Quest Diagnostics Incorporated

Welcome to the Quest Diagnostics second quarter 2021 conference call. At the request of the company, this call is being recorded. The entire contents of the call, including the presentation and question and answer session that will follow, are the copyrighted property of Quest Diagnostics with all rights reserved. Any redistribution, retransmission, or rebroadcast of this call in any form without the written consent of Quest Diagnostics is strictly prohibited. And I'd like to introduce Sean Bevick, Vice President of Investor Relations for the Quest Diagnostics Group. Go ahead, please.

Thank you, and good morning. I'm here 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 releases. 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 severity and duration, healthcare insurer, government, and client payer reimbursement rates for COVID-19 molecular tests, 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, including the impact of vaccination efforts, which are drivers beyond the company's knowledge and control. For this call, references to reported EPS refer to reported diluted EPS, and references to adjusted EPS refer to adjusted diluted EPS. Any references to base business, testing, revenues, or volumes refer to the performance of our business excluding COVID-19 testing. Growth rates associated with our long-term outlook projections, including total revenue growth, revenue growth from acquisitions, organic revenue growth, and adjusted earnings growth are compound annual growth rates. Finally, revenue growth rates from acquisitions will be measured against our base business. Now, here's Steve Ruszkowski.

Thanks, Sean, and thanks, everyone, for joining us today. Well, we had another strong quarter and continue to build momentum thanks to faster-than-expected recovery in our base business. Organic-based testing revenues grew compared to 2019 levels in the quarter, This is the first quarter since 2019 that organic-based testing revenues grew. The growth was driven by contributions from new hospital lab management contracts, as well as people returning to healthcare systems. We are well-positioned to continue our momentum and support the return to healthcare in the coming months, which is reflected in the outlook we have provided for the remainder of 2021. This morning, I'll discuss our performance for the second quarter of 2021, provide perspective on industry dynamics, and update you on our base business. And then Mark will provide more detail on our financial results and talk about our outlook and underlying assumptions. First, with regard to COVID-19 testing, we are closely watching the rapid spread of the Delta variant. where testing continues to help control the spread of the virus. In recent weeks, we have seen PCR volumes stabilize and begin to increase modestly. Positivity rates have increased in all geographies served by our performing laboratories over the last two weeks. COVID-19 testing also remains critical as employees return to the workplace and students return to the classroom in a few weeks. Unless we experience another lockdown, we expect people to return to pre-pandemic healthcare, and in some cases, catch up with healthcare they might have postponed during the pandemic. Now turning to PAMA and the recent MedTac report mandated under the Lab Act. We were pleased that MedPAC found it feasible to change the CMS data collection process to a statistically valid sample of private payer rates for independent labs, hospital labs, and physician office labs. This approach would produce an accurate representative market view of laboratory rates while reducing the burden on reporting laboratories, which is consistent with the charge of the Lab Act in the original intent of PAMA. The MedPAC report estimates that Medicare spending for the top 100 tests on the clinical advocacy schedule could increase by 10% to 15% over current rates based on certain rate and volume assumptions. And separately, our trade association recently appealed its legally challenged to PAMA, which was dismissed by a U.S. district court in late March. The ACLA has asserted its right to challenge the regulatory overreach by HHS in the implementation of PAMA. Along with our trade association, we will continue to work with policy makers to establish a clinical lab fee schedule that is truly representative of the market and supports continued innovation and access to vital laboratory services for Medicare beneficiaries as Congress originally intended. Now is the time to strengthen our laboratory infrastructure and support continued access to high quality lab services that patients depend on. Turning to our results for the second quarter. Total revenues grew by nearly 40% to $2.6 billion. Earnings per share increased by more than 264 percent on a reported basis to $4.96, and nearly 124 percent on an adjusted basis to $3.18. Cash provided by operations increased by more than 30 percent to $460 million. In the second quarter, we continue to see a better-than-expected recovery in our base business, with organic-based testing revenues essentially returning to pre-pandemic levels in June. We're seeing strong recovery in most of the country and a slower recovery in the Northeast. Demand for our COVID-19 testing slowed in the quarter as expected, reflecting an industry-wide trend, though in the last few weeks of June, demand stabilized and has since increased modestly, which we believe is attributable to some extent to the emergence of the Delta variant. We performed an average of 57,000 COVID-19 molecular tests a day in the second quarter, well below our current capacity of approximately 300,000 tests per day. We have engaged with businesses in the travel and entertainment sectors, in the quarter and working with partners to support a safe return of students to the classroom. We're also collaborating with CIC's Head Health, Gingo Bioworks, Patel Memorial Institute to make testing easy, fast, and affordable for school systems and other group settings across the country. We continue to make progress on our two-point strategy to accelerate growth and drive operational excellence. And here are some highlights from the second quarter. We continue to execute on our M&A strategy. In June, we announced the completion of our acquisition of an outreach laboratory services business of Mercy Health, one of the nation's most highly integrated multi-state healthcare systems with providers and patients in Arkansas, Kansas, Missouri, and Oklahoma. With this acquisition, we are on our way to grow our base business revenues approximately 2% from accretive strategic acquisitions this year and with additional limiting opportunities in the second half of the year. We continue to grow our health plan business to make progress and acquire with value-based programs with United Healthcare and Anthem. Our volumes through these health plans are growing faster than the company average. We have also invested in additional employee headcounts to better support these important relationships. During the quarter, we were also pleased to renew our longstanding contractual relationship with one of our largest health plan customers, Aetna. We remain a preferred laboratory provider and partner of Aetna's network. In addition, for the first time in over a decade, Quest is one of Highmark Delaware's in-network non-hospital affiliated preferred labs, serving more than 450,000 members. It's good to be back in the market, competing on the basis of quality, service, and value. You know, we're helping all of us be focused on healthcare's triple A's. of improving population health, enhancing the patient experience, and reducing costs. And towards that end, we're launching a new campaign designed to remind customers of the value that Quest brings to healthcare. Our Powering Affordable Care campaign speaks about our leadership in clinical innovation, our ability to enable better clinical outcomes through quality, speed, and accuracy of test results, our improved patient experience with accessible, easy-to-use patient resources, and finally, our ability to reduce cost of care. Base consumer-initiated testing revenues continue to grow in the quarter. Today, more than 17 million patients have an account on the MyQuest app and patient portal, with nearly 100,000 patients enrolling each week. And then finally, in advanced diagnostics, we're pleased to see full recovery in the growth drivers we're investing in, which we discussed at a recent investor day, and are tracking to accelerate growth. Now turning to our second strategy. We made progress driving operational excellence. We're on schedule to complete the full transition to our new flagship laboratory in Clifton, New Jersey, next month. This highly automated facility has consolidated testing previously performed in Teterboro, Baltimore, and Philadelphia. There continues to be intense effort and energy around our invigorate productivity initiatives, and we are on track to deliver our targeted 3% improvement across the business. We are focused on getting paid for what we do, and have made steady progress in reducing payer denials. Also, patient concessions for our base revenues were down in the second quarter to 2019 levels, driven by a focus on collection improvements. One positive outcome of the pandemic has been the patient and physician acceptance of the digitization of our experience. We are more customer-focused and efficient today with more self-serve options for customers, and we have moved a greater percentage of volumes to digital paperless transactions. Now I'd like to turn it over to Mark to provide more details on our financial performance and our outlook for the remainder of 2021. Mark? Thanks, Steve.

