At the request of the company, we ask that you please limit yourself to one question. If you have additional questions, we ask that you fall back into the queue. Our first question is from Anne Hines from Mizuho Securities.

Your line is open. Great. Thank you. And again, I want to thank everyone across for what they're doing. I have two questions regarding testing. Could you clarify the comments you made on serology testing, the assumptions and guidance? I think you used the words, it's in front of us. So does that mean you do not have a meaningful contribution for serology testing in 2020? And if so, do you think it's more of a 2021 contribution when the vaccine comes out? And then my second question would be around just molecular testing, the pooling that you announced Monday. Should we think about that as just the ability to turn around faster, or do you ultimately think it's going to increase the capacity over the $150,000 per day?

Thanks. Sounds good. Well, on serology, and we are doing serology as we speak. We brought that up in April. We have in our outlook for the year some serology volume. What I will say is there is growing evidence of the value of serology. There's been some debate of the evidence that would suggest if you have the antibodies that, in fact, it provides immunity for a period of time. It is clear that people are starting to weigh in that, in fact, those antibodies do provide confidence that there will not be a reinfection. And as that confidence builds and as we get into the fall and into next year, I do believe there will be a pickup in serology, particularly as we start to think about who should get the vaccine and who should not get the vaccine. So I think some of that is in front of us, but we do have some of that in our outlook. And as far as molecular testing and pooling, in the numbers that I provided, particularly getting to 150,000 per day per in a couple weeks, some portion of that will be driven by the opportunities we see with pooling. Some portion of that is also driven by adding new systems and new resources to increase our capacity. And what I'll say is we're not stopping there. There's opportunities in front of us beyond that 150.

Yeah, I just would like to add, and certainly serology testing is meaningful. I mean, we shared in Steve's prepared remarks, we've done two and a half million. That's certainly meaningful. It's just different than molecular where the demand is exceeding our capacity. We had shared, you know, earlier that we had capacity of 200,000 serology tests a day with an expectation that demand, you know, could possibly be at that level. For various reasons, it's nowhere near that, but certainly the amount of serology testing we're doing is very meaningful to class and is one of the offsets to the base business decline right now. All right, thanks.

Next, we have Stephen Baxter from Wolf Research. Your line is open.

Hey, thanks for the question. I also wanted to ask about the molecular testing. Can you talk a little bit about how your referral patterns have looked throughout the quarter and what percentage of that testing volume is now coming from return to work? And my thought process was that if you're currently utilizing, you know, close to full capacity in the molecular side and the return to work opportunity is still largely in front of you, you know, potentially have pretty high visibility even going out into Q4 one way or another as there's sort of a natural hedge built in there. And then just as my follow-up, it looks like DSO has increased fairly meaningfully during the quarter. I was hoping you could discuss that a little bit and whether you're seeing any collection challenges or delays with the COVID testing. Thanks.

Yeah, sure, sure. First, as far as demand, where is it coming from? In our prepared remarks, we talked about the different elements of demand. And what I'll share with you is that we have demand right now that is exceeding our capacity. And we're doing what we can to obviously bring up the capacity. And also what we said in prepared remarks is working with our customers and clients on prioritizing those specimens that we're getting in to make sure we're testing the most urgent need in the country. And we're making progress. And as we bring up the capacity and we manage our demand over the next several weeks and get into – August, we believe, as we get through August and into September, we'll have a higher level of capacity, but also a higher level of demand, and we'll be able to get to turnaround times that are in the acceptable levels that we've had in the past. So it's in front of us. We're working hard at getting there, and I think all elements that I describe will allow us to be successful through the next several weeks. As far as demand, Steve, you talked about return to work programs. It's starting to come into our demand. We're managing it with employers. We also see in front of us the demand for return to universities and colleges. There'll be a lot of testing required in the month of August around that. We also see physicians bringing up their offices and more physicians are actually sending us specimens that they've collected. So we see that adding to the demand. And then there's been broader access and broader availability of testing where people have now had access to asymptomatic testing in very convenient locations. And then I mentioned that our remarks, the access we've provided with CVS stores and also with Walmart has increased the demand. I would say across the board, it's growing in all areas. And we do believe, though, as we get into the September months, when we hope there's still a number of employers that are bringing employees back to the office or to work, that we are going to be in a place where our capacity will meet the demand that we see in our funnels.

