Q4 2020 Quest Diagnostics Inc Earnings Call
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Welcome to the quest diagnostics fourth quarter and full year 2020 conference call.
At the request of the company this call is being recorded.
Entire contents of the call, including the presentation and question and answer session that will follow are the copyrighted property of quest diagnostics with all rights reserved.
Any redistribution retransmission or rebroadcast of this call in any form without the written consent of quest diagnostics is strictly prohibited.
Now I'd like to introduce Shawn Tabak, Vice President of Investor Relations for Quest Diagnostics go ahead. Please.
Thank you and good morning, I'm on the line with Steve <unk>, Our chairman and Chief Executive Officer, and President and Mark <unk>, Our Chief Financial Officer.
During this call we may make forward looking statements and will discuss non-GAAP measures we.
We provide a reconciliation of non-GAAP measures to comparable GAAP measures in the tables to our earnings press release.
Actual results may differ materially from those projected.
Risks and uncertainties, including the impact of the COVID-19 pandemic that may affect quest diagnostics future results include but are not limited to those described in our most recent annual report on form 10-K, and subsequently filed quarterly reports on form 10-Q, and current reports on form 8-K.
The company continues to believe that the impact of the COVID-19 pandemic on future operating results cash flows and or its financial condition will be primarily driven by.
The pandemic severity and duration.
Health care insurer government and client payer reimbursement rates for COVID-19 molecular tests.
<unk> impact on the U S health care system in the U S economy.
And the timing scope and effectiveness of federal state and local governmental responses to the pandemic, which are drivers beyond the companys knowledge and control.
For this call references to reported EPS refer to reported diluted EPS from continuing operations and references to adjusted EPS refer to adjusted diluted EPS from continuing operations.
References to base testing volumes or base business refer to testing volumes, excluding COVID-19, molecular and serology testing volumes.
Growth rates associated with our long term outlook projections, including total revenue growth revenue growth from acquisitions organic revenue growth and adjusted earnings growth are compound annual growth rates finally revenue growth rates from acquisitions will be measured against our base business now.
Now here is Steve risk housekeeping.
Thanks, Shawn and thanks, everyone for joining us today.
So on a year dominated by the pandemic west broad critical COVID-19 testing to our country and delivered record revenues.
Earnings and cash from operations for the fourth quarter.
And the full year 2020.
The pandemic has tested our nearly 50000 employees.
And they have responded as heroes by developing COVID-19 test.
Building test capacity.
In a day, adding new testing models with our retail partners.
And supporting specimen is delivering results and of course <unk>.
And our customers.
We finished the year is one of the country's leading providers of COVID-19 testing.
I'm very proud of what we have achieved and optimistic about what we can accomplish in 2021.
So this morning, I'll discuss our performance for the fourth quarter and full year 2020.
Our ongoing role in the COVID-19 pandemic.
And update you on our non Covid based business.
And then Mark will provide more detail on our financial results and our financial outlook for the first half of 'twenty 'twenty one.
So before we get into the details of the quarter and the full year of 2020, we wanted to share our perspective on the new strategy for fighting the COVID-19 pandemic proposed by the New administration.
We are pleased by the efforts to expand access to testing across the country, especially.
Especially in the underserved communities, where there are known disparities in health care.
We support the new administration's approach to controlling the pandemic by expanding the availability of testing supplies.
Enhancing laboratory testing capacity.
And ensuring a clarity of message.
About the use of test in insurance coverage.
We also support.
The efforts of COVID-19 pandemic testing board.
And we look forward to additional details in days and weeks ahead.
Now turning to our results.
Two new high demand for COVID-19 testing drove our performance throughout the quarter.
In the second half of the year.
For the fourth quarter total revenues grew by more than 55 per cent to $3 billion.
Earnings per share increased by more than 126% on a reported basis too.
Two $4 from 'twenty one cents.
And nearly 168% on an adjusted basis to $4.48.
For the full year 'twenty 'twenty total revenues grew by more than 22%.
