Q3 2020 Quest Diagnostics Inc Earnings Call
Welcome to the Quest diagnostics third quarter 2020 conference call.
The cost of the company. This call is being recorded the entire contents of the call, including a presentation and question answer session that will follow are copyrighted property of quest diagnostics with all rights reserved.
Any redistribution retransmission or rebroadcast of this call in any form without <unk> consent of quest diagnostics is strictly prohibited.
No.
Please.
Thank you and good morning, I'm here with Steve Rusckowski, Our Chairman, Chief Executive Officer, and President and Mark I mean, our Chief financial officer during the.
During this call we may make forward looking statements and we'll discuss non-GAAP measures. We provide a reconciliation of non-GAAP measures to comparable GAAP measures in the tables to our earnings press release.
Actual results may differ materially from those projected.
Risks and uncertainties, including the impact of the call. It 19 endemic I 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. It comes.
The company continued to believe that the impact of Cobiz named <unk> on future operating results cash flows and the worst financial condition will be primarily driven by and that makes severity and duration and that mix impact on the U.S. health care system, and the U.S. economy, and the timing scope and effectiveness of federal state and local governmental responses endemic.
What kind of drivers beyond the companys knowledge and control.
This call references to reported yes referred to reported diluted EPS from continuing operations and <unk>.
References to adjusted Yes referred to adjusted diluted EPS from continuing operations right.
References to beta testing volumes were based fitness referred to testing volumes actually called mid 19, molecular anthropologie testing volumes.
Finally growth rate associated with our long term outlook projections, including total revenue growth revenue growth from acquisitions organic revenue growth and adjusted earnings growth our compound annual growth rates now.
Now here's Steve Rusckowski.
Well, thanks, John and thanks, everyone for joining us today.
I've got a very strong third quarter benefiting from just an answer thank you Chuck.
As well as the rapper recoveries from health care utilization.
We have performed over 22 million called the 19, we'll watch their answer all just yesterday more than any other provider.
Yes.
We most often mentioned is suffering due eliminations no can terminate your enabling the country's ability to try to work.
Classroom.
Well it feels.
I'm extremely proud of all that quest diagnostics has accomplished through open 19 pandemic.
I don't want to say or 40, some thousand employees for their hard work and dedication.
So this morning, I'll discuss our performance for the quarter our role in the COVID-19 pandemic and update.
And update you on our non coated.
Base business, and then Mark will provide more details on the third quarter results and our updated financial outlook for the remainder of the year.
Our financial performance in the third quarter was very small.
Our total revenues grew by more than 42% to $2.79 billion.
Earnings per share increased by more than 164% on a reported basis to $4.14 and nearly 145% on an adjusted basis to $4 or 31 cents.
These results reflect the Chinese demand for cold in 19 testing.
Yeah could you do recovery in her based testing volumes as healthcare systems are assumed not urgent care in elective surgeries.
Organic based testing volumes orders declined high single digits in July.
And approved during the quarter to mid to high single digit decline in September versus the prior year.
[noise] demand for Tobey Nike testing can't from several areas.
Kinda go past the Orubadi healthcare provider, so some clever spread throughout much of the country.
Especially for Donald COVID-19 pre surgical patients.
And people with high risk populations like nursing homes and prisons.
Every channel testing and our extended network access points, such as our garage recites offered across the country by Cvs Walmart.
Workplace house didn't get support a saucer or term employees to do their job and their offices.
University testing facilities were true students the campus life, including sports Yeah.
And our consumer testing directly after the call for bike question correct.
We've also demonstrated innovation and agility and brand COVID-19 check seems to our nation.
In the quarter, we were granted an emergency use authorization or you hate to offer all observe self collection.
We're the first provider to receive any way during the pandemic for specified pool.
And then finally, we teamed up with Walmart and drawn up to the pilot program for contact less delivery, especially cats using drugs.
Also on the floor.
Now lets it initiatives along with our Quest Diagnostics Foundation. So its Ross said reduce healthcare disparities that up to serve you better news, including those impacted back over Don King.
[noise] does value based commitment builds on our existing work with some very qualified health centers and will focus on serving people of color elderly and I'm certain populations and locations throughout the United States.
Well its plans to donate testing services broaden the range of initiatives.
<unk> total more than $100 million.
Our goal is to improve access to testing drive awareness is I love diagnostic innovations at managing itself.
Now before updating you on our base business, what it wants to do some comment on our recent CMS changes to Medicare pay more for Cobiz Nike testing.
And our decision to return the carriers that funding to the government.
So in conjunction with our trade Association. We've been currently reviewing all the new reimbursement policy for high throughput cope at 19, what you're testing from CMS will impact laboratory and patients we serve.
Last weeks announcement removes uncertainty that was an overhang unspoken 19 testing reimbursement.
Finally, we're grateful for the Cures Act funding from last spring.
Which provided us with them as an important time for Britain certainty for our country.
No sorry, most is it panned out but we no longer required this funding.
And as a result, we believe returning news for US is the government now is the right thing to do.
We're making progress on our strategy to accelerate growth in the base business.
So as a reminder.
Elements of our strategy to accelerate our two wrote more than 2% free nursery strategically aligned accretive acquisitions.
Extend relationships with health plans Oh systems.
Offer the broadest access to diagnostic innovation.
He recognizes the consumer friendly provider of diagnostic information services.
Then finally support population health data data analytics and extended care services.
No I will share a few highlights from our strategy to accelerate growth.
Our M&A pipeline remains strong.
Since the second quarter, we closed our acquisition of the American clinical laboratories are referred to as an Apple which is in Indiana and we did a couple two small tuck in acquisitions.
Our recent acquisitions are performing well drilled at the end of it.
For example, our memorial Hermann average acquisition announced earlier this year as well as the recent natural acquisition.
Growth in both Nike testing yeah.
Hey systems.
We've also seen growth in advanced diagnostics from our acquisition of Blue Fritz genetics.
The second growth driver expanding relationships with health plans or hospital health system is also delivering.