So, Steve, did you ask about patient concessions? I didn't quite pick up your last question.

yeah it just looks to me that the the dsos were up a bit maybe like so yeah five days maybe sequentially something like that i just don't know whether it's covet testing or other collections things that you guys might want to talk about a little bit thanks yeah that's really a formulaic approach cash collections are strong or as expected we did have some delayed um

billing around COVID testing because the payers needed to update their systems and many of them needed 30 days or more to do that. So we were holding on some billing, but I can assure you that, uh, you know, at this point in terms of our reserves and, and, uh, our cash collections and everything, we're very, very comfortable with where we're at in our balance sheet. And as you can see the operating cash flow, you know, a little was benefited from the cares act 65 million. was pretty strong year over year despite the depressed volumes, revenues, and earnings in the second quarter.

Okay. Thank you.

Thank you. Our next question is from Jack Meehan from Nefron Research. Your line is open.

Hey, Jack. Good morning.

Hey. Good morning. So, first of all, congrats on the trajectory. I wanted to get your thoughts on one of the top questions I've been getting through the labs, which is how can you convert this short-term opportunity from testing and make your long-term growth rate more durably higher? So I was curious to get your take on that. And then Mark, what does the guidance assume for incremental margins on testing in the second half versus reinvestment? And are there any things that you can accelerate to try and improve the longer-term trajectory of the business?

Yeah, let me start with, you know, we're going into the second half and clearly our base business is going to continue to be down versus 2019. We are hopeful that we'll start to continue to see some recovery in the back half of the year, but we're not necessarily contemplating any of that in our outlook for 2020. As we get into 21, it goes back to us continuing to work our strategy for accelerated growth. And we do believe we have the right strategies. And we wanted to share with you in our prepared remarks that we're working those hard. And I actually believe that the strategies are actually more appropriate given the pandemic than they were before. So if you think through those, one is we do believe there could be more acquisitions in front of us for growth through acquisitions. We announced the two deals recently that will prepare us nicely in the back half of the year for growth through acquisitions and sets us up for 21-2 with that carryover on that. And the funnel that we're seeing and we're going to push on that funnel will give us some nice growth through acquisitions as we Keep on working those in the back half. They'll help us in 21. Second is, as far as organic growth in our base business, we continue to work our relationships with health plans. I would say that our work on the Preferred Lab Network with United is going well. We're going to continue to, again, share with them. And we're pushing that same type of approach and concept with many peers throughout our throughout our contracts, and we believe there is an opportunity for us to pick up share, as we've said in our strategy. We also continue to work with hospitals. We talked about the BACL deal includes a professional systems deal, professional lab services deal. We have a number that are being finalized as we speak that we feel good about, and those will give us continued organic growth next year. And then also, as we think about our advanced diagnostics and the capabilities we're bringing to the marketplace with gene sequencing and consumer genetic offerings, we believe those strategies will give us some nice opportunities for continued growth next year. So we're continuing to push on the base business growth platform. At the same time, we'll have some natural recovery in our base business as the economy and as healthcare recovers, and also through acquisitions, we think we'll be in a good place as we get into 21 to deliver on that objective that we have of 2% growth through acquisitions. So, Mark, anything you'd like to add to that?