<unk> 944 billion.
Earnings per share increased by nearly 71% on a reported basis to $10 from 47 cents.
More than 70% non adjusted basis to $11.18.
Cash provided by operations increased by more than 61% to $2 billion.
We announced today that we are increasing our quarterly dividend by 10, 7% to 62 cents per quarter.
And this is our 10th increase since 'twenty all of them.
Additionally, our board of directors has increased our share repurchase authorization by $1 billion.
The increase the authority is on top of.
The approximately nine $900 million that was available as of December 31, 2020.
In the fourth quarter, we continued to see strong.
COVID-19 testing volumes.
Dan clearly spiked it was the very researched and people got tested in advance of the holiday go with us.
We performed an average of 135000 COVID-19 molecular tests today in the fourth quarter.
Well below our current capacity.
We continue to innovate to further expand capacity.
Reduce turnaround times and gain efficiencies.
And finally, we are focused on addressing health disparities in underserved communities through our quest for health equity initiative.
We recently held our first COVID-19 testing event.
The city and Baptist Church in Hollywood and in conjunction with leading black clergy, the United Way of New York City.
Testing is more important than ever as the vaccines rollout over the coming months to get at risk patients into care.
When they are we can still be effective.
Dan to isolate infected individuals.
We expect 'twenty 'twenty, one to be another very strong year for Covid testing.
Although demand for Covid testing is likely to decline throughout 2021.
As more people become vaccinated.
And fewer new cases are reported.
We believe that COVID-19 testing will continue into 'twenty 'twenty two.
Now turning to our base business.
Organic volumes were coverage rapidly throughout the assortment fall.
However, the recovery stalled at the end of November and into December due to the surge in COVID-19 infections across the country.
And Mark will provide and share some more details regarding the trends in our base business later.
With that we continue to make progress on our two point strategy.
To accelerate growth and to drive operational excellence.
Let me share some of the highlights from our strategy to accelerate growth.
Our M&A pipeline remains strong and.
And we achieved our goal to exceed the 2% growth CAGR from acquisitions that our base business over the last three years.
We continue to see increasing interest from.
Our hospital partners about how we can help them with their lab strategy.
Which includes discussions around both or outreach acquisitions and professional lab services reinsurance.
The deals we closed in 'twenty 'twenty, particularly the memorial Hermann outreach and medical acquisitions.
Positioning us well to achieve our M&A growth target this year.
And we remain confident that this year, we will execute a more similar type of outreach for tuck in deals in our pipeline.
Last year was also a record year, where our professional lab services strategy or P. A L. S.
Now this is the business to partner with hospitals to help them run their inpatient labs, we're efficiently.
In the fourth quarter, we announced two small pls partnerships.
With hospital systems in New York and Indiana.
And then the December we announced our largest pls relationship to date with Hackensack Meridian health.
The largest integrated health network in New Jersey.
Westwood manage laboratory operations to perform reference testing for 11, Hackensack Meridian health hospitals.
Sure.
We also continue to execute our health plan strategy by.
Shifting the dialogue to value based contracting efforts from the recent past when discussions focused primarily on price.
We continue to make progress with our new strategic relationship with anthem to improve quality.
Quality inefficiency in the delivery of laboratory services.
Romancing, our position with the United Health care within its preferred lab network.
And also are building momentum with many of our other national and regional Health plan partners.
Finally, we continue to grow our direct to consumer services in the quarter.
In December we announced our zero out of pocket Quest direct COVID-19 testing option.
Their servers offers appointment scheduling and specimen collection of more than 500 participating Walmart drive through locations.
And also in the quarter, we saw a number so the acceleration in the number of consumers.
Signing up for my Quest patient portal.
Today, roughly 15 million patients have my quest accounts.
An increase of nearly 2 million since October.
And recent market research indicates that our brand is strong.
Has strengthened over the past year.
With industry, leading net promoter scores.
We have a strong foundation to accelerate growth in our consumer offerings.
