Q2 2020 Quest Diagnostics Inc Earnings Call
Welcome to the Quest diagnostics second quarter 2020 conference call at the request to the company. This call is being recorded the entire content of the call, including the presentation and question answer session that will follow our 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 Shawn Bevec Vice President of Investor Relations for Quest Diagnostics go ahead. Please.
Thank you and good morning, I'm on the line with Steve Rusckowski, Our Chairman Chief Executive Officer, and President and Mark Dine in our Chief Financial Officer.
During this call we may make forward looking statements and will discuss non-GAAP measures. We provide a reconciliation of non-GAAP measures to comparable GAAP measures in the tables to our earnings press release.
Actual results may differ materially from those projected.
Risks and uncertainties, including the impact of the Kogan 19 endemic 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 covert 19 pandemic on future operating results cash flows and or its financial condition will be primarily driven by.
Pandemic severity in duration.
Impact on the U.S. health care system in the U.S. economy, and the timing scoping 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 D. P. S referred to reported diluted EPS from continuing operations and references to adjusted EPS refer to adjusted diluted EPS from continuing operations.
For instance to based testing volumes or base business referred to based testing volumes, excluding cobot 19, molecular and serology testing volumes.
Finally growth rates associated with our long term outlook projections, including total revenue gross revenue growth from acquisitions organic revenue growth in adjusted earnings growth our compounded.
Annual growth rates now here's Steve Rusckowski.
[noise] Dawn and thanks, everyone for joining me today.
All in one of the most challenging periods over our history, well diagnostic stepped up.
And expanded <unk> 19.
The country.
<unk> <unk> longer than expected performance.
Water.
Second quarter results were driven by called <unk>, <unk> testing and the rapid recovery of our beta testing volumes.
I'm very proud of west employees that on that front mine health care.
During the call them fighting go, but 19th and dynamic.
Well this morning, I'll, just talked about before mid water Oh.
Oh Im told me at night and damage.
And update you on our non Oh, good Dave <unk> <unk>.
And then Mark will provide more detail in the second water was felt in our financial position.
We got reinstated.
Our financial outlook remains your your.
With a broad range, which reflects uncertainty caused by the pandemic.
Mark will talk about <unk>.
Our outlook and underlying itself just in a few minutes.
Our financial performance in the second quarter was stronger than anticipated.
Oh, Oh lower than the same period of 20 Nike.
For the quarter total revenue falling to possibly 6% <unk>.
$1.83 billion.
Earnings per share decreased by approximately 10% on reported basis, So dollarsthirty six.
And approximately 18%.
The adjusted basis, So dollars 42.
These results were driven.
So on both Bakken or be in volumes from March and April.
Some began.
Non urgent care.
And then what surgeries sooner than we had anticipated.
Have you do bad for Cobot, Nike Lucky was tested well, partially offset baseball in line as well.
Demand came in from a number of areas.
You can see anything rather the virus route.
That's great.
The pent up need Dawn <unk> research okay.
People want high risk population nursing homes in prison.
But <unk> right.
Retail.
And finally employer is <unk> employees before they were trying to work.
Well start now.
Well, yes, it'll roll.
I'm, bringing Corbett 19.
<unk>.
We performed roughly 8.5 million Nike molecular diagnostic.
And more than 2.5 million anti body Robert.
We know the capacity for him up 230000, molecular diagnostic tests that day.
Double the capacity.
Hey.
Over the next couple of weeks, we expect Yep Yep form approximately 150000 molecular diagnostic tests per day.
Good overtly.
Has delivered every 20% Walt I think bleeding in those countries.
Working together with large national retailers like Walmart.
Yes, we've built.
A new model for consumers to access.
We're also supporting <unk>.
They like through topped the list just across the country.
I'm very proud of the progress we have made and rapidly scaling up capacity since the pandemic began.
Oh, well were demand for testing have stores in recent weeks.
And we are providing resell it about today.
<unk>.
And the average turnaround time for non party pace.
At least seven days.
So we're doing everything we can to bring more called midnight in Washington, <unk> occasion.
In the delivery of results.
We continue with that testing warms didn't work with our suppliers to ensure access equipment.
Reagent.
And so what.
Protective equipment.
We're exploring a range of new technology up to like Wow, We see a grant quell <unk> worse, the Bert do you.
Wore off.
<unk> <unk> or worse, they use authorization to use that then cooling for cobot Nike molecular testing.
[laughter] Inc., which is probably you blood banking will help expand capacity it that <unk> with <unk> <unk>.
Well our lab referral program, we're partnering with other quality laboratories, and our available capacity.
And in recognition.
The magnitude of current bad for testing.
Customer itself prior to <unk> we've.
Alright.
Well colleagues that Oh, so many ways over the last few months like book at night in pandemic.
Our company is central to the Chris Farley.
And I'm proud of our employees from loans for serving patients.
<unk> entities every day.
Yes, do we offered.
Yes.
So about 3000.