In the second quarter, consolidated revenues were $2.55 billion. up approximately 40% versus the prior year. Revenues for diagnostic information services grew 40.2% compared to the prior year, which reflected the strong recovery in our base testing revenue, slightly offset by lower revenue from COVID-19 testing services versus the second quarter of last year. Compared to 2019, our base DIS revenue grew nearly 5% in the second quarter, and it was up more than 1% excluding acquisitions. Volume, measured by the number of acquisitions, increased 45.2% versus the prior year, with acquisitions contributing approximately 5%. Compared to our second quarter 2019 baseline, total base testing volumes increased nearly 7%. Excluding acquisitions, total base testing volumes grew approximately 2%. and benefited from new PLS contracts that have ramped up over the last year. Importantly, compared to our 2019 baseline, our base testing volumes were nearly fully recovered in June. However, as Steve noted earlier, the geographic recovery continues to be somewhat uneven, with positive growth across most of the U.S., except in the Northeast, which remains below the 2019 baseline. With that said, we continue to see steady recovery in the Northeast. COVID-19 testing volumes continue to decline as expected in Q2, in line with broader trends across the industry. We resulted in approximately 5.2 million molecular tests and nearly 700,000 serology tests in the second quarter. COVID-19 testing volumes stabilized over the last several weeks, and we averaged approximately 43,000 COVID-19 molecular tests and 7,000 serology tests per day in the last two weeks of June. Revenue per acquisition declined 3.6 percent versus the prior year, driven largely by recent PLS wins and acquisitions. Combined, these two factors amounted to a decline of nearly 5 percent in revenue per rec in the quarter. unit price headwinds remained modest and in line with expectations. Reported operating income in the second quarter was $533 million, or 20.9 percent of revenues, compared to $283 million, or 15.5 percent of revenues last year. On an adjusted basis, operating income in Q2 was $584 million, or 22.9 percent of revenues, compared to $294 million, or 16.1% of revenues last year. The year-over-year increase in operating margin was driven by the strong revenue growth in the second quarter, due primarily to the ongoing recovery of our base business. Reported EPS was $4.96 in the quarter, compared to $1.36 a year ago. The second quarter of 2021 benefited from the gain on the sale of our minority ownership interest in Q-squared Solutions in April. Adjusted EPS was $3.18 compared to $1.42 last year. Cash provided by operations was $1.2 billion through June year-to-date versus $602 million in the same period last year, which included $65 million from the CARES Act funding that we eventually returned to the government later in 2020. Turning to guidance, we have established our full-year 2021 outlook as follows. Revenue is expected to be between $9.54 and $9.79 billion, an increase of approximately 1% to 4% versus the prior year. Reported EPS expected to be in a range of $11.48 and $12.18, and adjusted EPS to be in a range of $10.65 and $11.35. Cash provided by operations is expected to be at least $1.9 billion, and capital expenditures are expected to be approximately $400 million. Before concluding, I'll briefly review some assumptions embedded in our outlook for the remainder of 2021. Our outlook continues to assume a decline in clinical demand for COVID-19 molecular testing throughout the back half of the year. Return to life testing, such as the K-12 school testing program, could partially offset declining clinical demand later in the year. Reimbursement for clinical COVID-19 molecular testing continues to hold relatively steady. We currently expect this trend to continue, assuming the public health emergency is extended throughout 2021. Average reimbursement is likely to trend lower in the second half as our mix of COVID-19 molecular volumes shift from clinical diagnostic testing to return-to-life surveillance testing. As you consider the EPSL look we have shared today, keep in mind the following. At our Investor Day in March, we discussed making approximately $75 million in targeted investments to support our long-term strategies to accelerate growth. These investments are ramping with $50 million expected to fall in the second half. We also continue to incur expenses to comply with CDC guidelines, address supply chain challenges, and maintain staffing levels to ensure high levels of service and quality as the base business recovers faster than expected. We forecast these expenses to be approximately $30 million in the back half of the year. The low end of our outlook assumes an average of at least 20,000 COVID-19 molecular tests per day and 3,000 serology tests per day. It also assumes low single-digit revenue growth in our base business in the second half of 2021 versus 2019. The midpoint of our guidance assumes slightly stronger COVID-19 molecular testing volumes and a modestly faster recovery of the base business. And the high end of our guidance assumes both a greater level of COVID-19 testing and a strong continued recovery in the base business. I will now turn it back to Steve.