Oh prosperous testing volumes, excluding covance nike's have returned to growth year over year.
Given the challenges that hospitals are facing we expect many more to be open to discussions well cost and help them achieve their lab strategy.
So with professional lab services. This year, we have launched a record amount of bookings.
Represent larger and longer term agreements done in the past.
We also continue to make progress on our health plan strategy.
Within the United Healthcare preferred left with that work well being and that did reduce our those field and lab spending through the previously announced zero out of pocket benefit.
In addition.
United has added enhancements that reads that reduce the administrative burden.
For ordering physicians and patients related to those tests requiring pre authorization.
And then in August we entered into a new strategic relationship with anthem in 12 states.
We're working with the absence and improve quality and efficiency and delivery of laboratory services.
And then finally additionally, we're working with major national payers, so unable to their members who access code at Nike testing true.
True plus relationships with major retailers.
We made progress on a third element of our strategy to accelerate growth.
Hi, offering upon us access to innovation.
As a partner we launched three new combined all these 19 and respiratory virus house, reducing time for physicians to diagnose and treat patients.
By another party nearly 20 viral and bacterial infections from a single slot.
We also launched our automated next generation sequencing solution.
It enables individuals I suppose you still genetic testing insights about hereditary diseases.
Silver price points true ancestry health.
Finally, we grew our direct to consumer services and the core.
Wes threats test offerings continue to resonate with consumers.
In the quarter, we launched our COVID-19 active infections has offered.
Offering consumers a choice of using them at home kit or getting this assessment collection dawn at a drive thru locations.
Also we made remarkable progress in the surge of sign ups to our Myquest patient portal.
Today, roughly 13 million patients Oh, My quest accounts to make appointments are received their results through the smartphone or the computer.
And the third quarter.
On average more than 100000 patients per week signed up for the service. This is more than doubled the rate we've experienced before the end of it.
Now the second part of our tier one strategy is to drive operational excellence.
We continue to pursue our goals to reduce our cost base by 3% three year.
We also see more opportunities ahead to drive further productivity gains while at the same time, enhancing our customer experience and overall service levels.
So there's a couple examples.
We have standardized on the Siemens immuno assay platform on sports season over 18 regional laboratories.
The solution drives workflow efficiencies and this enables more than 50% reduction or equipment footprint.
We are still in the early stages of this realized savings, but so far we're pleased with its progress.
And then also our new flagship inventories lifted in New Jersey is being prepared to go live in early twenties, what do you want.
Wanting to play the state of the art facilities in the most highly automated in our laboratory network.
And will represent the final regional lab.
Bert into our standard operational I T system, which we call a few suite.
This will mark the combination of a multiyear initiative to simplify and streamline standardize original laboratory operations.
Now I would like to turn it over to Mark to take their results and update you on their outlook Mark.
Thanks, Steve.
In the third quarter consolidated revenues were 2.79 billion up roughly 43% versus the prior year.
Revenues for diagnostic information services grew approximately 44% compared to the prior year, which reflected significant demand for cold in 19 testing services offset by a modest decline in base testing volumes by.
Volume measured by the number of requisitions increased 19.7%.
One of the prior year with acquisitions contributing approximately 3% we.
We continue to experience improving performance in our base business in the third quarter.
Orders for organic based testing compared to our pre pandemic business declined high single digits in July and improved to a mid to high single digit decline in September versus the prior year for the year.
For the entire third quarter beta testing volumes declined roughly 5% versus the prior year.
And benefited from recent M&A and the new Pls wins that Steve highlighted earlier, we also.
We also experienced a significant contribution from call. It 19 testing during the third quarter performing approximately 9.9 million molecular tests and 1.5 million Surajit, we exited the third quarter, averaging approximately 93000, COVID-19, molecular and 11000 Surajit.
Yes per day.
Revenue per requisition increased 20.9% versus the prior year driven largely by COVID-19 testing this was.
This was partially offset by unit price headwinds of approximately 1.7% in the third quarter in line with our prior expectations. This includes the ongoing impact of Pam.
Reported operating income was 718 million or 25.8% of revenues compared to 313 million or 16% of revenues last year.
On an adjusted basis operating income was 831 million or 29.8% of revenues compared to 349 million or 17.9% of revenues last year the year over year increase.
The year over year increase in operating margin was driven by strong revenue growth in the third quarter, reflecting the relatively high drop through on incremental volume in our business.
Reported EPS was $4.14 in the quarter compared to $1.56 a year ago.
Adjusted EPS was $40.31 compared to $1.76 last year.
Cash provided by operations was approximately 1.46 billion year to date through September Thirtyth versus 895 million in the same period last year cash.
Cash from operations to the third quarter includes approximately $138 million a provider relief funds under the cares Act as a result of our strong financial position. We are planning to return to the entire Cures Act funding, we received which Steve noted earlier I did.
Additionally, we are accelerating the redemption of our senior notes maturing in April of 2021, well.
We will use the proceeds of the bond offering that we completed in May 2020 to repay these notes we expect to complete the early debt redemption in November.
Turning to guidance, we raised our full year 2020 outlook as follows right.
Revenue is now expected to be between 8.8, and 9.1 billion, an increase of approximately 13.9% to 17.8% versus the prior year.
Reported EPS expected to be in a range of $8.22 to $9.22 and adjusted EPS to be in a range of $9 to $10 cash provided by operations is expected to be at least 1.75 billion.
Capital expenditures are expected to be approximately 400 million.
We continue to operate under the uncertainty caused by the cold in 19 pandemic continued recovery in the base business as well as demand for and duration COVID-19, molecular testing our significant swing factors that remain challenging to forecast.
With that high degree of uncertainty in mind. Please consider the following the mill.
The midpoint of our full year outlook generally assumes based testing volumes to remain modestly below last prior year levels as we exit 2020 <unk>.
Oh in 19 testing volumes, averaging nearly 90000 tests per day for the molecular tests and 10000 tests per day, the Surajit test in Q4.
COVID-19, molecular reimbursement generally stable with recent trends are perfect.