Well my colleagues and this supervisors incurred increased expenses during the pandemic.
In April we took a series of temporary workforce that.
Demand for cost.
Included in Furloughs, we're just hours and pay cuts for salaried employees.
And then today.
I'm very pleased to report a vast majority of these data were reversed a month or the other two they bought either respond to our customers increased demand for testing.
Mark we've been fighting called <unk> game.
But we've also been focused on accelerating growth and debate.
And as a reminder, buys all most of our strategies that's already brought there to grow more than 2% for years through accretive.
Hi, Good line acquisition.
You expand relationship with Oh, My God awful lot of systems.
Offer the private access the diagnostic innovation.
Be recognized that the consumer probably provider.
I think information services.
And then finally.
For population health and data analytics and they tend to care services.
Now let me take you through a few highlights more strategy to accelerate growth.
Or the pandemic, the M&A environment understandably quote.
But like that we're able to complete the acquisition of <unk> Memorial Hermann thought resets in April and are pleased with early progress.
We also recently announced plans to acquire all those mid America clinical laboratory.
<unk> medical.
Well, we typically that's great that's expected this water.
Well well wholly own Mechel laboratory in Minneapolis and.
And about 50 patient service centers across Indiana.
Oh, So we'll provide professional lab services under a long term agreements with birdies possible labs owned and operated by not balding hospitals.
So that's something that's it.
Yeah community Health network.
Our M&A pipeline remains strong.
Given the many challenges that hospitals, let's say.
We expect many more be opens.
It's about <unk> can help them looks even last Friday.
That's the thing we.
We both know that Oh are reasonable laboratories, they've had their own challenges.
It also produced more opportunities, we're talking back with it.
Yeah anything depend damn it could be another catalyst.
To help drive industry consolidation.
Some transactions in the pipeline that will pause because of the pen down there are being revisited based on the new reality.
That's the health care system as parents, they got the sorry.
We also continue to make progress other health plan rabbit.
We entered our second year of being a member of you done just healthier afforded by that works.
We're pleased with results to date.
We have met or exceeded eight quality, Matt that's got to electronic Walgreens. Good result.
And patient service center employment rates.
We've also secured business for more than 180 other network you would see labs.
The money for patients.
Lowering the overall cost of care.
We look forward to making continued progress with the sport Latin networks in the second year.
Over the last few months, we've seen a remarkable surge in the starting up so our <unk> or Mike well patient portal.
Today more than 11 million patients has a my question I'll.
Make appointments.
And received a result through their smartphone or computer.
In late April we see the more than three fold increase weekly Grayson.
Well tolerated up you ended the second quarter.
We believe that our agency and appreciate you didn't give you a bar.
Experience.
Now I'd like turn it over the Mark who will take you through results Mark.
Thank you.
The second quarter.
Revenue was 1.83 billion.
Down 6.4% versus the prior year.
Revenues for diagnostic information services declined 5.7 per cent compared to the prior year.
Although revenue declines year over year.
Second quarter results were stronger than we communicated back in June.
He is stronger than expected recovery in beta testing volumes as well is growing demand holding night gene testing services.
Volume measured by the number of requisitions decreased 17.7% versus the prior year.
With acquisitions contributing approximately 50 basis points.
That's been volumes in the company's base business declined approximately 34% versus the prior year.
In April based volumes declined in excess of 50 per cent compared to last year, let's get home measures implemented across the U.S.
I will begin to limit elective procedures and many physician offices were temporary close for business.
<unk> volume trends began to improve in that.
Down more than 30% it stay at home actors.
Many hospitals reintroduced elective procedures and some physician office is real.
The base volume recovery continue didn't you.
Yeah.
Gee person.
The trends when they gain when that.
Throughout the quarter the strongest recoveries were observed in the states that open more quickly than others, such as Texas and Florida.
As we actually did you base volume decline had moderated to approximately high single digits. However, due to the recent spiking called the 19 cases across the country and the roll back of several state reopening.
We have seen a slight softening of our base business in early July.
Well based testing volumes for me.
<unk> Cold Midnight gene testing was a meaningful offset in the second quarter.
Yes. It is the second quarter, averaging approximately 110020 6000, Kobin 19, molecular instead allergy test respectively. Each day.
Over the next couple of weeks, we expect to have the capacity to perform 150000 molecular diagnostic tests a day.
Revenue per requisition increased 15.3% versus the prior year, primarily driven by reimbursement called the 19 molecular testing.
Unit price headwinds were slightly less than 2% in the second quarter.
Inline with our prior expectations. This includes the ongoing impact the Pam.
Reported operating income was 283 million or 15.5% of revenues compared to 307 million was 15.7% of revenues last year.
Imported operating income from the second quarter includes 65 million proceeds from the cares that.
On an adjusted basis operating income was 294 million was 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 declines in revenue associated with their based testing volumes, partially offset by cold and 19 testing and our cost reduction actions.
Adjusted operating income does not include proceeds from the chairs.