Thanks, Mark. Well, to summarize, we had another strong quarter with a faster than expected recovery in our base business. We are well positioned to continue our momentum and support the return to health care in the coming months. And then finally, I'd like to thank all Quest employees who continue to serve the needs of people who rely on Quest every day. Now we'd be happy to take any of your questions. Operator?

We'll now open it up to questions. At the request of the company, we ask that you limit yourself to one question. If you have additional questions, we ask that you fall back in the queue. To be placed in queue, please press star 1 from your phone. To withdraw, press Star 2. Again, to ask a question, please press Star 1. Our first question from Anne Hines, Mizuho Securities. Your line is open, ma'am.

Good morning, Anne.

Hi. Good morning. I think you just said your guidance assumes about 20,000 molecular tests per day. Is that average for the entire second half, or is that exiting the year? Also, can you just talk about what your guidance assumes for any kind of labor and inflation pressures for the second half, and do you see those getting worse, or are they stable throughout the year? Thanks.

Yes. So, Ann, that 20,000 is not the exit rate. It is the average for the back half. The $20,000 was the baseline for the low end of guidance. To get to the middle part of guidance, we would expect somewhat stronger than $20,000. Of course, there's moving pieces because it's also dependent on how the base business moves. And then the high end of guidance would be significantly more COVID testing and then a stronger base business recovery. you know, more in the mid-single digits revenue. So, you know, that's how we tried to dimensionalize the range for you. In terms of labor pressure, you know, we certainly saw some of that, and we responded to it. And, you know, that is built into the whole year. It's not accelerating at this point in our outlook in the back half. So we, you know, we have a process where we make annual salary and wage adjustments that was implemented earlier in the year. We certainly make some market adjustments periodically, which we've done. That's not, you know, unusual. So there's nothing extraordinary in the back half of the year in terms of labor inflation.

All right, thanks. Our next question is from Brian Tankuit with Jefferies. Your line is open, sir.

Hi, good morning, and congrats on a good quarter. I guess my question for you, Steve, as we think about the PLN and the preferred networks, it sounds like we're seeing some progress there. But any color you can get, you can give us on the recovery and the uptake and the traction you're getting there, especially as we exit the COVID drag.

Yeah, so we're feeling good about the programs we've put in place over the last couple years, Brian. We started these with United As for Now, and then we mentioned that we have a program that we're working with Anthem across the country we feel good about. We continue to work other programs with other payers that see this as an opportunity as well. What I said in my remarks, we do see you know, those payers and the volume going through those payers growing faster than our other base recoveries. So we feel we're actually getting some traction with everything we put in place. And I can tell you the engagement between us and those organizations are quite good. And I've said before in my remarks, you know, we're seeing an opportunity to get a variation of the group with a high-quality, low-cost, I value laboratory like Quest Diagnostics and then tighten up the network to what we describe as the preferred lab network. And it's really all about what we've talked about in my remarks around the triple aim and covering affordable care. So good progress. What we've done already is making a dent in the opportunity and we see more opportunities in front of us.

Awesome.

Thanks, Steve.