Our performance through mid October is slightly above these assumptions, but again our guidance reflects the uncertainty of the current environment.
Finally, as Steve mentioned, we're currently in the early stages launching our recently announced initiative with a class foundation to reduce health disparities in underserved communities as we move forward, we expect to exclude the costs associated with this multi year initiative in determining our adjusted results while we are.
I'm prepared to share a detailed outlook for 2021 today I'd like to offer some considerations for next year.
First we are likely to have an easy compare in our base business for much of the year, especially in Q2 so.
Second demand for COVID-19 testing is likely to persist well into 2020 as well we believe that molecular PCR testing will continue to play a very important role in diagnosing tracking and tracing active COVID-19 infections and that that will eventually be a growing need for surrounding testing.
As vaccines and additional therapies coming to the market.
Third we are working to understand the details the recent CMS announcement regarding COVID-19, molecular reimbursement for 2021.
Finally, as a reminder, there will be no Medicare reimbursement cuts underpinned by 2021, given the one year delay included in the care of that.
I will now turn it back to Steve.
Thanks, Mark to summarize we had a very strong third quarter and have performed over 22 million of these Nike molesters LG test today.
Well also developed and the Jews a number of new innovations all around the country to get back to work.
Also an awful lot of deals.
We've seen further signs of recovery and health care utilization as our base testing volumes.
Rapidly throughout the third quarter.
And finally again I'm extremely proud of all that quest diagnostics has accomplished slots is very oh, sorry.
Yeah. Thanks, Hey, all the 42000 people at quest diagnostics for all their hard work and dedication.
Now we'd be happy to take any of your questions operator.
Thank you we will now open it up to questions. That's request of the company. We ask that you. Please limit yourselves to one question. If you have additional questions. Yes police fall back in the queue to be placed in the queue. Please press star one.
To withdraw from start to.
Again to ask a question.
Press Star one.
First question is from Ann Hynes with Mizuho Securities. Your line is open.
Hi, good morning.
Again, though.
Everything so I just wanted to touch back on your comments Mark about the reimbursement for next year I know that Hello, Fellows, I know, but just for modeling purposes, maybe.
Maybe can you talk about your current turnaround time, what you expect your molecular capacity it would be by that time in January and should we assume would you need to make any more part of investments to be able to get that hundred dollars reimbursement for molecular tests and myself.
And my second question is just about cash flow, obviously elevated because of you know that the testing.
Do you expect how do you expect to deploy that once you're able to and maybe about timing of the cash deployment that's on very elevated thanks.
Yeah, let me start with operational piece of that and first of all we're running about.
Capacity of 200000 tests per day, even though what you heard from our.
Our guidance is we're running less than that in terms of actual results.
And we've done that for two reasons one is to be prepared for the fall where were anticipating further demand for cobi Nike testing and then.
And then secondly, as well we have more capacity way result, less it helps us with turnaround time, so I'm happy to share that right now, we're averaging less than two days for testing of Workover in 19.
Oh, what I'll also say as I said in my early.
Introductory remarks, we're trying to understand you know the exact guidelines and I'm sure there'll be more detail from CMS in terms of recovery.
Because the reimbursement changes what were looking at turnaround times, we're looking at it today from specimen collection to results and that's also by calendar day, and there will be more specificity based on this from CMS, but you know they'll be more clarity around that so we are performing well.
Reverses or our demand and we're not stopping there we're actually increasing our capacity as we speak we're working out some of the warehouse capacity, we can get out of some of the new systems, we put in place and the second is we're looking at applying pooling to some of our IBT platforms, so that should get us to that.
Actually coming out of this year at a 250000 per day versus the 200 today. So we should be able to meet the demand and keep our turnaround times at the level I've already indicated so mark yeah. So just to add to that and you know the Devil's in the details we need to understand exactly when the clock starts on turnarounds.
Hi.
Based on where we think it should end up we expect to be in very good shape around meeting the criteria. We you know at this point I assume we have to get more than half of those past a turnaround in two days or less that obviously, we need clarification uncertainty around that and that's for you know, obviously Medicare and we start to work.
Some of the issues with the commercial player pairs as well so I understand you know how it's going to work with them. So that's why we're cautious in terms of committing too much you know to what this pronouncements by CMS means little work to do but certainly we're optimistic as we look at it and we should be able to meet that requirement.
Hi that cash flow.
As you see we're obviously feeling much better about our cash at this point the fact that were repaying.
At that early from April that we you know.
We issued in <unk>.
Pre fish.
Issuance in May a shows our confidence returning 138 million, which of course is deducted from our projection what I said at least 1.75 believes we're expecting a very strong cash here and you know Steve mentioned, we have a very strong M&A pipeline and as I've said, many times to investors I would prefer.
Her to do M&A, because when we do it we're highly confident that that's a better return for our shareholders, but we do have very strict criteria.
To find deals that meet those criteria. So I'm optimistic that we will deploy.
A chunk of that for M&A and then at some point you can expect us to return to our normal capital strategy.
As we move forward does throughout the calendar year early next year.
Great. Thanks.
Next question is from Stephen Baxter with Wolfe Research. Your line is now open.
Hi, Thanks for the question I wanted to ask you about the progression of core volumes through the quarter. I believe you said August or volumes were down mid to high single digits and then in today's release I think it also has the September exit rate at about the same level down mid singles to high singles. So this would seem to suggest that the baseline.
You know volume returning to normal slowed a little bit is that consistent with what you guys have actually experience and if so what do you think needs to happen to see improved further it if it's not you know whats the nuance that I'm missing and that just to put a finer point on it does guidance assume do you see a continued improvement from the September exit rate or basically continuation at that level.
Thank you.
Sure. Thanks for the question still.
As we mentioned.
Volume improved from July, but really September versus August it was fairly flat. So yes. It was a little stagnation in improvement of the base volumes not completely surprising given the recent uptick in coal, but again, so it hasn't gotten worse for us, but it did not continue its improvement.
And that's why.