Sure. So to answer your specific question about margin drop-down, Jack, You know, as we've shared in the past in a, you know, short window, we're a highly fixed cost business on our base business. So generally any plus or minuses, you know, will be 80% or so drop through. It's really supplies and reagents that are the variable cost. So most of it, you know, everything from our logistics infrastructure to phlebotomy, even largely the labor in the laboratory, you know, in a window is fixed. So, you know, variation, good or bad, around the base business has a very high drop through. And although we certainly have good margins on our COVID testing, there's more variable cost in the COVID testing. So it's not quite as high a variable margin on any sort of plus or minuses from our base case, but still very attractive.

Thank you. Next we have Ricky Goldwasser from Morgan Stanley. Your line is open.

Yeah, hi. Good morning and thank you for all the details. So my question is on the guidance. Mark, you obviously highlighted the assumptions on the low end of the range. Just trying to understand better what you're assuming at the high end, and especially when we think about molecular testing, I think you're expecting that at the low end, that there's going to be a step down in the fourth quarter. So just trying to understand kind of like the rationale for that. What type of environment do you see? Where are we going to see a step down in molecular? What are you assuming at the high end? And then when we think about just the future COVID-19 addressable market in relation to vaccine administration as it relates to the molecular, are you in any kind of conversations with the vaccine manufacturers? And what do you think the role of testing will be in relation to the vaccine?

So I'll let Steve handle the vaccine question, but I'll just talk about the assumption. So, you know, Ricky, I appreciate the question. If there's one thing that's been demonstrated over the last several months is we don't have the ability to predict some of these things. So I don't think any of us here envision a 50% decline in our business in April, even when the pandemic first started. And then on the other side, we didn't expect the fast recovery that we saw throughout May and June, given what had happened in April. And so, you know, we want to recognize that some of these things are out of our control, and we want to talk about, you know, some ranges of potential outcomes and how they might impact our financial results to take away, you know, a little bit and hopefully a large degree of the uncertainty we've been living with over the last couple months where, you know, people were wondering, you know, what might be happening at Quest. But when we talk about PCR molecular volumes falling off in Q4, it's not because we have a vision of that happening, but we want, we had to make some assumptions in the guidance And since, you know, that's several months away, and we've shown that even a month or two in the future, it's hard to predict. We didn't expect this surge in June that happens. And, you know, therefore, we're just, you know, being, I think, appropriately cautious and explaining what those assumptions are. So we don't have any sense that it will fall off. I think all of us for society are hoping it will fall off as maybe the infection rate dampens. But also note that some of the non-clinical work, the work we're doing for, you know, return to work for employers and students should, you know, be heavy in Q3. And some of that we might expect to, you know, step down in Q4. So that is one driver that might lead you to believe that demand would dampen a little bit in Q4. But it's not as if we know how the virus, you know, is going to proceed and the infection rate. And certainly some people would say that, you know, When we get to flu season, we might even have another spike. So we don't know, but we wanted to be very clear around those assumptions.

Yeah, Ricky, on your question about next year and specifically the vaccine. So first of all, we believe there will be COVID-19 testing next year in 21. And second is, if you assume we'll have a vaccine next year or sometime, And you go back to what I said earlier about the role of serology and evaluating and prioritizing who should get the vaccine. We do believe there will be a role of testing in 21 for us. And then finally, in terms of working with those that are developing the vaccine, we are actively in conversations of using our data in a productive way to recruit patients, and some of this is around the vaccine development, but also using our data to help with the donation of plasma for the country. So good use of our data, which is part of our strategy, again, for growth, to use our data in a smart way as a diagnostic information services provider to help with the pandemic.

Thank you. Our next question is from Ralph Jacoby from Citi. Your line is open.

Hey, Ralph. Hey, good morning. Sorry to harp on this, but I do want to go back to the guidance. Because when you first updated in early June, you expected breakeven as slightly positive for the quarter. You obviously ended up at $1.42. That essentially implies all of the 2Q earnings came in June. So if I just run rate that number for six months, I'm already at 840 in earnings before I even contemplate the over $2 you put up in the first half. And, again, my guess is COVID testing trajectory moves higher. And, you know, assuming some continued core recovery, so I'm still struggling a little bit to understand, you know, the offsets or the headwinds. on what appears a pretty extremely conservative range, particularly at the lower end. But I just want to make sure I'm not missing anything else.