Our next question is from Jack Meehan with Nefron Research. Your line is open. Hey, Jack. Good morning.

Hey. Good morning. I wanted to dig in a little bit more on the base business recovery. Was it fairly linear since the end of March to the commentary you made around June? And then was curious if you're seeing any sort of pent-up demand and whether you thought that might have helped the trajectory, any commentary around test for requisition that would be helpful?

So we are seeing a nice step-by-step improvement in base business. I would say there's been a nice recovery over the sequence of the first half. You know, you remember we entered the half with our base business being done somewhat around high single digits and kind of improved throughout Q1 and then continued into Q2. And, you know, there's different ways we look at it. One is the clinical cut, and we actually see good recovery in our general health business, our cardiometabolic business. I mentioned in my remarks our advanced diagnostics business, which includes a portion of cancer and genetic and molecular testing, good recovery. We still see our prescription drug monitoring and toxicology business being somewhat of a laggard, but it actually is starting to recover, not back to 19 levels, but it's coming along. And then the geographic basis, we do see much of the country back to 19 levels. And as we said before, the Northeast is stubborn. We see New England starting to move in the right direction, Massachusetts and Connecticut, and New York City being the slowest recoverer, if you will. And that's all boroughs, not just Manhattan. And we're hopeful as the opening continues and as people get back into life within Manhattan and New York, that that will recover as well. So to answer your question you started with, it has been more of a nice steady progression, clinically and also geographically. Mark, anything you'd like to add to that?

Yeah, the one thing I'll add, Jack, is it is somewhat uneven, even though it has been steady nationally. And we do have a couple regions that are actually back to the volume growth we had in those first couple months of 2020 before the pandemic. So that's why we're feeling good not just about utilization recovery, We're really good about getting back and working on the things with our key partners, such as the PLN, other relationships that we've called out with some of the payers around value-based contracting, and then really continuing to have our strong relationships relationships with hospital systems, and we, you know, talked about how much progress we've made around PLS. So, you know, the good news is that, you know, things are open for business. We're able to go back in to the offices, not completely, but much more than we were over the last, you know, 12 months plus, and therefore we're getting back to what we were doing before the pandemic started.

Great. Was there anything related to pent-up demand that you saw?

You know, it's hard to tease out. You know, what we talk about in our calculation of revenue for REC is that we are seeing more tests for requisition. So one could assume that some of that is, you know, tag on to test because the patient shows back up in the office and they haven't been there for 16 months. So hard to tell. You've got to believe there's a little bit of that. It's in my prepared remarks as people return and, you know, catch up on pre-pandemic levels. But, you know, we've also, to Mark's point, Now, we're better than 19, but remember, when we started at 20, we had some nice growth in the first couple months, and so we've got more opportunities in front of us to continue the recovery and also build on top of what we see to gain that share we're planning for. Thank you.

Thank you. Our next question is from Ricky Goldwasser with Morgan Stanley. Your line is now open.

Yeah, thank you, and hey, good morning. A quick follow-up and then my main question. Just on the follow-up, you mentioned that you renewed the Aetna contract. I just wanted to understand how should we think when we model, how should we think about the pricing impact for the next 12 months? When we think about the value-based programs that you are now signing with payers, I think, Steve, you mentioned that it is actually growing faster than the rest of your book. Can you maybe give us some color on where you are seeing these value-based relationships and mostly focused on commercial versus Medicare, and also what is the framework? Are you sharing upside? from the savings, or are these more sort of fixed-price contracts with some downside protection?

Yeah, Mark, do you want to talk about what's in there?

Yeah, so first off, the Aetna contract was extended. It will be invisible to you because there was no significant changing in pricing. And in that contract, we continued to build stronger elements of what we call value-based contracts. And I'll touch on that in a minute, Ricky. So, you know, it's more focused on commercial, although obviously Medicare Advantage as well. You know, there are certain things you can do in the, you know, purely commercial that are harder to do in Medicare Advantage because some of the rules around that program. But the framing is not us sharing our upside with them, but really they're sharing their upside with us. So we win together, so as we show greater value for their membership by getting more work to a better value lab like ourselves relative to out-of-network providers, or in some cases, other high-cost providers in network, they obviously, their members, or for their fully-insured books, they themselves save money, and then we earn upside to a base-level contract, and that base-level contract is not at a discount It's really been kind of the historical levels. We didn't have to give up in order to gain, but it was really more about the case that we've been making for years that's getting more and more buy-in from the payers that we're part of the solution. And working with us and not focusing on our price, but focusing on what we can do to drive better quality, better service, and better value for their members is good for everybody in that ecosystem. So that's really the elements. We've shared, you know, steerage where they give us lists of accounts where, you know, a lot of lab work's going to out-of-network or higher-cost providers. We go in, you know, with their support to call on those physicians to educate for the people who have high-default plans, co-insurance, et cetera, so the patients are bearing some of that higher cost, which obviously has more influence than if they're fully covered by the payer in terms of the doctor. And then we talked about M&A incentives where, you know, in the past when we would buy hospital outreach, as soon as we start billing it, it would fall to our price, obviously, and a huge windfall for the payers. But, you know, that it's good for them if we buy outreach, and therefore, instead of, you know, taking that hit immediately, maybe a step down in those rates and we share some of those savings, over those first couple years. And that's an element we've gotten into just about every one of the major payer contracts. You know, so it's things like that, Ricky, where, you know, we've made the case and they're finally buying in that, you know, when we're successful and they're successful, you know, together we can do more of that. And therefore there's upside that in the past we didn't see that now we have a chance to earn when we prove that we've actually saved them money and, you know, driven improvement for their members.