I talked about what we expect in Q4, we don't expect a full recovery any time. This calendar year. So you know obviously, we have a very broad range $300 million. So within that range was multi variables, but in terms of the base business, we're not counting on in the middle of that incomplete recovery, we're not a you know expect.
And yet to move materially away from where its been the last couple of months, but that would kind of get to you know to the lower ended up or is the range depending on that along of course with Cogan testing as well you know where they go from that mid point, so not counting on anything but you know certainly improvement could well lead us towards the upper end.
And if it's eroding a little bit it could lead us towards the lower end of our guidance yes.
Yeah, and we're watching that carefully.
You go back in.
Sure what I said, we started off.
Got it at high single digits, and then also as I indicated in September it was mid to high so slight improvement there, but we're watching it as we entered the fourth quarter and as we sit here in the fourth quarter in October.
Next question is from Ricky Goldwasser Morgan Stanley. Your line is now open.
Hey, Ricky good morning, Ricky.
Hi, Good morning, So I had a question on the gross margin you can see higher than that so clearly we're seeing the benefit you also see a return.
Core volumes, but can you maybe help us quantify all see the gross margin that we saw in the quarter what is coming from the return of core versus realized price for Kobe testing understanding the reimbursement, but also the hearing you talk a lot more about direct to consumer testing that I'm assuming come.
With the higher price points, if we could just get a little bit more clarity on that.
Sure. So Ricky first I will confirm that direct to consumer does come with a higher price points.
Certainly there are other expenses that go with direct to consumer we've actually invested incrementally in some marketing to drive awareness and so on but from a gross margin perspective. The consumer testing is is higher than our core business, but recall, even though we feel good about that business, it's still very small.
Part of our overall enterprise and then.
Green Covenant base, you know, obviously, we don't get into gross margins on specific test offerings, but the one benefit I will point out in coal that is that you know there's no patient responsibility. So when you think about it and I don't have you have the precise numbers, but just lets say you know because our overall enterprise about 20% of our revenues come from patients.
If we collect as we've shared 30, if we 70 cents on the dollar you can imagine that there's you know about a 6% higher margin on that particular business, because it's a 100% reimbursed by payers instead of having any patient responsibility. So there are some benefits in the gross margins on co but it really is.
Unrelated to price and really has everything to do with the coverage policies and not having that inability to collect all the money that would do.
Great and just one follow up if I may you you gave us some early puts and takes for 2021, we're starting to hear some companies that are accelerating hiring.
In preparation for next year, when you think about the Sovaldi Christine first of all a ti associated with.
Vaccine et cetera should we assume a step up in costs related to increased hiring in preparation for that.
Yes, so ricky.
We manage our workforce carefully over the last since.
The nine months.
As you recall, the second quarter, we had to bring down their workforce so furloughed overseas.
Furloughed over 6000 people, we have reserves reduced work schedules we okay.
What is the.
Mark in our board and ER and then we saw the steady recovery.
In our base business coupled with.
We'll be testing that we've done so weve restated.
Salaries Weve brought that will work.
We'll work weeks, Yeah, we brought that you know the vast majority of the furloughed employees and actually we've heard people. So we've heard people, where we need to hire people, particularly in areas like specimen processing you can see with the <unk>.
Volumes were seeing you have done a lot of people who receive all these lessons to sort it out before before the home in a while.
I'll tell you, we're still being very very careful before we have another person, we're being very careful in overhead and marketing go through exactly whats in our in our expenses, but we've been very limited in hiring in our expense categories. There will continue to be very prudent with our hiring or.
Our overhead was in our laboratory operations and our operations in general.
The reason for that is we want to make sure. We don't get ahead of ourselves we feel we got good leverage in the third quarter as you see and we believe we have a workforce in place to manage the Uh huh.
The man, we're getting right now yeah, we're constantly looking at what we think the future demand will be but we want to make sure. We don't get ahead of ourselves. So so indicated what we think the fourth quarter is going to be we are building capacity.
To get more colds and mentoring testing done we got plenty of capacity available for so first rajiv without adding a lot of stuff with the exception of some of the value of these jobs as I mentioned and so you know as we get into deeper into this the fourth quarter and we get into beginning of next year will then assess.
We view that some people so far with the.
No. So modest hiring we're back to full workforce that we're watching is you know frankly daily yeah, we want to make sure we don't add people before we view yes.
Yeah. So we don't have any proactive plans to add resources, Ricky we're going to continue to monitor demand in our business that we have the flexibility generally to react in a fairly short window.
As as volumes move in one direction or the other so I can confirm no no plans they had as an expense base in Q4 in anticipation of anything next year at this point.
Next question is interesting and interesting enough as a last point, we do have this natural hedge on this is despite where we are with the economy. We still have attrition. It's overdraw store southwest is still trying to keep up you know there are other options for people definitely with some of our our not exempt deployment jobs.
And therefore, you know if things turned out we would get carefully turn off our stick it as well.
Operator next question.
Next question is from Ralph Giacobbe from Citi. Your line is now open.
Great. Thanks, Good morning, I Wonder.
Well I want to go back to the I want to go back to the reimbursement comments and specifically in your prepared remarks I'm on the CMS reimbursement tweak and it removes the overhang I guess I just want to be clear on what the expectation is now sort of post the P.H.D. period, assuming we meet those Turner.
<unk> does it sustain 100 dollar level and my sort of interpreting that right or not and the second piece is related just post that PHG period. My understanding is the commercial rate for code. It will either be fall to your contracted rate or there is a rate negotiation that takes place.
Correct and then how should we think about commercial right off the 100 on and things like that so look let me start with where we saw some uncertainty and therefore the words, we use overhead first of all for this year. You know we had some uncertainty as you know the third water about so your birds and see.
Oh the Mercy, we're that's in place and that was extended to October Oh, we were hopeful that the rate.
$200 is our.
Expectation given us a new rate changes the incentive that we felt like it was a January therefore, we're assuming $100 for reimbursement for the remainder of this year, but up.