Well, we laid out for you in a pretty detailed fashion the low end. So you can take a look at those assumptions and, you know, you can have your own point of view. And that's why we wanted to be very, very clear about that assumption. So your notion that Q2 earnings were all pretty much in June is spot on. And the issue with multiplying that times six for the back half would be a couple things. One is our base business was down, exiting the month, high single digits. It averaged 15 in June. And the question is, is that sustainable? Will it take a step back? Will it get worse? We don't know. So certainly if it were to improve or were to hold for the whole six months, let's say at, you know, down 10% versus that 20% assumption on our floor, that would make a material difference for the business. And as I just described, you know, at an 80% drop down, you can do some of the math, but, you know, our core business was about $2 billion a quarter before COVID hit. So, you know, 1,000 basis points is a pretty significant difference on revenue and OM. On the PCR, we shared that we're assuming the volumes drop down in Q4, not because we have any foreknowledge, but because, you know, as I said, return to work and back to school will, you know, largely be behind us and because we don't know. So we want to be cautious about putting on a guidance that counts on a level of PCR testing that at this point is unpredictable. Obviously, we go through Q3 and we get better knowledge towards, you know, Q4 and see a need to update that, we would do so. But, you know, given how things have moved, Ralph, you want to be really careful. The other thing is, you know, as I said, we fully expect if we continue to have high levels of COVID and need this testing that the federal emergency will continue. But because that's unpredictable, it could actually be revoked at any time. We want to be very careful about assumptions on reimbursement for our molecular test. And so, at this point, we're only building in that reimbursement through a 90-day extension since that's been voiced by HHS. And while we would hope and expect, if COVID continues, that that reimbursement would continue into Q4, that would make a very significant difference as well. but that is not in either the bottom or the high end of our current guidance.

Thank you. Our next question is from Pito Chickering from Deutsche Bank. Your line is open.

Good morning, guys. Thanks for taking my questions. Two questions for you. Back to the pooling option, the guide would have assumed a larger multiplier effect for geographic areas with a low positive testing rate. As you progress into the third quarter, is there a reason why that can't scale to provide a much larger multiplier effect? And what would hold it back from being that large of an impact? And the second question is, as you look into 2021 and if there's a decline in COVID testing in both molecular and serology in the U.S., is there any discussions about providing testing capabilities for other countries that don't have the testing infrastructure?

Yeah, so let me start with pooling. So what you mentioned is true. That is, it's more beneficial in areas that have low prevalence. We've started to ramp up our capacity that will be driven for it and getting some nice boost in our capacity, which we're planning for, as I mentioned, to get to that 150 in a couple weeks. So we're going to apply those concepts in our laboratory-developed test locations and try to steer it towards the low prevalence areas to be able to get the best bang for the buck. So we'll push that. And the multiplier is considerable when you have low prevalence. So that would be very helpful to bringing up our capacity. We'll keep on pushing on it. As far as testing for non-U.S. geographies, frankly, we are focused entirely for all intents and purposes on the U.S. We could consider it in 21, but it's not in our plans right now, and we haven't spent a lot of time thinking about it as we sit here dealing with the pandemic in the U.S.

Thank you. Next, we have Kevin Caliendo from UBS. Your line is open.

Hi, thanks, and thanks for taking my call. I kind of want to get to the assumption around the vaccine and how to think about this. So if we were to assume a vaccine becomes available January 1, there's a billion doses or whatever the number might be, how do you anticipate the vaccine being distributed and administered along with testing? Are you suggesting that first people would get serology testing to figure out who would need the vaccine or – we can't imagine that this vaccine is going to be administered quickly to the entire population. So take me through how you would expect to model out the administration of the vaccine along with testing.