The 40 bps 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 30.
This is 596 million in the same period last year.
National operations in the second quarter included 65 million provider disbursements under the cares X. I just mentioned.
Our financial position remains very strong during the second quarter, we amended our revolving credit facility, allowing this greater financial flexibility.
We completed a 550 million debt offering in may which may be used to redeem only payer 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 <unk> billion in cash on the balance sheet.
Finally, our board of directors means committed to the company's quarterly dividend at this time.
This morning, we reissued our full year 2020 outlook as well.
Revenues expected to be between eight and 8.6 billion, an increase of approximately 3.5% to 11.3% versus the prior year.
Reported EPS expected you either wanes, Fivesixty, six and 766 and adjusted <unk> within the range of 660 and 816 per share.
Cash provided by operations is expected to be at least 1.25 billion and capital expenditures are expected to be between 375.
400 million.
We continue to operate under extremely under certain conditions due to the cold in 19 pandemic, which is evident in the wider than usual outlook ranges, we shared in our quarterly press release today.
Did you consider I didn't 2020 outlook I'd like to share the following considerations and assumptions.
First regarding based testing volumes, we expect based testing volumes to remain below prior year levels for the remaining goes here.
Well the magnitude of the year over year decline is likely to fluctuate geographically state throttle. The opening phases are 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 based testing volumes through the remainder of the year.
Regarding molecular called at night gene testing demand capacity.
We continue to drive towards molecular cold in 19 testing capacity of 150000 tons per day over the next couple of weeks.
Keep in mind misrepresent peak capacity operating at the optimal conditions due to various factors such as routine maintenance and planned downtime, we generally operate somewhat under peak capacity.
We expect demand for molecular cold in 19 testing to remain high at least it was the third quarter.
Please note that the low end of our outlook assumes recent molecular cobot 19 testing volume trends continue.
Similar levels throughout the third quarter, and then step down in the fourth quarter.
Regarding Medicare reimbursement for molecular called at night gene testing.
Lifting 100 dollar Medicare reimbursement for molecular cold in 19 testing, it's tied to the public health emergency declared by HHS.
HHS officials have recently indicated they plan to extend the public health emergency or 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're not aware any plans for it.
Regarding Calvin Klein jeans wear allergy testing Carbonite Jim's rowdy testing also continues to help offset declines in based testing volumes.
Continue to believe there's meaningful potential wouldn't serology testing, but rights in customer demand remains in front of house.
Regarding the cost actions undertaken as Steve mentioned, we've rolled back many of these cost actions. We took in April with most were there any actions expected into July.
Finally, as we develop this outlook, we contemplated a range of potential outcomes in the second half the 2020.
Hello, and 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.
Well I'll turn it back to Steve.
Thanks, Mark well to summarize in the second quarter Quest diagnostics step up.
Rapidly expanded <unk> 19 testing for the country.
Yeah deliberate stronger than expected performance.
Looking forward to the rest of the year, we will continue to expand cobot 19 testing capacity.
While also serving the unmet needs of health care 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 request employees, who have been on the front lines of health care.
Answering the call and finding the gold at Nike pandemic.
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 Ann Hynes.
From Mizuho Securities. Your line is open.
Great. Thank you and again I would think everyone across the what they're doing.
Two questions regarding testing.
Comments, you made answer all your testing the assumptions and guidance I think you are right in front of Boston does that mean, you do not having minimal meaningful contribution for strategy 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 the molecular testing.
Well, then that you announced Monday.
So we think about that it's just the ability to try to wrong faster or do you ultimately think it's going to increase capacity over the hundreds of 2000 part day. Thanks, So it sounds good well on cirrhosis and we are.
Doing so as we speak we brought that up in April.
Happen or.
Outlook for the year.
Some throat surajit volume.
What I will say.
Growing evidence of the values allergy, there's been some debate.
Of the evidence that would suggest.
Antibodies.
Got it provides.
A period of time.
It is clear that people are starting to.
In fact, you know those antibodies do provide.
Ah confidence that there will not be a section and as that confidence builds.
You get into the fall.
Next year.
Do believe there would be a pickup in search allergy, particularly as we start to think about who should get the vaccine should not get the vaccine. So.
Some of that is in front of us, but we do have some of that outlook.
As far as molecular testing and pool.
Numbers that I provided particularly getting 250000 per day.
In a couple of weeks you know some portion of that will be driven by the opportunities we see with <unk>.
Oh, some portion of that has also driven by adding new systems.
Sources.
Inquiries or capacity.
And what I'll say is without stopping there there's opportunities in front us front. It goes beyond that 150.
Yeah, I guess would like to add in certainly Surajit testing is meaningful I mean, we showed and Steve's prepared remarks, we've done two and a half million, but 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 200000 strategy test 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 strategy testing.
We are doing it's very meaningful the question is one of the offsets to the base business declined right now.
Alright. Thanks.
Next we have Stephen Baxter from Wolfe Research Your line is open.