But up until we've heard this there was some uncertainty about 20 to 20 and then secondly in 2021 remember the original rate was a $51 and it went up to $100 and so therefore, the new reimbursement that's being spoke on the guidance. It seems that the turnaround times, it's too dangerous $100. If you don't.
$5, so whatever remove some of that uncertainty of that going reverting back to where it was before we got the ball from 51 to 100, So Mark let me take it on the commercial side, Yes, generally said, even though she Asian route.
We have provisions in our contracts for new tasks and certainly the high throughput held at 19 molecular test is one of those so there is no provision for its default automatically to any sort of relationship.
To CMS or what have you we had to negotiate that we were highly successful in getting it to match CMS is rate, but certainly as we go forward you know we're going to have to continue to talk to.
Talk to our commercial plant payers and negotiate there's no say answer at this point, where commercial reimbursement Micah.
Operator next question please.
Questions from Jackie Nephron Research your line is now open.
Hey, Jeff Good morning.
Hey, good morning, so wanted to dig in a little bit on the commentary around core volumes. Just a clarification first I think you said the core was down mid single digits.
Does that include M&A, just to bridge versus the monthly commentary and then as you look out to 2021 do you think routine demand and returned to the pre code that baseline or is there. Some reason why you think it might stroke.
Struggle to get back to 100%.
So there's a car volumes I want to be clear for the quarter were mid to high single digits with an improvement from July into August and then fairly flat in September and that was an apples and apples comparison. So M&A you know puts those.
Core volumes at a better place and then also some of the new Pos deals, but we didn't want to confound utilization.
Hi.
Just reporting the base business, we want to understand kind of the apples to apples almost same store analysis and that's the one where were you know were down mid to slightly higher single digits for the whole corridor in terms of next year.
Like everybody else, we were trying to figure out how quickly things might recover and to what extent were looking they're all the same reports you are.
You know given.
You know the continued slight dampening of utilization given the potential you know further.
For the economy to have impact on utilization and other uncertainties at this point, we're not expecting any time soon to get the base volume back to the pre pandemic levels, but with that said it doesn't mean it couldn't happen. We're just not at this point, assuming and while we haven't given guidance.
For 2021, we wanted to you know just give some of our initial thinking but obviously when we come out with guidance, we're going to give you very specific around what those assumptions are and at that point, we'll have a lot more information.
Yes, so call it around Oh, we've got variation around geography and around clinical franchises. So.
So by way of example, a New York City is still not recover.
And so business in New York, So we look at the percentage overall, it's affected by New York not recovering as other parts of the country are fully recovered so were watching that carefully and we're watching a five city, if things change, but city or state understand the consequence of that no.
Secondly, as we've got some clinical franchises that are back to free pandemic levels, but we still have some wider suite over prescription drug monitoring business, which is still below.
That level. So if you look at it from.
Different dimensions, you can understand why we're below three pandemic and then what it takes to got to get back to.
Get back to where we were going into 2020 and and potentially get above the it will require some of these areas to get back to normal levels that we saw you know in the winter months before before me is the pandemic it mark.
And as Steve pointed out there is a lot of complexity, we actually do have some geographies that are growing year over year and then we have some like it's really Manhattan.
And you know if you look in long Island, you look at West Chester County look at New Jersey run out right outside Manhattan, there in much better shape than Manhattan is and we are sure whether that has any of it had to do with you know.
No physician offices and so on it we think it might be you were commuters and go into the city, they're getting their work done elsewhere instead of whether at work during the day, but certainly don't have any specific information on that at this point.
Next question is from Erin right.
Your line is now open.
Right.
So.
Thinking about that.
Between the point of care rapid testing capabilities and your cobot offering how should we be thinking about testing begets testing. It started environments and then I guess a broader question.
<unk>.
Are you thinking about consumer behavior when it comes to diagnostic testing in a close call that world well, it's inherently expedite some of your direct to consumer initiative here doesn't change or in fact, many of those efforts such as question, Iraq, and other consumer and love to see dramatically more meaningful.
Yes.
Thanks.
Yes. So thanks I'll take the first part is around a point of care point of care solutions.
As you know there's two point of care solutions. One is the point of care diagnostic solutions that were out there for some time provided by I've emailed tourism Raul intensive purposes. They were there for a number of months and they provided a role and then most recently I believe you're referring to what's happening with the estrogen testing, we do believe there will be a role.
Richard testing purposes, particularly for monitoring and surveillance of a population.
But we do understand for a while.
A lot of reasons why PCR and the return to the lab model is going to continue to be the gold standard yeah.
And one of the reasons for that depending upon the quality of the epogen testing that might be applied their requirements around reflex testing to PCR for both positives and negatives and again that also we believe that physicians do prefer PCR testing as well.
Our offering means flu respiratory panel and in a couple of tests that will be a PCR and we think with the flu season coming out with US you know, we're going to get some demand for as well. So we believe that Anderson testing will be a necessary part of our portfolio Yeah. We do.
We would expect to be bringing out a solution for antigen testing as part of our services, we offer up or will be complementary to the PCR testing.
What we're currently doing so hopefully that provides some clarity of what we did the role will be and then finally on the consumer piece. We do believe that there is increased interest in our direct to consumer offerings is for the basic testing.
As you all know a number of patients have not gone through their doctors as they should we.
We do believe there's an opportunity for them to have to let the panel Chuck for the cholesterol venture the standards are working properly.
I'll cover their glucose they won't see sexually transmitted diseases.
As we mentioned we brought out Surajit testing direct to consumer and most recently opened 19 testing. We believe there is interest in a a very convenient approach to getting testing yeah. Every coupled this with a tele health.
Physician console as part of our service and we do believe going forward, there's going to be increased demand for coal tele health in terms of his role at our business overall, and then secondly is testing and getting that either.
Either indirectly through quest direct we're getting through.
True, but tele health provider as well and we're very well positioned in that regard with our relationships with health health companies, but also with cluster right before the end of it we kicked this program all in so a we have a nice platform. That's been building up volume and we feel that there's going to be more opportunities in front of us is the demand given the.