So just one follow-up on the upside payment to base levels. So should we think about that now that sort of at the end of the year, as you calculated by the upside, we could see upside to numbers from payments at the end of the year, or is this something that would just kind of flow through on a quarterly basis?

Well, it's really, I'll address the two examples I gave. So In the steerage one, where we're moving work, it's really more quarterly, so it's a constant look at that. You know, we have a formula for doing that, and then, you know, we're reimbursed more regularly. It's not a once-a-year catch-up, and that's much better for us for a lot of reasons, not just for, you know, more regular rev rec. but also for accounting purposes and so on. For both of us, that's a better approach. On the M&A, obviously that would be somewhat invisible to you, because when we do a deal, what it just means is that we get paid more than we would have historically, some of a premium over what our negotiated rates would be you know, the volume that clearly has moved from that hospital system to us, the hospital outreach business. So you're not going to really see that. Again, that's going to be a regular monthly quarterly thing, not a catch-up.

Thank you.

Thank you. Our next question now is from Ralph Jacoby with Citi. Sir, your line is open.

Yeah, Ralph. Hey, good morning. Thanks. So you mentioned PAMA in the prepared remarks and looks like the cuts are likely to restart next year. Maybe just remind us the headwind. And then at your analyst day, you suggested an EPS range for 2022 and kind of pointed to the higher end, I think closer to an $8 number. Just wanted to confirm that that assumed PAMA was coming back. And then just your comments on incremental investments that you talked about in the back half, just You know, just wondering, does that change anything related to that $8 number that we should be thinking about for 2022? Thanks.

Let me start with PAMA. So remember, what I said in our remarks, we're fighting hard to get a better answer on PAMA. And so hopefully that was clear in the remarks. You know, we do believe that the MedPAC report does give us, you know, some data that suggests that we, we're right with saying that if you collected all the data and it was representative, that there'd be a 10 to 15 percent reduction in the rates versus what we see now. And we obviously have some work to work with reduction in the price-cost, not a reduction in the . Make that clear, okay? An increase of 10 to 15 percent, right? And in that regard, we have some work to do to get that through Congress, because it's going to take a legislative fix. But we're going to keep on pushing at that. But with all that said, what we'll keep on saying is we're assuming, worst case, in our op book, that in fact, in 22, we'll see another cop. Okay? So that's clear. And then Mark, you want to touch a little bit on the range and where we pointed to it and yesterday?

Sure. So what I did was I laid out the CAGRs from 2018 and said, You know, obviously the pandemic has clouded issues with the base business, and at some point we all hope COVID is a much smaller piece of, you know, our revenues. And, you know, the base business CAGR that we laid out would have suggested $740 to $8, and what we were saying is based on a base business being fully recovered by the end of the year and everything else that we – we're confident we should be in that range. And yes, we felt because of everything we knew at that point that it should be in the upper end of that $740 to $8. PAMA was absolutely included in that. As I shared, that at this point, if nothing changes, should be the last year of the sizable reductions that we've had since PAMA was implemented. So based on the current fee schedule and the current methodology, There can be a 15% cut on any CPT code next year. And we estimate our overall book of business is going to be somewhere between 10% to 15%, so higher than 10% to less than 15% based on what we can see. However, because that traditional Medicare book of business is much smaller than it was when we started, the dollar impact is actually going to be similar to what it was in the first couple years of PAMF. So still a large number, somewhere around 1% of our overall revenues. And then once you get beyond that, even if PAMA isn't fixed, based on our understanding of commercial pricing, and we don't know everything, but certainly we know our prices, and we've shared that we've really stabilized commercial pricing combined with some competitive intelligence of the marketplace. We feel that while there might be some cuts with the recalculation, they're gonna be relatively small compared to what we incurred the first several years.

Yeah, we continue to feel good about the investments we're allowed to make with the additional resources. We talked about it in Investor Day, about $75 million worth of investments. We talked today, that continues in the back half of the year. That's dialed into the outlook or the guidance we provided. And it's entirely consistent with what we teed up in Investor Day around our growth platforms. We're investing in those health plans relationships, those hospital relationships, opportunities we see. We see opportunities to accelerate advanced diagnostics. We've spoken about the recovery we've seen there. And then also the opportunities we see around the consumer and consumer-initiated testing. So, you know, our performance is allowing us to make these investments to accelerate growth, to get to that outlook that we provided to you for earnings growth. So we feel good about our ability to make those investments and we are making them. So we're hiring the people who are spending the money and it's included in the guidance in the back half.