The second part of our two point strategy is to drive operational excellence.
We continue to pursue our goal to reduce our cost base by 3% per year.
We also see opportunities ahead to drive further productivity gains.
And at the same time enhancing the customer experience.
Once again, our invigorate program delivered approximately $200 million of cost savings in 2020.
And we continue to see more opportunities to deliver future efficiency in our cost base.
Our new flagship laboratory in Clifton, New Jersey with live on January Force.
This is the most highly automated laboratory in their network.
And over the course of 'twenty 'twenty, one we expect to consolidate volumes from Peterborough.
Mark Baltimore.
And Philadelphia Labs to this state of the art facility.
Now before turning it over to Mark.
I'd like to announce that we plan to update you on our strategy.
And market overview at our upcoming virtual Investor day.
And it will be held on Thursday.
March 11th.
So stay tuned for more details mark.
Thanks, Dave.
In the fourth quarter consolidated revenues were $3 billion up nearly 56% versus the prior year.
Revenues for diagnostic information services grew approximately 58 per cent compared to the prior year, which reflected ongoing demand for COVID-19 testing services offset by a modest decline in our base testing revenue.
Volume measured by the number of requisitions increased 26, 8% versus the prior year with acquisitions contributing four 5%.
As we highlighted in our 2020 outlook update in mid December.
<unk> testing volumes ordered in our base business were down mid to high single digits versus the prior year in October and November.
The recovery stalled in late November with organic testing volume trends down high single digits versus the prior year in December due to the surge in new infections across the country.
Additionally, many state and local governments impose new orders designed to reduce the transmission of COVID-19.
Compared to December organic base volume trends remained relatively steady in January versus our pre pandemic 2019 baseline.
For the entire fourth quarter total testing volumes declined roughly 2% versus the prior year and benefited from M&A and new Pls partnerships that began in 2020, Inc.
Excluding M&A and new P. O S wins eight testing volumes declined approximately 8% in Q4 versus the prior year.
COVID-19 testing continue to be a meaningful contributor to volumes during the fourth quarter. We resulted approximately $12 5 million molecular tests and 1 million serology tests contributing approximately 29% to volume growth in Q4.
We exited the fourth quarter, averaging approximately 130000, COVID-19, molecular tests and 10000 serology tests per day.
Revenue per requisition increased 25, 2% versus the prior year driven largely by COVID-19 testing this.
This was partially offset by unit price headwinds of approximately one 6% in the fourth quarter, which includes the impact of Panama and was in line with our prior expectations.
Reported operating income in the fourth quarter was $795 million or $26 five per cent of revenues compared to $363 million or 18% of revenue this last year.
On an adjusted basis operating income in Q4 was $860 million or 28, 6% of revenues.
Per the $329 million or 17% of revenues last year.
Year over year increase in operating margin was driven by the strong revenue growth in the fourth quarter due to continued high demand for COVID-19 testing.
Reported EPS was $4 21 from the quarter compared to $1 86, a year ago.
Adjusted EPS was $4.48 compared to $1 67 last year.
Cash provided by operations was approximately 2 billion for the full year versus $1 two 4 billion in 2019.
As a reminder, in the fourth quarter, we returned approximately $138 million a provider relief funds. We have received under the cares Act.
Our financial position remains very strong as we announced this morning, we increased our quarterly dividend approximately 10, 7% to 62 cents per share and the board expanded our share repurchase authorization by $1 billion. So we now have nearly $2 billion available for future share repurchases.
We resumed share repurchases in Q4 and bought back $250 million of company stock during the quarter.
Turning to guidance it continues to be a lot of uncertainty around the trajectory of the pandemic and its impact in COVID-19 testing trends as well as further recovery in our base business.
Therefore, we are currently providing an outlook for only the first half of 2021 and expect to provide updates as the year progresses.
Outlook for the first half of 2021 is as follows.
Revenue is expected to be between $4 85, and 5.15 billion, an increase of approximately 33% to 41% versus the prior year.