Hey, Thanks for the question I also wanted to ask about the molecular test all I can you talk a little bit about how you're referral patterns of look throughout the quarter and what percentage that testing volume is now coming from returned to work and my thought process was that it you're currently utilizing they'll close to full capacity the molecular side and the return to work opportunity is still low.
<unk> bring you potentially have pretty high visibility, even going out into Q4, one way or another as they're sort of a natural hedge built in there and then just as my follow up it looks like Dsos increased for the won't be during the quarter. I was hoping you can discuss out a little bit all whether you're seeing any collection challenges or delays with Dakota Justin thanks.
Sure sure first as far as.
The man or is it coming from in her prepared remarks, we talked about the different elements of demand.
What else share with you is that yeah, we have demand right now.
Exceeding our capacity.
And we're doing.
What we can't obviously bring up the capacity and also what we said in prepared remark is working with our customers and clients.
Prioritizing.
Oh specimens that we're getting in to make sure we're testing the most urgent.
And in the in the country, Yeah, 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.
<unk> as we get through August.
September.
We'll have a higher level capacity, but also higher levels of demand and we'll be able to get to turnaround times that are indexed acceptable levels that we've had in the past. So it's in front of US we're working hard of getting there I think all elements to describe will allow us to be successful through the next several.
As far as demand, Steve you talked about a return to work programs. It started to come into our demand a word managing it with employers. We also see in front of us the demand for return to universities and colleges.
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 suddenly go specimens collected oh, so we see that adding to the demand and then there's been broader access and broader availability of testing where people have now.
Access to asymptomatic testing and very good premium locations and then I mentioned that our remarks, he axis, we've provided with Cvs stores.
As a group.
So I would say across the board is and it's growing in all areas and we do believe though as we get into.
The September bonds.
There's still a number of employers are bringing employees back to the office or to work that we're we are going to be in a place where our capacity will need to demand that we see enough on those.
So Steve did you ask about pacing concessions I didn't quite pick up your last question.
Yeah. It just seems to me that the the Dsos were up that maybe like those yeah. Five days, maybe sequentially something like that I used to know whether it's called the testing or other collections things that you guys talked quite a bit.
Yeah, that's really.
Formulaic.
Gross cash collections are stronger as expected we did have some delayed billy around kobin testing, because the payers needed to update their systems and many of them needed 30 days or more to do that so we're holding on some billing, but I can assure you that a you know at this point and.
Terms of our reserves in and cash collections and everything we're very very comfortable with where we're happy that our balance sheet and as you can see the operating cash flow you know what was done enough that it from the Cures Act 65 million was you know 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 Nephron Research. Your line is open.
Good morning.
Good morning.
So.
First of all congrats on the trajectory I'm.
Wanted to get your thoughts on one of the top questions I've been getting to the labs, which is how can you convert this short term opportunity from testing and make your long term birth rate you know more durably higher.
So I was curious about your take on that and then Mark what does the guidance assume for incremental margins on testing in the second half versus reinvestment and there are there any things that you can accelerate to try and improve the longer term trajectory of the business.
Yeah, let me start with.
Yeah, we're going into the second half and clearly a base business is.
Going to continue to be down versus 29 team.
We are hopeful we'll start to.
She some recovery in the back half of your but we're not necessarily contemplating any of that.
Our outlook for for Twentytwenty.
As we get into 21.
It goes back to us.
Do you need to work our strategy for accelerated growth and we do believe we have the rigs strategies and we wanted to.
Share with you in her prepared remarks that were working those hard and.
I actually believe that the strategies are.
Actually more appropriate given the pandemic then be where 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.
Announce the two deals recently that will prepare us nicely in the back half of the year.
For growth through acquisitions, and said it sets us up for 21 to would that carry over from Adam.
The funnel that we're seeing and we're going to push on the funnel will give us some nice growth through acquisitions as we keep on working those in the back half the opposite 21.
Second is a is far is organic growth in our base business.
We continue to work our relationships with health plans I would say that are working to preferred lapping up work with United is going well.
A gain share with them and we're pushing that same type of approach in concept with many peers rotor 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 continued to work with hospitals, we talked about.
<unk> tobacco deal includes professional.
Systems deal professional lab services deal, we have a number that are being finalized as we speak a bit we feel good about and those will give us a 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 so we're continuing to push on the base business growth platform at the same time, we'll have some natural recovery and our based businesses the economy in as health care recovers.
And also through acquisitions, we think we'll will be enough of a good places we get into 21 to deliver on that.
That objective that we have of 2% growth through acquisitions. So.
Mark anything like that to that.
Sure So to answer your specific question about margin dropdown Jack.
You know as we've shared in the past in a short window, where a highly fixed cost business on her based business. So generally any plus or minus is you know will be 80% or so drop through its really.
Why isn't reagents that are the variable cost the most of it you know everything from their logistics infrastructure to phlebotomy, so even largely the labor in the laboratory you know in a window fixed so you know variation good or bad around the base business has a very high drops right.