Yeah, well, you know, obviously this is beyond Quest Diagnostics and rationing or prioritizing who should get it first and what's the progression and how you distribute it throughout the United States. But like with other vaccines, vaccines, you'd like to get it to the higher risk groups. And the higher risk groups are those groups that we actually tested initially higher on the priority list for COVID testing. And so those were with pre-existing conditions or over the age of 65. And obviously people that have been compromised with other respiratory illnesses in the past. So independent of serology and antibody testing, my assumption would be those at-risk groups would be high on the priority list. And then the second priority list would be everyone else. And if, in fact, you were to test positive for the antibodies, then my sense is there will be evidence at that point that will suggest that, in fact, you'll have immunity for a period of time. And, you know, the question will be how much of this would be public policy versus independent choice of whether you want to have the vaccine or not. That's all speculative on my part. A lot to be determined. First of all, where the vaccine will come from, when it's going to be available, how much will the U.S. get. And also, this is going to be, I'm sure, debated throughout the United States as we get into it.

Thank you. Next, we have Lisa Gill from J.P. Morgan. Your line is open.

Thanks very much, and good morning. Steve, I just wanted to follow back up on reimbursement. So you talked about Medicare. Can you talk about the commercial market? So is the anticipation that the commercial market will just follow Medicare through the emergency pricing? And what's your anticipation post-emergency pricing? Should it be rolled back, number one? And number two, we've heard in the market that some of the health plans are pushing back on multiple tests done on individuals? What's been your experience so far?

Sure, sure. So first of all, we do have an assumption that commercial rates are aligned with Medicare rates. And Mark, why don't you just remind everyone what we have in the outlook going forward as far as our assumptions for reimbursement?

Yeah, so we, you know, the emergency use I assume the federal emergency expires on July 25th. HHS has expressed a view that they're going to extend that 90 days. So we've built that $100 price, which is not our AWR. You know, we don't fully get $100, but that $100 price into our, pretty much our full book. And so the commercial, as we shared previously, the commercial payers pretty much fell in line with the Medicare reimbursement rate. There's a couple of, traditional state Medicaid plans that didn't quite get there. But for the most part, we get that price from everybody regardless of who they are. And so therefore, we would expect that to continue. So as long as the Medicare rate stays up, it doesn't mean, you know, there might be, wouldn't be some pressure, but we would expect the commercial payers to stay in line with that because obviously if it stays, there's a federal emergency and it'd be hard to argue that They should be cutting the rate for a test that's quite so important. And nonetheless, we will get some pressure. Once we get through that, where the commercial rates end up, obviously, we will take a position that says it shouldn't be less than Medicare. You know, we'll be very transparent with what our costs are and, you know, the continued importance of that test, even post-emergency, and we'll do our best to keep it at the Medicare rate and not something less than that. But that's still... Lisa, obviously still in front of us.

Yeah, as far as policy, payment policy, reimbursement policy, it is evolving. What I'll share is that frequency policies, first of all, as we all know, you could test negative one week and the next week you'd be positive. So therefore, it's quite important that people feel that they should get tested if they've been exposed and if in fact they believe that they might have some early symptoms. So we're continuing to state that as the position, and I think by and large people support that notion. But you have seen positions taken on return-to-work programs that employers are moving with, and in many cases these employers are self-insured, so it's sort of a mood issue what pocket it comes from. But for those fully insured employers, there is positions by some of the insurers that that's not included in their healthcare reimbursement policy. So therefore, it should be paid for by the employers. And then equally with universities and colleges, whether the students are free on campus or testing is included in the reimbursement like a physical would be if they're going back to school or playing sports or going to camp. There's some debate around that. So I would say or characterize it, Lisa, is people are debating some of this. We're seeing kind of a growing trend with some of this. And then also as we evolve, we're trying to understand who should get tested and who should not get tested. There is even some question of whether after you've been tested positive and you know for 14 days right now most people are operating on the protocol that you get retested again but there's some there's some views that maybe that second test to verify your negative is not of great value and therefore this might help reduce the demand that we have on the system right now so that's being debated as well so it's evolving a lot of discussion And, Mark, anything you'd like to add to reimbursement in general on COVID?