Reported EPS expected to be in a range of $5 seven from $6 seven.
And adjusted EPS to be in a range of $5 90 and $6.90.
Cash provided by operations is expected to be at least 800 million and capital expenditures are expected to be approximately $200 million.
The demand for and duration of COVID-19 testing as well as the continued recovery in the base business are significant swing factors that remain challenging forecast.
With that high degree of uncertainty in mind. Please consider the following.
Our first half outlook generally assumes a gradual improvement in base testing volumes, but we expect the base business to remain below our pre pandemic 2019 baseline throughout the first half of the year.
Well with 19 molecular testing volumes, averaging roughly 100000 tests per day from the first half of the year.
However, we expect average daily volumes to decline throughout the first half of 2021 as more people become vaccinated. Therefore, we assumed COVID-19, molecular volumes will be lower in the second quarter compared to Q1.
COVID-19, serology testing volumes, averaging 15000 tests per day for the first half of 2021 with demand expected to increase modestly throughout the first two quarters of the year.
Given the strength of our financial position and high cash balances, we expect to complete a larger amount of share repurchases. In 2021, then we have done historically, while maintaining significant flexibility to execute on our M&A pipeline. However at this point our EPS range is only assume enough share repurchases to.
Maintaining a stable share count we expect to share more details about our capital deployment priorities at our upcoming Investor day in March.
While we arent, providing a detailed outlook for the full year at this time I'd like to offer some additional considerations for 2021.
As a reminder, there will be no Medicare reimbursement cut under panel this year given the one year delay included in the cares Act.
We expect organic base testing trends to slowly recover throughout the year with volume likely approaching a full recovery compared to our 2019 baseline by the end of the year.
If the country vaccinate a significant portion of the population by the summer we would expect a continued decline from COVID-19, molecular testing volumes in the second half of 2021 compared to our expectations for the first half.
Similarly demand for COVID-19, serology testing is likely to wane in the back half of the year.
Finally, COVID-19, molecular reimbursement is likely to trend lower in 2021 compared to last year.
Many of you know beginning January one CMS has moved to a new reimbursement model with a rate of $100 per all tests reported within two days and $75 for all other results.
Commercial payers have now moved to this new reimbursement model as well.
Also while we are encouraged that HHS now plans to extend the public health emergency throughout 2021 prospective changes to COVID-19 molecular reimbursement are still possible.
Furthermore, direct client bell reimbursement per Covid testing services remains competitive.
I'll turn it back to Steve.
Thanks, Mark well to summarize I'd like to thank all quest employees, who have worked tirelessly over the past year.
They have delivered a significant portion of the country's COVID-19 testing, while serving the needs of people will rely on quest every day.
Thanks to their heroic efforts, we delivered record revenues earnings and cash from operations from the fourth quarter.
The full year of 2020.
In light of the countries the company's strong financial performance, we have increased our dividend and share repurchase authorization, while maintaining flexibility to pursue our M&A strategy.
We look forward to sharing a more indepth update on our mark abuse and strategy.
At our upcoming virtual Investor day to be held on Thursday.
11th.
Stay tuned for additional details on that day.
Now we'd be happy to take 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. Please fall back into Q3.
Can be placed in the queue. Please press star one from your phone so.
So withdraw press star two.
Again to ask a question. Please press star one please announce your name and company.
And our first question comes from Ralph Giacobbe with Citi. Your line is open.
Thanks, Good morning.
I guess I'm wondering I think I think I I think I heard you say that you expected molecular reimbursement to trend lower.
Just wanted to flesh that out to understand that and maybe what have you assumed from reimbursement with phe likely extended for the full year and and has there been any discussion or thoughts about proactively go into plans and perhaps not continuing to get that sort of inflated phe reimbursement and exchange maybe from more favorable longer.
Term pricing escalators.
<unk>.
Mark do you want to start it.
Sure.
So we are expecting.
To still do.