Although we certainly have good margins on October testing, there's more variable cost in the cold testing so.
It's not quite as high a variable margin of money sort of plus or minus is from our base case, but still very attractive.
Thank you next we have greater next question.
From Morgan Stanley Your line is open.
Yeah, Hi, good morning, and thank you for all the details. So my question is on on the guidance Mark you all see highlighted the assumptions on day to low enough to range I'm, just trying to understand better what you're assuming a behind it, especially when we think about molecular testing thing you're expecting there.
At the low end.
So there's going be a step down into fourth quarter. So just trying to understand kind of 50 rationale for that.
What type of environment do you see where are we gonna see stepped down in molecular what are you assuming into high in.
And then when we think about just the future covert 19 addressable market.
In relation to vaccine administration as it relates to the molecular.
HM.
You in any kind of like conversations with the vaccine manufacturers and and how do you see what do you think it levels off testing will be in relation to vaccine.
So I'll, let Steve handle the vaccine question and then I'll just.
Talk about the assumption. So you know Ricky I. Appreciate the question. If there's one thing it'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 happens in April and so you know we want to recognize that some of these things are out of our control and we want to tie.
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 hopefully a large degree of their uncertainty we've been living with over the last couple of months, where you know people wondering you know what might be happened here quest. So when we talk about PCR.
Molecular volumes falling off in Q4, it's not because we have the vision of that happening.
We want you had to make some assumptions in the guidance and since you know that several months away, we've shown that even a month or two in the future. It's hard to predict that we didn't expect this surge in June that happens and therefore, we're just you know being I think appropriately cautious and explaining what those this.
Simpson's ours. So we don't have any sense that it will fall off I think all of US for society are hoping that whole lot as maybe the infection rate dampens, but also note that some of the Nonclinical work. The work we're doing for <unk> you know Rick returned 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 the demand would dampened a little been coupons, but it's not as it we know how the virus.
You know is going to proceed and the effect your rate and certainly some people would say the you know well get the flu season, we might even have another spike. So we don't know, but we wanted to be very clear around those assumptions.
[noise] you know there Rick in your question about you know next year and specifically the vaccine. So first of all we believe there will be over at 19 testing next year and 21, you know and second is if you assume well I've a vaccine next year or sometime.
And you go back to what I said earlier about the rules around energy and evaluating and in prioritizing who should be the but we should get the vaccine. We do believe there will be a role of testing and 21 for us.
And then finally in terms of working with those that are developing the vaccine. We are actively in conversations over using or data in a productive way to recruit patients and some of this is around the vaccine development, but also a abusing or data to help with the donate.
One of plasma for the country. So good use of our data, which is part of our strategy again for growth to use or data the 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.
<unk>.
Hey, good morning.
Sorry to harp on that but I, but I do want to go back to the guidance.
When you first updated in early June you expected breakeven to slightly positive for the quarter you obviously ended up at $1.42.
That does essentially implies all of the Twoq earnings came in June. So 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 so and again my guess is called the testing trajectory moves higher and you know assuming some continued core recovery.
I'm still struggling a little bit to understand.
You will the offsets or the headwinds on what appears a pretty extremely conservative arranged particularly at the lower end, but 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 you're you're a notion that you know Q2 earnings were.
All pretty much a in June is spot on ER and the issue with multiplying that time six for the back half would be a couple of things. One is our base business was down exiting the month, you know 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 weren't to improve were to hold for the whole six months, let's say, a you know down 10% or is that 20% assumption on our floor that would make a material difference.
The business and as I. Just described you know at an 80% drop down you can do some of the math, but.
For the business was about 2 billion a quarter before coal dead. So you know a thousand basis points is a pretty significant difference on revenue and Oh.
The PCR we shared that we're assuming the volumes dropped down in Q4, not because we have any for knowledge, but because you know they said returned to work and back to school will.
Largely behind us and because we don't know so we want to be cautious about putting on a diamonds 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 a you know Q4 and see a need to update that we would do so but you know give.
And how things have moved Ralph do you want to be really careful. The other thing is you know as I said, we fully expect if we continue to high high levels of cold bid and me this testing that the.
Well emergency will continue but because that is 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, where only building in that reimbursement through a 90 day extension since that's been voice they take Johnson, well, we would hope and expect it's cold. It continues that that reimbursement would continue into Q4 that would make a very significant difference as well, but that is done in either.
The bottom or the high end of our current guidance.
Thank you. Our next question is from Peto Chickering from Deutsche Bank. Your line is open.
Hi, Good morning, guys. Thanks for taking my questions two questions for you back to the pooling often a that would've assumed a larger multiplier effect for geographic areas with a low posit testing rates 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 that large have an impact.
And the second question is as you look into 2021, and if there's a decline in koby testing it wasn't a molecular and serology in the U.S. is there any discussions about providing.