I would just add that we have not had a significant amount, and it would be very few, if any, of denials for frequency limitations. So, you know, while things might evolve, Lisa, to this point, we've not run into issues with the payers around frequency for the molecular test. And for the return to work and back to school programs, you know, we are not taking the risk on those. So we are either arranging client bill where we get paid directly contractually by a customer, or in some cases where they think they have coverage from the payer, we have a fallback to where if we do get a denial, then we have a right to bill the client directly. So, you know, we think we're protecting ourselves, you know, from a financial standpoint, and we have not run into headwinds thus far from the payers on frequency denials.

Thank you. Our next question is from Matt LaRue from William Blair. Your line is open.

Hi, good morning. I wanted to ask about how payer mix is trending in the base business. Obviously, we've had rising unemployment, but also, you know, I suspect that patients in the commercial population may have been quicker to seek services as restrictions were relaxed. And then I wanted to follow up on the opportunity for back to work and back to school. Just curious what discussions you've had and what role lab-based testing might play versus rapid testing, and if perhaps there's an opportunity for Quest to play a role not only in testing, but managing the testing strategies for employers, cities, or companies, or schools.

Mark, you want to take the first part of this around payment? I think that was the question.

Yeah, I'm sorry, Matt. Your specific question, can you repeat it?

Sure. Just pair mix, how that trended through the quarter in the base business.

Yeah, pair mix did not change materially. The one thing we did see was an increase in uninsured. So beyond that, I don't think that there was any And we rarely see, given our size, we rarely see material changes of payer mix, and this was no exception. So certainly the drop in utilization did not impact people with certain payers more than others. The one thing we did see was more uninsured.

Yeah, Matt, on return to work programs in universities, role of, let's just say, point-of-care devices, we are looking at all those devices and where they can help us, particularly around surveillance and what we're finding for the initial testing, if you will. The gold standard is the PCR test for molecular diagnostic workup, and then secondly is for serology. Our blood-based test is the gold standard. The sensitivity and specificity of both those are the best still to this day, and there are a few devices that are coming to the marketplace that are offering, we think, an opportunity for us to include that in our services that we provide to both employers and to universities. Specifically, some of the antigen devices that are coming to the marketplace we're looking at you know, those devices and some of the sensitivity is around 85%, which is lower than our sensitivity. But for surveillance and in combination with possibly serology and just overall biometric screening of some form, it could be a helpful set of tools for us to manage a population over time. So we are thinking about how we'll include those in our services to employers and also to universities as they, you know, have surveillance for their populations going forward.

Thank you. Our next question is from Brian Tankelet. Your line is open.

Hi, Brian.

Hi, Brian. Hi, Brian. You're breaking up. Oh, sorry. Yeah, how's this? Is it better?

Much better, much better, yep.

Okay. Yeah. So how do you think about the strategy in terms of balancing increasing capacity beyond that 150,000 tests per day versus the uncertainty of not knowing how big this opportunity really could be? And what are the limiting factors right now that can, you know, that prevents you from pushing that up to, say, 200 or 250 a day?