We do quite well in terms of reimbursement in the near term. We believe we can meet the turnaround times certainly the threshold that's required to be eligible for the higher range and then we get paid obviously based on the individual tests. So we're still thinking in the near term that our average weighted reimbursement is going to be pretty.
Strong, but we also recognize the reality.
The pressure on the industry from all the various payers, especially the commercial payers and so therefore as we mentioned you know throughout the first half of the year, we would expect some reduction in that reimbursement.
Not something that we'd be momentous, but certainly some downward pressure and as we said the client area is very very competitive. So there's quite a few labs at this point given the demand that would have a significant capacity and so therefore in the coronary but it's very very competitive in terms of your question.
I'm sure you can appreciate route that first off we don't feel we're getting paid access to think for Covid PCR, where we feel like we're being paid appropriately, but even if you could exactly forecast the volume of our Covid testing and forecast the base business you know over a period of time, which obviously would be.
Nearly impossible.
I'm not sure that we.
We need to trade off anything we're very happy with the relationships that we built as Steve mentioned with the payers. We've moved away from a focus on price and moving toward more of a partnership any alignment around value creation, where you know theyre looking for us to.
Save the money and create value in big piece of that is moving more work to us because we're already a very you know high value compared to the rest of the industry and possible choices for patients. So that's good.
Good question, Ralph certainly appreciate it but for practical and for strategic reasons because of where we think we are with the payers already with some of these new contracts.
Certainly not something that we're looking to pursue right now.
Yeah, let me just add to that.
Speaking to demand.
I would share is that over the course of.
The last 10 months, we brought up our capacity considerably.
And we're going to continue to build it.
And the reason for that is we want to continue to be prepared in the event that we do have another surge.
And then secondly, as we wanted to make sure we.
Really have a capability to.
To meet turnaround times that are expected in the market.
And.
Over the last 10 months and obviously a lot of our testing has been for the clinical purpose.
What we believe as we enter the second half and we're having many discussions in this regard.
It won't be a lot more demand for return to work programs with employers, which had been pushed out as you all know.
Return to leisure activities, there's a number of.
Of cities that have large tourism bases that are thinking about what they need to do to get people back into those venues.
And there'll be a lot of activity around just returned to life and I know that we are still trying to figure that out.
And that's going to offer us a lot of opportunity in the future and with that there's always a COVID-19 task, but theres also.
Number of services, we provide and those are yet to be defined so we're still.
Trying to understand what that second half opportunity would be but.
What we see so far we will continue to have strong demand, but it may take a different form as we get into the second half and as we go into 'twenty two.
Thanks Ralph.
Thank you.
Operator next question.
Pedro Chickering with Deutsche Bank. Your line is open.
Hey, Good morning, this is Justin Bowers on for Peter.
Just with respect to the Guy can you can you kind of frame the.
The high end in the long run for US in terms of your your testing assumptions and then also default process on the day increase in serology testing.
Through the quarter.
Yeah sure Justin So you know it's multi variable so there's several ways you can come to.
High end low end, so what I would say as you know.
They're all based on.
The three major drivers with most of the gene on the base volume recovery and the level of PCR volume to a lesser extent serology. So if we don't see a significant falloff.
From where we stand today in P CNR or.
If it you know surges up again because of these variants or some other unknown factor certainly that would take us to the higher end combined with.
The base business also were to continue to recover and not you know.
<unk> go the opposite direction as Covid surged again, so there is some negative correlation obviously between the two but if they are both moving from same direction that would move us to the higher end and then if for some reason COVID-19 fell off markedly even more than we are planning as we talked about we are planning for a decline over time Linda.
First six months.
That midpoint and the base business did not show recovery or even potentially took a little bit of step back for economic or other reasons and that would take you to the low end, but you know I can't at this point provide exact you know changes in the base from Covid, because obviously, there's multiple ways to get to either one but directionally, that's what ring fences.
Guidance with the midpoint being as I said.
Modest recovery, but not full to the first six months of the base business and then some step off but still significant COVID-19 testing for the first six months with second quarter being.