I think it abilities for other country that don't have the testing infrastructure.
Yeah. So let me start would pooling so.
You mentioned that it's true that is.
It's more beneficial.
Areas that have low prevalence.
We've started to ramp up our capacity that will be driven for us we're getting some nice boost in our capacity, which were planning for as I mentioned to get to that 150, a couple of weeks.
So we're going to apply those concepts and our laboratory developed test locations and and tried to steer it towards the low prevalence.
The areas to be able to get the best thing for the box. So we'll push that and the multiplier is considerable when you have low prevalence. So that that would be very helpful to bring up or capacity will keep pushing on it.
As far is testing for non U.S. geographies, you know frankly, we are focused entirely for all intents and purposes on the U.S.
We could considerate and 21, but it's not in our plans right now and we haven't spent a lot of time thinking about this goes we city or deal with the pandemic of new us.
Thank you next we have Kevin Caliendo from UBI S. Your line is open.
Hi, Thanks, and thanks for taking my call I kind of when it gets to the assumption around the vaccine and how to think about this though if we were do assume a vaccine becomes available January one there's a billion doses or whatever the number might be how do you anticipate they vaccine being distributed and then.
Ministered along with testing or are you, suggesting that first people wouldn't get surajit testing.
Figure out who would meet the vaccine or <unk>, we can't imagine that this vaccine is gonna be administered quickly to the entire populations and take me through how you would expect to model out the administration the vaccine along as testing yeah, well you know.
Obviously this is beyond quest diagnostics.
And and rationing are prioritizing who should get it first and what's the progression distributed through throughout the United States, but.
Like what other.
Vaccines, you'd like to get it to the higher risk groups and I are risk groups are those.
Groups that we actually tested.
Initially.
Higher on the priority list for covert testing so those were with the pre existing conditions are over age 65.
And obviously people that have been compromised with other respiratory illnesses in the past so independent of Serrano gene antibody testing my assumption would be a those that risk groups.
The high end the priority list.
And then the second priority list would be everyone else and if in fact, you were to test positive for the anti bodies. Then my sense is there will be evidence at that point that will suggest.
That in fact, you 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, whether you want to have the vaccine or not.
That's all speculative to spec live on my part lots to be determined.
First of all where the vaccine will come from one is gonna be available how much will do you have Scott.
And also this is gonna be I'm sure debated throughout the United States as we get into it.
Thank you next day, Lisa Gill from JP Morgan Your line is open.
Thanks, very much and good morning.
If I just wanted to follow back up on on reimbursement. So you talked about Medicare keep talking about the commercial markets anything anticipation that the commercial market well just follow Medicare through the emergency pricing and what's your anticipation post American see pricing said it be rolled back number one I never too we've heard in the market.
That's some of the health plans are pushing back on multiple paths dawn on individual what what's been your experience. So far sure sure. So first of all we do.
Assumption that commercial rates are aligned with Medicare rates and Mark watches.
Remind everyone. What we have in the outlook going forward as far as or assumptions for reimbursement.
Yeah. So we you know the emergency use absolutely the federal emergency expires on July 20 cents HHS has expressed.
A view that they're going to extend that 90 days. So weve built that [laughter] hundred dollar price, which is not our ADW. Our you know we don't fully get $100, but that hundred dollar price into are pretty much our full book and so the commercial as we've shared previously the commercial payers are pretty much fell in line with the Medicare.
Reimbursement rate as a couple of traditional state Medicaid plans that didn't quite get there, but for the most part we get that price from everybody regarding the regard.
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 argued that they should be cutting the.
Protests, that's quite so important and nonetheless.
We will get some pressure once we get through that where the commercial rates and up obviously, we will take a position that says it shouldn't be less than Medicare yeah, we'll be very transparent with what our costs are and you can see it is important to that test even post emergency and will do.
Our best to keep it at the Medicare rate and not something less than that but that's still leaves obviously still in front of us.
Yeah as far as policy payment policy reimbursement policy is evolving.
What else share is that frequencies.
Policies.
First of all as we all know you could test negative one week in the next week you'd be positive. So therefore is quite important people feel that they should get tested if they've been exposed and <unk>.
If in fact, they believe that they might have some really symptoms. So so where did you too.
I think that as the position and I think by and large people you know support that notion but.
You have seen positions taken out returned to work programs that employers or moving with and in many cases. These employees are self insured so sort of a moot issue what pocket. It comes from but for those fully insured employers there is a positions by.
Some of the insurers that that's not included in their health care reimbursement policies. So therefore should be paid for it but employers.
Then equally with universities and colleges whether the students.
Pre pre on campus testing is included in the reimbursement like a physical would be if they're going back to school are playing sports or go into account.
There's some debate around that so I would say are characterized.
Leases is people work are debating some of this we're seeing kind of a growing trend would some of those and then also as we evolve we're trying to understand who should get tested <unk> docket tested.
There is even some question of whether after you've been tested positive.