And the revenue as well. So some of these, you know, are you know, several years, you know, in the coming in terms of the return, and some of them you get much more immediate. On consumer, we talked about, you know, potential quarter-million-dollar business by 2025. You know, that's coming from small millions before the pandemic. And so you can imagine that with some of the things we're doing, we're going to be building, you know, significant incremental revenue to get to that 250 over the next couple of years. It's not going to all come in the last, you know, year or something like that. So we're getting revenue growth upside as well for those investments, not just incremental expense.

Very helpful. Thank you. Thanks.

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

Hi, Pito. Hey, good morning, guys. Two quick follow-up questions here. On the 2021 guidance, you quantify the COVID assumptions, the base business assumptions for low-end guidance. Can you quantify the same levels for the mid-range and the high range of guidance? And just to clarify on that last question, the investments that you're making this year, does this continue to 2022 and beyond? Are they one time in nature? Or do you believe you'll have to add additional investments next year? Thanks so much.

Yes. So, yes, I didn't intend to quantify with specificity the been at high end because, you know, it's multivariable equations. So what I wanted to do was make clear the low end, you know, for a lot of reasons you can imagine. We wanted to make people understand how we might get to that low end. And it's not a base business recovery that stalls or goes backwards. It's really a you know, much slower than what we've seen and that we would expect. And we don't think there's a high probability for that. But, you know, one thing we've learned in this pandemic is all these things are somewhat volatile and hard to predict. If you saw a lot of retrenchments, you know, across the country because of the Delta variant and other things that might cause, you know, geographies to shut down. We want to make sure that we provide you guidance that are 95% plus deliverable or even more. Once you get beyond the floor, there's so many different moving parts that could go in opposite directions. It's kind of hard to give you a point estimate. We wanted to make sure that people also understood that the COVID average per day, we're anticipating for the past year, significantly lower than we're getting right now. As you might imagine, you know, we've been working on this outlook for a while. You know, the recent news with obviously Delta driving up the positivity rate cases, obviously our volume's increasing. One thing we've also learned is not to overreact to short term. So, you know, and we're very transparent. So we give you those volumes every two weeks. So we felt that, you know, we can build you know, a reasonably deliverable, highly deliverable outlook, make clear what those assumptions are. And especially around the COVID volumes, you're going to see that every two weeks. You're going to know, you know, where we're going in terms of that outlook range that I laid out this morning.

And as far as the investments, you know, some of the investments, you know, are temporal within 21. But as you would expect, we're investing in long-term capabilities that will continue into 22. But rest assured, the applied business case and the revenues associated would be there as well. So, yes, we will have the outlook assumptions. We'll have some portion of these investments continued to 22. And trust that those investments are investments for us to do that.

And back to Ralph's question again, Peter, I want to emphasize those were built into the outlook that I provided in Investor Day. So we, you know, we've tried to make clear that we see these growth opportunities, you know, the COVID revenue upside has given us an opportunity not just to deliver some record earnings over the last couple of quarters, but actually to invest and accelerate the long-term prospects for our base business. So we thought it was the right balance between, you know, near-term growth delivery of results as well as long-term growth of the business. And so, you know, when I gave you that multi-year outlook, four years, and then when I framed 2022, those all fully contemplated these investments.

So then just on that one, is it fair to say that you are reiterating the thought number today for 2022?

Yeah, so nothing's changed. Yeah, so we would feel, you know, compelled if there was something over the last six months that would cause us to feel that that range was no longer appropriate, we would say something, absolutely. All right. Thanks so much.

Our next question now is from Dan Leonard with Wells Fargo. Your line is now open. Hi, Dan.

Hi, this is actually Tim Bailey. I'm for Dan. Thanks for the time. So I just wanted to dig a bit more on the question. So I believe the back to school COVID opportunity is framed as upside in relation to the guidance for the second half of the year. So first, I just wanted to clarify, is there any back to school testing baked into the COVID guidance or company level ranges discussed? And then secondly, given we are kind of weeks away from kids heading back to school, I'm sure there's been some discussions, but could you give us some insight into the internal or on-the-ground discussions happening, like, you know, are there broad-based general screenings, plans for back-to-school, maybe a big one-off push at the start of the year, just any more additional color there would be really helpful.