Markedly lower than the first quarter.
Okay got it and then just to clarify the earlier comments it sounded like the base business right now is kind of running stable.
Month over month from December levels are we interpreting that correctly and then just in terms of the molecular tests are reported on our website at $32 8 million is that because that's the right number it looked like a kind of a huge step up.
From February to January but more importantly is that does that kind of where you guys are now so total molecular and I'll hop back in queue. Thank you.
Sure Steve do you want to take that would you like me to.
Well, let me step.
The step up is the step up that we've seen based upon the strong delivery that we have in the fourth quarter and the beginning of January.
So we are as I said in my introductory comments you know we are one of the leading providers of COVID-19 testing.
Second as it does not include.
Serology you did ask a question about zero G. Because we do believe there'll be <unk>.
Enrolls neurology throughout.
'twenty one.
We seem to see some early indications that there is interest in understanding whether you have the antibodies are not which might inform patients and physicians around their urgency of getting vaccinated.
And at the same time, we're bringing out a new capability called Quants serology testing.
This will allow physicians and patients to see isn't that day do you get the spike protein from.
The vaccines.
And we'll be bringing that out of two platforms in the next few weeks.
Can't help us.
Determined if the vaccine is being effective.
So we do believe that there will be some increased demands for serology.
This is on top of what we already do.
Serology is providing a really important role for management of the disease overall surveillance epidemiology.
And in measuring the response of whats happening pre and post vaccination and broad population so well.
We believe there's an opportunity in front of us from 'twenty one in that regard.
And Justin just to close out on your other question, Yes, $32 8 million was the total through as of Monday, and that was up 1.8 million over the prior two weeks so about 130000 a day.
In the prior two weeks.
Operator next question.
Jack Meehan with Nephron research your line is open.
Thanks.
Hey, good morning.
Steve You mentioned the focus of the New administration on Covid testing can you talk about how you think quest role might change at all serving the pandemic and if we start to see greater adoption of home testing. How do you think quest is going to be positioned for that.
Yeah. So I think you know the.
New administration is.
Leveraging what we've done in the past in the past as a country and as an industry and taking it to the next level I mean do you see the capacity that's out there now the country back a few weeks ago, we were doing about 2 million COVID-19, molecular tests. So obviously up considerably from where we all started last March.
But going forward Jack I do see that there'll be a change beyond the PCR tests as I mentioned earlier.
Could it be greater demand.
For.
Programs that get to portions of the population that help us get back to work you bet to leisure activities get back to life and so we're having a number of dialogues around that and that will include the role of antigen testing.
And and more rapid testing.
Workflows that allow us to to see if that true a person that wants to engage in whatever the activity is is is negative and you can say for a reasonable period of time to participate.
So when we get into that World you know, we'll obviously be providing testing, but as I said earlier, there's a number of services.
It solutions that you need to provide and like.
Like so much in health care, you see one you'll see one but we are currently engaged with a number of organizations a number of municipalities and the number of corporations and what they will be doing in this regard, particularly in the second half I think the first half first quarter as you know.
Mines are in our guidance.
We're going to start to see improvement as we get into the second quarter since the second quarter will be a selling quarter for us all.
We do see a lot of people are getting prepared for better infection rates better positioned for populations to get back to work life and leisure.
Leisure activities that we're going to start to see more of that quest has a significant role in helping in that regard.
Great and then just a follow up I have a two parter on unit pricing I was curious if you could weigh in do you have any notable commercial contract renewals in 2021, and then maybe more broadly as you have discussions with commercial payers now.
You feel like you have a little bit more of a you know.
Good footing in terms of negotiating price given.
The role of the labs have served.
The pandemic.
Yeah, Let me start with where you ended I think our relationship with the health plans has never been better.
<unk>.
As you've seen over the next last number of years, we've increased our presence we have the best access to lives now that wherever that we've had in over a decade.
So we are in a very strong footing and also during the pandemic of share.