Oh for 14 days right now most people are operating on a protocol that you get retested again, but there are some there's some views that.
Maybe that second test to verify your negative is.
Have a great value and therefore this might help reduce demand that we have on the system right now so that's being debated as well so it's evolving lots of discussion and mark anything like to add to reimbursement of Regeneron cobot.
I would just add that.
We have not had.
A significant amounts and be very few if any of denials wars frequency limitation. So.
Well things might evolve Lisa to this point, we've not ran into issues with payers around frequency for the molecular test and for the returned to work and back to school programs. You know, we're not taking the risk and those so we are either arranging clientele, where we get paid directly contractually.
By the customer or in some cases, where they think they have coverage from the pair we have a fall back to where we do get it denials than we ever right to build the the client correctly. So yeah. We think we're protecting ourselves Oh, 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 leverage from William Blair. Your line is open.
Good morning.
Good morning, or one of the basketball how pair mix is trending in the base business, obviously that rising unemployment call. So I suspect that patients into commercial population man.
Quicker to seek services as restrictions relaxing the I wanted to follow up on the opportunity for back to work and back to school.
I'm just curious what discussions you've had what rural land based testing that play versus rapid testing and perhaps there's an opportunity for quest to play a role not only in and testing, but managing the testing strategies for employers cities or companies, where our schools Mark you want to take the first part of this run payment I think those.
The question.
Yeah, I'm sorry, Matt what your your specific question can you repeat it just 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.
Sobi beyond that I don't think there was any <unk> rarely see it'll given our size, we rarely see material changes of pair looks and this was no exception I'm. 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.
Return to work programs.
For cities.
The role of let's just say point a cure devices, we are looking at.
All those devices and where they can help us particularly around surveillance.
Yeah, what we're finding for the initial.
Testing if you will have the gold standard is is the PCR test for.
The molecular diagnostic workup and then secondly is for surrounded your blood based test is the gold standard.
Sensitivity and specificity of both those are the best.
Still to this day and there are few device. There are a few devices are coming to the marketplace that are that are offering we think an opportunity for us to include that in our services that we provide to both employers and to University, specifically some of the and antigen devices that are coming to the marketplace. We're looking.
Yeah.
Those devices and some of the sensitivity is around 85%, which is lower than our sensitivity but.
For surveillance and in combination with possibly Suralco Gi and just overall.
Biometric screening of some form it could be helpful set of tools for us to manage a population over time. So we are thinking about how will those in our services to employers and also to universities as they.
Surveillance for their their populations going forward.
Thank you. Our next question is from Brian <unk>. Your line is open.
Hi, Brian.
Right.
[laughter].
Oh.
You're breaking up.
Oh, sorry.
Yeah, how does the better much better much but again I've got yeah. So how do you think about the the strategy in terms of balancing increasing capacity beyond that hundred 50000 tests for a day worth it sorry, yes, not knowing how big this opportunity you're really could be and what are the limiting factor it's right now.
Now.
Yeah that prevents you from question that up to say 200, or two or 250, a day, yeah, well first of all as I mentioned well my earlier remarks, we are going to push it beyond 150.
And we do see capacity excuse me do we do see demand going forward, that's going to be on 150, and we do believe we'll get to a point where capacity will meet that demand.
And so we will get there well go beyond the 150.
And the limiting factors or combination of.
Machines, Oh, so getting.
<unk> test systems and laboratory test equipment and.
Particularly for laboratory developed test its not just the platforms the PCR platforms, but.
In our set up you know there's actually two other pieces that you need to consider it's the extraction and.
And then second is the liquid handling and there's been some machine.
Constraints on us for getting those systems would be able to bring up bring up more and more capacity, but we're working with all are suppliers to get as much as we can get to bring our capacity and pick up beyond the 150.
The second is just a manpower yeah, we're running 24 seven.
And as I mentioned in my remarks, you know doing 8.5 billion test over the last four months. Our teams are working nonstop remember this is microbiology departments department that has gone from.
The backwater of of laboratory to front and center.
And we have you know capacity limits around the people and and those that are trained adequately to deliver on this and and then third is just you know physically you need to get you know these systems in place <unk>.
<unk> controls and training in place and that just take some time.
And then fourth is you know the reagents, we are limited by how much.
Juice, we get to run all are different platforms, and we're working with our suppliers.
Anymore.
We have had some shortages when some of the suppliers and that is not helped our ability to deliver results and so we're working actively too.
You know get them to first of all give us more and then second it'd be reliable what they commit to delivering against US now I'll also say that everyone is working incredibly well together.
Manufacturers are working with the task force.
The White house working at a future ideas of where we can get more capacity, we're all pushing hard to get more and more capacity, but to answer your questions those of the rate limiting factors around.
What we need to do to get to be on 150, but we will get to be on 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 timeframe.
Yeah, Brian you know to be clear you Didnt ask at this directly but we're not being conservative.