Yeah. Well, first of all, as I mentioned on my earlier remarks, we are going to push it beyond 150. Okay. And we do see capacity, excuse me, we do see demand going forward that's going to be beyond 150. And we do believe we'll get to a point where our capacity will meet that demand. And so we will get there. We'll go beyond the 150. And the limiting factors are, you know, a combination of machines. So getting, you know, the IBD test systems and laboratory test equipment and particularly for laboratory-developed tests, it's not just the platforms, the PCR platforms, but in our setup, there's actually two other pieces that you need to consider. It's the extraction, and then second is the liquid handling, and there's been some machine constraints on us for getting those systems to be able to bring up bring up more and more capacity. But we're working with all our suppliers to get as much as we can get to bring our capacity and take it beyond the 150. The second is just manpower. We're running 24-7. And as I mentioned in my remarks, doing 8.5 million tests over the last four months, our teams are working nonstop. And remember, this is in our microbiology department. department that has gone from the backwater of the laboratory to front and center. And we have capacity limits around the people and those that are trained adequately to deliver on this. And then third is just physically we need to get these systems in place. We need to have the adequate controls and training in place. And that just takes some time. And then fourth is the reagents. We are rate limited by how much juice we get to run all our different platforms, and we're working with our suppliers on getting more. We have had some shortages with some of the suppliers, and that has not helped our ability to deliver results. And so we're working actively to get them to First of all, give us more, and then secondly, be reliable in what they commit to delivering against us. Now, I will also say that everyone is working incredibly well together. The IVD manufacturers working with the task force, White House working at future ideas of where we can get more capacity. We're all pushing hard to get more and more capacity. But to answer your question, those are the rate limiting factors around capacity. what we need to do to get it beyond 150, but we will get it beyond 150. And that's where we want to be to be able to meet the demand we see, particularly as we get into the late August, early September time.

Yeah. And Brian, you know, to be clear, you didn't ask it this directly, but we are not being conservative. We are doing everything we can. The challenges are not financial, you know, willingness to, you know, spend more capital or, or for that matter, operational expense to get things up and running. They're all operational in our ability to get more equipment. And it's, as Steve said, multiple pieces of equipment and to get them operating and to get the people who are trained to do it. And we are, you know, moving as quickly as possible. As we said, we doubled our capacity from in May. You know, we're expecting another 20,000 per day increase from where we are today over the next several weeks. And then as Steve said, we're going to go beyond that. So, There's no hesitancy to add capacity because of uncertainty of demand. We're doing everything we can to increase our capacity and certainly to reduce turnaround times.

Thank you. Our next question is from Eric Caldwell from Bayard. Your line is open.

Thank you very much. Maybe just a couple of quick housekeeping first. I know you said that your guidance assumes PCR volumes decline in 4Q versus 3Q. I'm just curious, can you give us a sense on how much, what you're expecting for average daily volume in PCR in 4Q that's implicit in your guidance assumption?

Eric, I'm sure you can appreciate that it's not as if we have a point estimate forecast for every number within that range or even the high-end range because we've got, you know, multiple factors that can move things material. You know, certainly, as we mentioned, the base volume decline or improvement relative to our assumptions is very material to the outcome. And then that PCR, you know, volume is very, very material as well. And then finally, the reimbursement rate, you know, beyond the 90-day extension is very, very important. So, You know, there's multi, you know, variables. So, you know, I really can't answer directly, but, you know, a specific number because, you know, we're running scenario planning. But I would tell you that, you know, at this point, we have a significant reduction in Q4 demand to get to these guidance numbers. So, it's not small. It's fairly significant. And again, not because we know that's what's going to happen, but just given the uncertainty of the volumes and the knowledge that the return to work and back-to-school volumes would largely be gone by Q4.

Thank you. Next we have Derek DeBrown from Bank of America. Your line is open.

Hi. Good morning. Two questions. So the first one being, can you give a little bit of color on – some of the rebounds in the different categories, and then you noted some softening in July. So can you talk about what you've sort of seen in oncology versus ClinChem versus pathology, just to give us a flavor on how you're seeing sort of the pickups?