Sure that we were deeply engaged with many of the plans of what they needed to take care of their membership and also their employees. So the relationship has continued to strengthen.
And as I said in my introductory remarks, and Mark said as well we.
We're shifting the dialogue away from exclusively price to the value we deliver.
And when you go back to what we've talked about in the past around what we bring to the table in terms of our value proposition around quality our service performance our innovation.
All at a very affordable price, we believe our value proposition is really second to none.
And as I said, you know of course of the last year, we've done well.
Our service and look at our our reputation in the industry in net promoter scores and those are quite strong.
When you bring that those facts to the table Jack our position in terms of working out.
Forward looking relationships.
You know, providing a much stronger foundation and a better understanding on the other side that we really do deliver a lot more value. So so we're in a good position with our plans were in good position with our contracts. We obviously don't provide specific details, but we feel very good about that and also I share that we continue to make progress with our <unk>.
The relationship with a per lab network in the building relationship with anthem, we're quite encouraged about as well. So we feel good about our relationship and the progress we've made but also the opportunities in front of us to continue to build on what we've been talking below so mark anything you like to add there.
Sure. So Jack I understand the question and several years ago, I think there was an expectation or people holding their breath every time, we expect extended our contract with a major payer because it would imply some sort of major price concession I can tell you. This.
This has become largely invisible.
To you all you know unless we talk about it like anthem, which was really a new contract and brought together a number of our.
States under a single contract as opposed to having different.
Periods of time in which we were negotiating across the anthem network. We just extended with a major commercial per you didn't hear about it because there was no.
Price concession and in fact, we've made huge headway with this payer I'd tell you you know getting them to acknowledge that in the world of Panama, the whole notion of a discount to the CMS MLA rates no longer will apply going forward and that in fact, you know.
CMS will be setting the market and that they should feel confident is a market rate that they can feel comfortable and represent to their perspective, where current member. So you know it really that's what it's been about as they all want to make sure that they can say they've got good prices and now you've got an external benchmark you can look to them. So we just extended with a very large NAV.
We do have one coming up this year, but I can assure you that it's not gonna be a it will not come with a major price concessions were going to continue to work on the value based contracting with that actually comes good pricing that we feel you know represents a market and then these come with upside, whereas we perform.
We both share in the benefit of that upside that's the way, we're really contracting and over the last couple of years and how we would expect to contract going forward.
Thanks, everyone here next question.
Kevin Caliendo with UBS Your line is open.
Great. Thanks for the question. This is Adam noble in for Kevin I, just wanted to double back to your comments around reimbursement for Covid PCR one just to confirm that you're assuming throughout the first half that.
The phe is extended so that the Medicare rate.
With the add on payment remains 100.
And then you talked about.
That kind of a commercial reimbursement.
Potentially.
Declining over time, just any thoughts around kind of what the magnitude of changes on the commercial side, you guys could could potentially see in PCR.
Yeah sure I'll comment on that and Steve may want to add so yes, we would expect.
That as long as the.
Federal Health emergency continues that the structure with the opportunity to earn $100 per test from CMS will continue now you know that is a very small portion of our volume, but we would expect that however, as we as I said in the prepared remarks, there is some risk that they could become.
There is no guarantee that that will continue so and you know that not only could they decouple reimbursement with the FHA, but they could also like they did January 1st change.
The approach. However, you know at this point, yes, we are we assuming that most of the highest probability is that as long as the FHA continues CMS will continue to pay us under this new method.
On commercial obviously, we're not the only player and so while we defend.
And you know feel like we do a good job of explaining why reimbursement makes sense as we've negotiated some new.
Payment methodologies, including some who wanted to move to the Medicare methodology. We think we've done a good job, but obviously there are other labs as well and you know to the.
That other labs don't do as good a job as we do there could be additional pressure on us. So that's why it's hard for us to predict exactly where this is going.