We're doing everything we can the challenges are not financial but you know willingness to spend more capital or for that matter operational expense to get things up and running their all operational in our ability to get more equipment and it's it's Steve said multiple pieces of equipment and to get them operating into <unk>.
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 for mid May.
You know we're expecting another 20000 per day increased from where we are today over the next several weeks and then as Steve said, we're gonna 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 in certainly to reduce turnaround times.
<unk>.
Thank you. Our next question asked from Eric Coldwell from Baird. Your line is open.
Hey, Thank you very much maybe just a couple of quick housekeeping first.
No you said that a your guidance assumes PCR volumes a decline in Fourq versus Threeq you I'm. Just curious can you give a sense on how much what you're expecting for average daily volume in PCR in for Q.
It's a a implicit in your guidance assumption.
Yeah. So you know Eric I'm sure you can appreciate that you know we it's not as if we have a point estimates forecasts you know for every.
Number within that range or even the high end range because we've got you know multiple multiple factors that can move things material certainly as you 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 multiple you know variable so I really can't answer directly but.
Whatever number because you know we're running scenario planning, but I would tell you that you know at this point, we have the 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 on the volumes and the knowledge that the returned to work and.
Back to school volumes largely be gone by Q4.
Thank you next we have Derek get Brown from Bank of America. Your line is open.
Hi, good morning, two questions. So first one being.
Can you give a little bit of color on some of the rebounds in a different categories. And then you noted some softening in July So you talk about what she's sort of seen oncology versus Quinn Cam versus the dollar GE just to give us a flavor on how you're seeing sort of the pickups.
So let me.
You know characterize it this way.
Primary care, you know put a well BG billions and that is well we've seen a nice rebound as physicians of.
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.
Bounced back on that piece of or or demand.
Secondly is a we are seeing.
Nice recovery and.
Some of those.
Some of those procedures that might have been pent up and or Cas allergy tissues of actually rebounded.
A good way, we're not sure it's entirely sustainable because there might be some of this.
<unk> has reacted to the pent up demand.
That's coming back to us that we lost in April and May and we started to see than Juno will come into the summer and that's why when we talk about outlook we are.
Our cautious to make sure that we're not taking the June run rate is or run rate forever and 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 the run rate that we should expect for no reasonable period time in Q3.
And then some of our other businesses, we have for life insurance business. You know frankly, that's down considerably we haven't seen a big recovery there.
Pre employment drug testing businesses started 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 in the worst being those that are tied to.
The economy in general constraints around.
Normal programs like for life insurance, and wellness and hiring people.
Mark anything like that to that.
Yeah, I would just add that are most of our base business has come back proportionally as Steve said on college. He is really picked up recently over the last couple of weeks, we'll see.
Much of that was deferred pent up demand, but the one category. It's not just in pre employment that a prescription drug monitoring so the whole drug testing area that lagged a little bit some of the other franchises within the the base business not just in our employer business.
Thank you and our last question comes from Mike Michel from Evercore ISI. Your line is open.
Oh, Thanks, and then just a follow up on pulling it is there a specific positivity rate threshold you had a mine were pulling makes sense in a particular state or region and I know you've got four reimbursed in threed specimen, but how much does pooling change your cost structure, there a big incremental margin difference versus testing single specimens.
Yeah. So think about you know the best is obviously, the lowest and where we pool.
We could put a four specimens and a well you know that quadruples the throughput per batch if you will and if there's zero positives then you get at all.
We have a you know positives within that Ron you have to test those.
That whole well and but obviously starts eat into the productivity gains. So you know the best as you know lower lower than 2%, we actually have a number of states and geographies that are.
In that range I'm not sure right now the northeast is doing quite well.
But the sustained.
And then 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 we have plant.
If you look at pulling again it deploying is applied to our laboratory developed tests is a piece of our capacity. It's gonna give US you know 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 you know some of the capacity, but there's other things we're doing as well.
Yeah, just a reminder that pulling it was only currently possible owner held the tea and so therefore, you know it's not as if it's going to be and expand our across our whole.
But network and we can prioritize.
You know low prevalence areas for that LDP to a certain expense or to a large extent and so to Steve's point, we're going to target. The areas that we're currently have low positivity rate, but the the biggest benefit it well we do get caught some cost savings on reagents. When you can you know do for samples that wants instead of a single one.
Even despite some retesting, it's really the benefit of the capacity so being able to serve more people with the same equipment more patience is really the benefit much larger although there is a certainly a good cost of sales savings that comes with Pooley [laughter].
And we have no other questions. Thank you.
Okay, well, we appreciate the time of the phone we appreciate extent and interest in her business and are we.
Hope you like US are appreciative of everyone at question, what we're doing and we appreciate your support as well so have a great day everybody.
Thank you for participating in the quest diagnostics second quarter 2020 conference call transcript I prepared remarks on this call will be posted later today on the quest diagnostics website at Www Dot Quest diagnostics dotcom, a replay of the call may be accessed online at Www Dot quest diagnostics Dot com.
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