Yeah, so let me, you know, characterize it this way. Primary care, you know, I'll put OBGYNs in that as well. We've seen a nice rebound as physicians have open back up their offices and call back some of their patients. In some cases they have extended hours, so we've seen a nice bounce back on that piece of our demand. Secondly is we are seeing some nice recovery in some of those some of those procedures that might have been pent up and our pathology tissues have actually rebounded in a good way. We're not sure it's entirely sustainable because there might be some of this is reacted to, you know, the pent-up demand that's coming back to us that we lost in April and May and we start to see it in June that will come into the summer. And that's why when we talk about outlook, we are... cautious to make sure that we're not taking the June run rate as our run rate forever in the summer. We actually might see some slowdown related to that being absorbed, if you will, through the system. And then we'll get to the run rate that we should expect for a reasonable period of time in Q3. And then some of our other businesses, we have our life insurance business. Frankly, that's down considerably. We haven't seen a big recovery there. Our Pre-employment drug testing business is starting to come back as employers start to hire people, but it's down considerably versus 19. Our employer population health business, where we do wellness programs for employers, is down considerably. Many of those events have been canceled. So I would say it's really a wide variation, with the best being primary care and the worst being those that are tied to the economy in general. constraints around normal programs like life insurance and wellness and hiring people. So, Mark, anything you'd like to add to that?

Yeah, I would just add that most of our base business has come back proportionally. As Steve said, oncology has really picked up recently over the last couple weeks. We'll see how much of that was deferred pent-up demand. But the one category, it's not just in pre-employment, but prescription drug monitoring. So the whole drug testing area, that's lagged a little bit, some of the other franchises within the base business, not just in our employer business.

Thank you. And our last question comes from Mike Neuschell from Evercore ISI. Your line is open.

Thanks. It may be just a follow-up on pooling. Is there a specific positivity rate threshold you have in mind?

where pooling makes sense in a particular state and region. And I know you'll get full reimbursement for each specimen, but how much does pooling change your cost structure? Is there a big incremental margin difference versus testing single specimens?

Yeah, so, you know, think about, you know, the best is obviously the lowest. And where we pool and we can put four specimens in a well, you know, that quadruples your throughput per batch, if you will. And if there's zero positives, then you get it all. Where you have pauses within that run, you have to test that whole well, and that obviously starts to eat into the productivity gain. So the best is lower than 2%. We actually have a number of states and geographies that are in that range. Actually, right now, the Northeast is doing quite well. We hope that is sustained. And then as you start to go up to high single digits, it starts to lose its effectiveness because of all the retesting you need to do. So clearly, less than 5% is in the sweet spot, and greater than 5% starts to get marginally worth it. But if you look at pooling, again, pooling is applied to our laboratory-developed tests. It's a piece of our capacity. It's going to give us more capacity to get us to that 150 and also, we believe, beyond. But we're not just doing pooling to get more capacity. We're adding new systems and processes and people, everything we talked about earlier. So it will give us some of the capacity, but there's other things we're doing as well.

Just a reminder that pooling is only currently possible on our LDT. And so, therefore, you know, it's not as if it's going to be an expander across our whole network. And we can prioritize, you know, low prevalence areas for that LDT to a certain extent or to a large extent. And so, to Steve's point, we're going to target the areas that currently have low positivity rates. But the biggest benefit, well, we do get some cost savings on reagents when you can you know, do four samples at once instead of a single one, you know, even despite some retesting. It's really the benefit of the capacity. So being able to serve more people with the same equipment, more patients, is really the benefit. Much larger, although there is certainly a cost of sales savings that comes with pooling.

And we have no other questions in queue.

Okay, well, we appreciate the time on the phone. We appreciate the extent and interest in our business, and we hope you, like us, are appreciative of everyone at Quest and what we're doing, and we appreciate your support as well. So have a great day, everybody.

Thank you for participating in the Quest Diagnostic second quarter 2020 conference call. A transcript of prepared remarks on this call will be posted later today on the Quest Diagnostics website at www.questdiagnostics.com. A replay of the call may be accessed online at www.questdiagnostics.com forward slash investor or by phone at 888-566-0435 for domestic callers or 402-998-7000. 0605 for international callers. Telephone replays will be available from approximately 10.30 a.m. Eastern Time on July 23, 2020 until midnight Eastern Time on August 6, 2020. Goodbye.