Yeah, so in part, and Mark just laid out of expectations around COVID testing, we did assume that, you know, the clinical testing would come down and the return to life testing would go up. And a portion of that return to life testing has to do back to school programs. And what we highlighted is we've been working with the different partners with two programs that are funded with the funding for testing. One is the $600 million program for return to school programs where we have partners to help us with that. And school systems throughout the United States could apply for that money and get the money to reimburse for whatever program they come up. And then there's a larger program for about $10 billion. But as you can understand, I mean, every school system throughout the United States is going to have its own plan. And so they're going to start ramping up soon, getting into the month of August and then September. And I think there is going to be a fair amount of variance across the United States of who does what and when. And I do believe that given what we see now with the Delta variant, I'm sure that will have some bearing on the need for testing to make sure that we're safe when kids return back to school. And also return to office programs. We do expect that there will be more returning to the workplace with people that have been working remotely. I think clearly there's gonna be a heightened level of safety. With that happening, and as I said in my earlier remarks, testing is vital to that, so we've embedded that in our expectation as well. But we assumed that clinical testing would come down. We believe that a lot of our capacity is not used for the hospital portion of COVID testing, as in the early days of COVID testing. And some of it, the recent increase that we've seen has been related to some of the the effects we see from the Delta variant so far in the last week or two. So hopefully we have to find some color of what's assumed in the guidance so far.

Yeah, I just want to remind everybody how that surveillance testing works. It's very different than our clinical testing. So if you think about the PCR tests today where we're averaging, you know, over $90 per test, that's not, you know, economical for surveillance. So what we have come up with, and others have as well, but our methodology is a heavily pooled approach. We pool a handful of samples today when we're testing in low positivity regions for economic reasons. But it's our responsibility if we have a positive to retest those individual samples. So you don't want to pull too many because the math suggests that you're going to be retesting a lot of samples. And so when you go to surveillance, the assumption is that nobody has it. And so therefore, you're going to do a lot less retesting. But actually, in this case, we're not obligated to do it because they're not even identified. So what happens is the collection's done. The entity, in this case a school, knows whose 10 samples, let's say, are in that specimen collection device. It's not shared with us. All we do is test it and we say this group is negative, hopefully. And in the case where it's positive, then they, the administrators, know which students need to be retested. And then that's a separate order, that's a separate payment, et cetera. And so the reason that's important is that in order to make this economic, and because the economy is a skinny gap with this huge pooling, we have to do approximately 10 specimens to equate to a single one for our core PCR business. You know, the volumes, you know, have to be tenfold to have the same dollar value to our top line. So, yeah, there's absolutely some contracts we've won. We've got some of that volume. But to, you know, really move the needle, it'd have to be, you know, really broadly distributed. endorsed and embraced, and while the funding's there, to this point we've seen some momentum, but not enough to, you know, be significant at this point and really move the needle to offset the decline in the clinical testing we've seen over the last several months.

Great. Now, that was extremely helpful. Thank you for the time.

Yep. Thank you. Our next question now is from Derek Brown with Bank of America. Your line is open.

Hi. Good morning. Hey, so two quick questions. Just a little bit more color on the recovery and the base business. Are you seeing anything in particular in terms of oncology and esoteric versus routine testing? Just a little bit more color on that. You gave some geographical differences, but I'd love some mixed differences. And then another question that keeps coming up, you know, in contrast to where you're guiding to, we just got off the Dan or her call, and they're talking about They went from 10 million point-of-care tests in the first quarter to 14 million point-of-care tests in the second quarter. So, you know, one of the questions we continually get on the central labs is the impact longer term on the business on point-of-care testing. Is this trend going to continue, particularly given the number of players that are sort of entering this market from the point-of-care and at-home space? So I'd love some of your general thoughts on your thoughts on volume shifts, for certain applications into the point-of-care market? Thank you.

Let me start with the first one. So, you know, what we said is our general health and our cardiometabolic testing, which is sometimes referred to by us as our general diagnostics, and I would say in the industry sometimes as routine, routine has recovered nicely, and that's throughout the United States, so nice recovery there. Second is you asked about oncology. We've seen good recovery in our AP business and pathology business. As I said in my remarks, our advanced diagnostics business is our definition of what's sometimes called esoteric. It has actually recovered nicely, and we are making investments there. We think we're tracking well against our investment accelerated growth plan, so we feel good about that. The second question, which has to do with point of care, and when I say point of care, it is the PCR point of care and then also the antigen test. We do believe there's some portion of the testing demand, if you will, that's taking place with these new approaches. We do believe there is a place, specifically with return to work programs for antigen testing in some of the point of care applications. But equally, what you see with our volume somewhat stabilized as you saw in the second quarter when we report our numbers and the modest increase you just saw is PCR continues to be the gold standard and so in many cases they do reflex back to the PCR testing when there is a positive for sure and a questionable negative to make sure it's not a false negative so we do believe we hit a good place in the marketplace and And we do believe there is a place for the port of care devices, including the antigen, as well as PCR going forward.

Thank you.

Thank you.

Our next question from Tycho Peterson with JP Morgan. Ma'am, your line is open.

Hi, Tycho. Hi, good morning. This is Julia for Tycho today. Thanks for the time here. A lot of my questions have been answered already, so just following up on an earlier question about your payer program, it's great to see that you're having success with United and Anthem and, you know, recently renewed contract with Annette as well. You previously said the volumes through these relationships are growing faster than the rest of your book. I'm just curious if you can, you know, provide some additional color on, you know, how much faster these volumes are growing and what kind of, you know, investments you're making to capitalize on these opportunities. Thank you.