Circumstances continue to.
I have a lot of interest for consumers.
Operator next question.
Next question is from Donald Hooker from Keybanc. Your line is now open.
Great Great. Good morning, good morning, So there's a lot being talked about here a lot of topics, but one thing that jumped out to me in your prepared remarks with the record bookings npls.
And I was wondering if it's possible to sort of maybe size or scope that I suspect I know why that might be the case, but I'd also love you to do.
To hear your perspective on what you think is going on there is it speaks to maybe the health of the hospital environment as well yeah, well, we're we're we're curves.
As I mentioned in my prepared remarks, our hospital business is actually growing and doesn't versus last year and that's encouraging that's what I'll call. The 19, so that's an encouraging trend.
We see hospitals African business and were seeing the testing up you would expect from those hospitals that were doing well in the marketplace and this is where what we traditionally called our reference testing business and then in addition to this over the years you know we have.
Built up a professional lab services business. This isn't just a new program. We've been working on this rover five or six years and we've built up a nice portfolio Referenceable accounts, and that's serving us well and so we are a pending a number of long term multi year contracts. This year that will provide.
Growth for US 21 for certain yeah, we see continued growing interest from integrated delivery systems and how we can help them with their lab strategy as you know maybe just hospital systems.
Having a difficult time through that they have done that and now speaking with many of the Ceos and entry of the conversation.
On Tuesday, with one are looking a lot of options to get more efficient and more effective and one of the areas that we've talked about for years and I think it's going to be.
He is building momentum is walking in and having a conversation around their lab strategy, which includes the reference testing the sophisticate dosing the sundial Oh it could help save their money for the acute care Laboratory and then you know it does beg the question of what they do with their their outreach business and in some cases, they sell back to us.
What we did with more urban this year with Michael.
See more and more prospects. So so it continues to receive strong interest. This year was really a banner year were bookings there, we'll see that in the growth of 21, So marketing if you like to add to that yes, Don as you know, we don't generally prospectively announced the size of the contract.
Well you will see as we report our quarterly results and we talk about organic growth and where it's coming from the Pls contribution. So certainly moving forward you're going to see evidence of what Steve just talked about and some of these very large bookings in deals that were just starting to implement and that will accelerate our growth into 2021.
Operator next question.
Question is from Kevin Caliendo with GBS. Your line is now open.
Hey, Kevin.
Hey, guys.
Sort of a two part question here I guess I don't understand why you expect coated volumes to sort of be down from your current levels. Given hope it is likely to increase we're already seeing the outbreaks for Q.
And but even if they are let's just say 90 versus you know the hundred sort of pace that we're at now the margin assumption for for Q is still meaningfully lower I I, maybe Ricky was asking about this earlier, but are there any additional costs.
Bonuses or anything.
Anything that maybe you're going to do in the fourth quarter that you didn't do a year ago that would suggest you that the margin sequentially falling given your guidance.
Yes, so as I did not intend to imply is that PCR volumes will be reduced in Q4 were actually the midpoint of the guidance assumes it stays where it is where we are right now and as I've shared through the first couple of weeks of October were actually slightly ahead of the midpoint of guidance.
So I wanted to clarify that in terms of margin.
Really nothing of significance, we did have in Q3, a significant catch up expense on our bonus as I'm sure you can imagine early in the year, we were projecting to significantly Miss our targets and then Q3 really reverse that got us to a point, where we're expecting to.
Exceed our top.
Our targets and so in Q4, we would just have assumed.
Assuming we delivered as a Q4 upper portion of that so actually there was in Q3, a significant incremental expense to catch up our bonuses that I'm not going to repeat into Q4, So there's nothing.
Huge significant other than there are some of the cost actions that Steve referenced that we are you know reinstated you know to nor normalcy. So we did have some reductions in July on salaries and so in Q4 of those will be in wherever they work for a pandemic and then we didnt reinstate the oral one.
Okay matched late in Q3 and that will be fully reinstated in Q4. So there are a couple of.
I'd call headwinds, but those are really just replacing is the pre pandemic levels and then normally in Q4. We just have you know some other margin pressures given you know the holidays and some other things that we managed it but nothing of note and finally, there are and there was a small amount of incremental investment I referenced some of.
The things that we're doing around supporting our consumer business, we want to continue to build that business. We think it's going to be increasingly is important and so.
Important and so we do have the opportunity given our business performance to invest and so there was a little bit of a commercial investment in our consumer business in Q4, that's a step up from where it's been in Q3.
Next question is from friends Chick.
Yes, Peter Chickering from Deutsche Bank. Your line is now open.
Good morning, guys. Thanks, taking my questions.
Two quick ones for you I know that night, they get more experience with the buffer Latin networks, what levers do you think plays a bigger impact with changing consumer behavior as it is zero co pays and consumer or is it the lower admin burden from the referral sources and also a quick follow up on the core organic volumes, you mentioned seeing geographic spread.
Sure in New York City is geographic weakness the primary driver that you see it across your book of business or is it more broad based specialties like Penn and talks.
Yes. Thanks, so much yeah. So so we have continued to work on our relationship with United Healthcare.
Well as we said 19, we've made some really good progress of picking up share related to the appeal and we had a lot of things to do with the fall of 2019 was related to employers are on a pocket and pre authorization work and then we really feel good about January.
In February we actually did see a nice a progression.
Progression of our volumes of them you know that we have the pandemic in March. So we yeah. We continue to work those programs and FX you know this week and spending time with United on US and we continue to work on that we think we can do to move more of their lab purchases to the P. OLED is obviously specifically too.
And there will be other programs that were working with them by geography by state if you'd be able to make sure that employers and patients, yes integrated delivery systems I understand the value of what we deliver and remember.
Go back to where we started we believe that by the improvement in access with United and the rise in the <unk> and asked them in Georgia. This is the time of our last Investor day, It afforded us about 4 billion dollar opportunity market.
And we believe that we should be able to get about 25%.
We were seeing some of that in 2019, and we believe there is more opportunity in front of us So I'm going to share with you is going to continue that work in 2020, and we do expect it will continue to help us.