Mark, you want to say something?

Yeah. So, you know, as you might imagine, there's not an answer to how much faster because they're not, you know, all equal, and also each of them have more concentration in certain geographies. So, you know, as we shared, you know, Northeast and specifically New York City is growing at a different rate, so you just assume that payers that have more membership there, we might have a different answer than the payers that are in Texas or Florida, let's say, or even California. So, you know, we've looked at, because it's one of our key, you know, we have a process we call the whole shims, and we have these, you know, breakthrough objectives. One of them is growing our share in these health plans, and we look at it regularly. and we share information back and forth to understand kind of our share of wallet with those. And so we have a chance to see as they themselves also are recovering in terms of the volume that's going through their membership, whether we seem to be growing at the same pace in that recovery. And that's the basis for us saying that we're growing faster. So in this business, a couple hundred basis points is a big difference. It's not going to be 10% or, you know, double-digit kind of differential. But, you know, a couple hundred basis points of share growth is meaningful. That's clearly what we saw before the pandemic started. As you look back to our 2019 performance, what we shared in the first two months of 2020. So once the business, you know, utilization becomes fully recovered, we're confident that we'll get back to that, you know, not just historical growth with market, but finally getting to, you know, growth above that by share gains. And that's what we laid out in our multi-year outlook at Investor Day.

Yeah, as far as investments, what Mark said is every one of these plans have a detailed plan of what we're going to do to gain that share. And, you know, some of it happens nationally and some of it happens locally and some of it happens by line of business. So, for instance, we do have some programs that go with the payer to – their national accounts, and their plan sponsors, the important plan sponsors. And so a lot of that is local, and so you ask the question where we're making investments. Well, put those investment dollars where we think you need extra capacity to drive those programs by payer. And there's a lot of variation around where those opportunities are by payer, and that detail is what we're speaking to when we talk about investments in the health plans.

And I'll just give you one other example, which we've shared in the past, but it's really expanded broadly. So take toxicology and prescriptive drug monitoring. The PEARS, as that was starting to grow, and there was some concern in the PEARS part around the behavior of some of the providers, They put in some really onerous rules in place, such as pre-authorization and so on. Of course, that impacts everybody, including the people like ourselves who are very responsible around our panels and how we conduct ourselves. And so we went to some of the payers, talked to them about that, and said, hey, not only is that not right for us, it's not right for the patient, because it can make it more difficult for them to get testing they need. But also, if you got rid of that, you would actually steer more work to the good left. And what I say, it's not just us. Certainly our chief competitor and some others are just like us. We're very responsible. We do good work in toxicology and prescription drug monitoring. So they put in rules in place where we're actually exempted from pre-auth. So that's another example where it's really not an investment. It's an investment of time to work with them to get them to understand and get them to change some of these rules and behaviors. But again, it's an example where, you know, we're benefiting but so are the patients and a lot of other people because it's a more thoughtful approach to rules around lab testing.

Very helpful. Thank you.

Thank you. Our last question now is from Matt LaRue with William Blair. Your line is now open.

Hey, Matt. Hi. Good morning. So, the Clifton lab went live in January and Steve, I think you said that the consolidation from the other two labs will wrap up here next month. In the past, you talked about sort of doubling throughput, 30% more capacity, I think 15% increase in productivity. Just curious, you know, if there are any data points to share so far on how the consolidation is going and how we should think about the impact of margins as volume is consolidated into Clifton. Thanks.

Yeah, so we're pleased with what we're able to do. It's pretty remarkable that we built this facility in the middle of a pandemic. And for all intents and purposes, we're on track. and it's up and running. We bring in this facility to do that consolidation, we had to continue our program around harmonization of processes and harmonization around systems to get them all on the same platform within the new facility. We're on the final strokes of that implementation. We feel good about it. In that facility, we have implemented a lot of the new systems. We put in place our new immunoassay platform from Siemens we talked about. It's a big investment for us. We are getting some pretty good gains for a month and more to come. Second is we put in place new front-end automation and through the lab automation with our partner in Kecko. And actually Siemens has done this systems integration with that as well. So we are pleased with the progress date so far and we're looking forward to more productivity from that going forward as we continue to burn in systems and work out some of the, you know, early details. And those improvements are already part of the 3% productivity gains that we have in our operational excellence program. They're already included in our outlook that we provided in Invest Today.

All right. Thanks.

Okay, so thank you, everyone, for this call, and we appreciate your continued support. You have a great day.

Thank you for participating in the Quest Diagnostics second quarter 2021 conference call. A transcript of prepared remarks on this call will be posted later today on Quest Diagnostics' website at www.questdiagnostics.com. A replay of the call may be accessed online at www.questdiagnostics.com forward slash investor or by phone at 866-360-3307 for domestic callers or 203-369-0162 for international callers. Telephone replays will be available from approximately 10.30 a.m. Eastern Time on July 22, 2021, until midnight Eastern Time, August 5, 2021. Goodbye.