Yes, sure we want to accelerate our growth.
I just want to remind everyone that.
That the zero out of pocket. It still has a ways to go. So they you know they started with are fully insured small plans and then expanded it and then it is going to go out to the sponsored plans obviously they have to market it to the employers who are paying those bills.
And you know the good news is we're collaborating with them on that and trying to demonstrate how that will save the employers a lot of money. So to this point most of the movement has been through other activity thing that United has done to encourage physicians to stop using out of network providers have inhouse go in and Sheldon.
Benefit of moving that lab orange loss as a PLM member, but still a lot of runway in front of us in terms of how that might benefit. He you know lower burden is really just a new thing. They you know we're putting in some.
You know a pretty significant requirements around some of the higher cost testing and you know they realize that.
Two things one is that the PLM members can really have more responsible panels or approach to.
Clinical testing the second thing is obviously, we have good prices compare to some of the other providers and Weve mentioned in the past that some of the managed Medicaid payors, so outside of United and use this approach in our specifically toxicology to drive better value. They were you know with toxicology exploding over the last.
Some years it putting some very real tight resource.
Tight restrictions on utilization and seeing that the national labs tend to do this responsibly and at better prices. It does it does from let's say off so not only does it make it easier on fish physicians and patients, but it tends to steer more work to us because the administrative burden slower so you're not going to see that in the same areas, where they're trying to.
Control some of the growth in high cost testing, but that's a benefit to us is to come yet.
Next question is from Matt Larew with William Blair. Your line is open.
Hey, good morning.
Good morning.
During the early weeks of the traditional flu season or sending a couple questions first what are your expectations going and make with respect to potentially higher vaccine rates are essential.
What are you hearing from physicians about approaches to flu versus potentially blue coat in or flu RSV Coakley combos, Matt.
Emetic, which is asymptomatic and then what are you hearing about with respect to reimbursement on those combo offerings versus the individual analytes. Thanks.
Yeah, so that were watching that carefully.
We believe that when somebody presents themselves with symptoms.
They want to rule on coated.
And we believe that PCR testing will be the option as Weve mentioned, we brought on a new solution, which we feel really good about with a single Swabbing and test floor.
Relenza you can also test for other viral and bacterial issues and that is going to be very convenient for positions us to quickly diagnose and treat the patients effectively now what you bring up we're watching it carefully as you know with all of us being socially sense and all of us doing better job apology.
I mean in schools now seeing that Charlie backup assumption it might actually lower the infection rate this year, but we're not certain of that and so we're watching that so mark you want to talk about reimbursement for.
Some of the yes, it's you know it's still to be determined.
Basically for reference.
C code 87631, which is the respiratory multiplex panel within five targets is a $142 today.
876 through two which is a which 611 targets is a $218 and then 87631.
Flux with 12 to 25 targets is for 16. So you know still to be determined exactly where we come out on this still have to go she Asian put the commercial player payers, but at least we could reference you know in the past for some of these sub multiplex panels, you know the reimbursement is reasonable.
Operator next question.
Next question is from Brian Tanquilut.
Jefferies Hey, good morning, guys and congrats Brian.
Good morning.
Okay.
Are you talking about urology and how that plays into the 2021 outlook.
Are you thinking about the ramp of that and what are the conversations right now with payers and potential coverage are likely cover interest or all of you on to vaccines out.
Yeah, we're we're doing.
Our share of zero G.
Running around 10000 per day, we've got plenty of capacity in front of US we believe it's going to play an increasingly important role as.
As we get into 2021 is a vaccine becomes available were actively engaged with those pharmaceutical companies that are doing the trials for the vaccine trying to understand where we might play a role and we'll pull grow either with a vaccine or post vaccine. It's Raul GE has as a role there.
We're also doing some surrounding population health testing, we've done some work for states and we're doing work for the CDC and we believe that that work will continue to get it.
To get to have a good handle on what is happening with Russia, Zumiez and you have an early warning signal that they are moving in the wrong direction. So so more to come we're working through that we do believe it's going to be a growing and bigger opportunity in 21 and more visibility of that as we understand when the vaccine is understandable.
Production of where we are with the data.
And then also we'll be bringing new solutions out to the marketplace that will provide more and more utility.
Around serology and more to.
More to come on that but you know we were working on the science and we believe it's going to be more we can do that contribute towards the pandemic.
As we go into <unk>, particularly as we see how the pandemic progressive.
This discussion with the payers, it's still early Brian.
No. This is not clarity around the exact role that's wrong, which is going to play and while we believe there is going to be an important role you know it's not a point, where we are in detailed discussions with payers yet.
Next question is from Derik de Brown with Bank of America. Your line is now open.
Hey, great. Thanks for fitting me in just a question a quick question on the impact on the business from cooling how much your how much of the samples are being pulled right now and what do the economics on that and the reimbursement for that me how much is your cost savings and I guess, how much of the volumes do you think can ultimately be pool.
I mean, realizing the fact is you've got to have low endemic areas to do that just just your thoughts on that for the business. Yeah sure. So remember we talked about 200000.
That's per day for capacity and we're currently resulted in third quarter about 100000 per day.
Roughly roughly 20% to 25% of that volume is down on what we call our ldcs and that's what we've been leveraging the pooling capability is particularly useful and has no good improvements in productivity and efficiency, where you have low prevalence populations.
Because when you do.
Because when you do the pooling women well lights up the test for that well and you get up to 14, 15% positivity regs in locations. The math doesn't work it out anymore. So we're pool applying it in the right way, it's primarily around our LDC portion overcapacity and what I mentioned in an earlier call.
Comment was we're looking at applying that to our IB de platforms as well and that will be helpful and moved our capacity from 200 up to 250.
Yeah, and just to remind everyone. Steve said the efficiency is really highly dependent on the positivity rate and well we do save on reagents. Its not an order of magnitude less expensive real economic benefit of pool income from capacity increase so that our ability to do more.
Testing and the margins we get on that testing not you know huge difference there is about it's not a huge difference in the cost per individual tests that we pool.
Next question is from Lisa Gill with JP Morgan Your line is now open.
At least Warner Good morning, Good morning, Steve I, just want to go back to the guidance that Marc gave her kind of thoughts for 2021, and just understand a couple of things a little bit better when we think about the base business what's your.
Expectation around unemployment trends and as we think about you know that the near term what we've seen in the last few months do you think that unemployment is having any impact on your core volume and then secondly, when we think about coal bed and we think about PCR testing persisting into 2021 do we think.
That's just in the first part of the year and Ed when we think about potential vaccine.
You know what are your thoughts around PCR testing I understand your comments around strategy, but how do we think about PCR testing.
You want to start with.
21 comment the economy, yes. So so you know Lisa it's hard to know specifically, what's driving the dampened utilization certainly things have opened up a lot more than they were in the spring. So whereas you know physician offices were closed I think there was a huge.
Fear and a large part of the population around engaging with the health care system at all because of the risk potentially of catching covidien. When you went into the physician office well I wouldn't suggest that eliminated certainly that has improved dramatically. So you know there is some overhang left there certainly but you know the.
The unemployment rate is probably a contributor right now you know we don't know for certain and we wouldn't expect that to change dramatically you know certainly in the next six months and who knows how long before it might turn around so we're being cautious around our thinking for next year and we wanted to share that obviously people will form their own opinions, but.
We would expect unemployment to have some dampening on utilization going into next year in terms of the call when volumes, we haven't modeled and we haven't given guidance for 2021, but you know maybe three six months ago. Some others had hoped that co what might be behind us this calendar year.
This calendar year, clearly that does not look like it's going to happen, but all of this depends on how quickly the vaccines get rolled out how effective they are.
And even once they get rolled out we see a role so whether it's at a level.
The level of testing, we're seeing today or something a little less we expect there to be a meaningful amount of cobot testing, including the PCR testing throughout you know a reasonable part of next year.
Yes, just to add to that.
Remember when the economy, we saw this back in the.
Well the great recession whatever happens.
Wallace access and so access is important to us in the interim was inspected as consumer confidence and no large portion of the population stand for.
Oh started their own pocket and therefore, they're going to be plus of new laws and and so we are thinking about that as we think about modeling 2001.
With that.
We looked at where we are with our base business versus where it was when you think about the math and the full year.
It should be easy comparison as Mark said in his comments about 20 watt, even if it's down versus 19, just to look at the comparison of what full year will be for 20 versus 21.
Given where we are right now that makes for an easy comparison, yet as far as PCR remember, we brought up our first PCR tests on March nine and <unk>.
And we've been ramping rapidly.
So we have not had a full year.
Our we're hitting our stride.
We're building capacity with two because we do anticipate more demand winter.
Winter is coming and we're all anticipating more demand as we enter the winter clearly in the first quarter and then we'll start to see hopefully some of the vaccines as we all know those won't be.
Well the deployed immediately.
And you know the pandemic the virus will be with us for a large portion of the 21 and so if you think about the full year of 21 for COVID-19 versus what we did in the 2020, there's still going to be a lot of volume for testing.
Yes, the full 12 months versus essentially a half year for PCR in 20, Twond. So something to think about as you do your models and to Steve's point for this year based on our guidance expectations, we see our base volume down organically in the high teens. So even if it's down a couple hundred basis points in 2021, it will still be.
An easy compare for the full year.
Last question is from Mike Newshel with Evercore ISI. Your line is now open.
Thank you.
Going back to the geographic differences on the core volume rebound you mentioned just wondering.
Just wondering if you know if you're seeing fluctuations tied specifically to whether new covert outbreaks like is there a patient behavior changing and affecting the core business when cases spike in receipt or where is that variation there is more correlated to how.
Far along local economies are injury opening you know is there a volatility at a local level or is that just some states are bouncing back faster than others, yes.
Yeah, well you know it's.
By state Civeo, the Big four States, California shuts off first and we saw steady rebound are still not back to print.
[laughter] endemic levels, particularly in some of the large cities like L.A.O.
If you go into Texas, we actually saw a good rebound the toxicity of great presence in Texas, both in Houston and Dallas.
Despite some of the flare ups, we saw in the summer summer they still continue to be in the range of where we were pre and let's look at Florida.
You know what went down in the spring into the summer others still issues in Florida, we're still not where they were pre pandemic and then if you go to the northeast.
You know New York, and then go to the Boston and Connecticut actually we've seen some nice steady recovery with the exception of as we've indicated earlier in New York City, but specific to the borough Manhattan.
We still have a ways to go to recover there. So we're watching those specifically related to infection rates, but what we had said some of these playoffs in church interesting enough like in the state of Texas and Florida in the summer months. It did not have a as negative a consequence to our our base business as we saw back in the spring.
And so were watching it carefully but so far we're good.
So far we're getting there and then and then again accounted for the clinical franchises all of us to some portion of the volume.
Faxes real are related to the specific businesses by prescription drug monitoring there's other issues related to what it takes to get those back to pre endemic levels that are not related to the geography at all I can say, there precisely negatively correlated but actually that would be my representation.
The areas with the lowest positivity rates like New York actually.
Actually are down the most so you know we haven't seen a huge you know a parallel movement between spikes in co bid over the last several months and a tour of downturn in utilization that actually has kind of gone the opposite direction.
[noise]. Okay. So thank you all for your questions. We appreciate your support on this call today in general and we wish you all a great day.
Thank you for participating in the quest diagnostics third quarter 2020 conference call a transcript of prepared remarks on this call will be posted later today on quest diagnostics website at Www Quest diagnostics Dot com a re.
A replay of the call may be accessed online at Www Quest diagnostics dot com forward slash investor or by phone at one 803 376568 for domestic callers or four zero to two 209 660 for international callers telephone replays will be available from approximately 10 30 am eastern time.
On October 22nd 2020 until midnight Eastern time November six 2020, Thank you and goodbye.