But certainly in our mind, we would expect to continue to defend our commercial contracts as well to the <unk> seen the same basis for CMS paying us at that range don't apply to the commercial payers as well I also want to remind everybody that as long as these zero patient out of pocket applies that is also a huge tailwind.
For us because.
To avoid having to build patients where historically, we've shared that we get about 70 cents on the dollar and I have to get 100% of that payment from the third party.
It's also a large enhancement to our revenue.
And our profitability as well so that's that's a factor and we don't want people to forget about.
Steve.
Just to add to that.
The CMS new methodology for reimbursement.
And as you know we are reimbursed at $100. When we report the results from two days in.
$75, so for all relative results and.
Mark's comments, we have seen a few payers payers to look at this model as well.
But we're encouraged by the public health emergency extensive through 'twenty one.
And also just to share our timeliness of our results are quite good we have met that.
<unk> showed a 50% of COVID-19 molecular tests resulted in less than two days, we did that in the last few months and I will share that the majority of our testers are resulted in two days or less so my other comments I did mention that we're continuing to build capacity because it just gives us a lot more.
Operational flexibility too to be better turnarounds times based upon where the demand is coming from.
I think we're progressing well, we're very good provider of the test.
Time is one element.
Quality and reliability and and also the type of testing, where we have done.
Our methodology for PCR tests, both on the LPG side and obviously the kits are are somewhat consistent throughout the industry.
Really quite strong so if you look at the accuracy and the quality of our testing you know people have come to consider us the gold standard.
Bode us well going forward as well.
And if I can just get a next question.
Eugene Kim Your line is open with Wolfe research.
Good morning, and thank you for all the color around guidance.
Apologies if I missed this but have you guys provided to average reimbursement levels for the PCR testing in Q4 and.
And can you comment on whether you are embedding similar levels in the first half guidance.
Yeah. So we we didn't specifically call that out but I can tell you that it did not change much in Q4 from where it was in Q3.
So you know it was it was above $90. We you know we do have some client bill customers that are less than 100, and we don't get paid per 100 per cent of the testing, sometimes do day missing data and so on and so forth, we do get some denials, but certainly north of 91.
WR previously now.
We did talk about the fact that we expect that to have some pressure to reduce overtime in the first half that doesn't mean that it absolutely well, but in our guidance in the midpoint of that guidance. We do we did make an assumption that given the new model with the $75 not just with.
CMS with some commercial payers were not going to get paid for 100% of our test set that hundred where we had been done previously still a large majority of Steve said meet that two day turnaround time, so that'll create a little bit of erosion and then also I mentioned that you know there's a lot of capacity there for a very competitive environment.
Net client Bill Arena aside from the third party.
Got it thank you and just as a quick follow up on the base business can I confirm you said you don't think you'll get back to pre pandemic levels in first half how does that compare to 2019 or does that include the acquired volume as well.
Thank you.
Yeah. That's a that is correct. We would've said was you know as we're looking at the back half, even though we're not giving guidance because there's too much uncertainty around it we expect it to be back to pre pandemic levels towards the end of 2021. So in the first half we still expect to be down versus 2019.
We felt you know even though the pandemic didn't start largely for our business till March easiest compare and how to talk about it as 2019 volumes.
We did have a large growth for the first two months of 2020 as we shared at our first earnings quarter earnings call.
Confounds things a little bit on a year to year comparison, but yes, we're going to can you talk about our volume performance relative to 2019, because it's the cleanest compare for the whole year.
And when we speak to that I heard it in your question.
Looking at organic.
Growth and so we spoke of a couple of acquisitions.
Closed last year.
And you know in our organic.
Again it does.
Discussions we're excluding those in any other deals we might do prospectively. So it's organic.
Base business, we're talking to.
And we thank you Brad.
The best representation of utilization. So that's why we think it's important our organic performance versus 19 kind of gives a sense because of our size and reach we think where the market hopefully one was performing.
Yeah. So the acquisition revenue will be on top of that.
We obviously you announced a couple of deals and what we said is we have a good funnel and anything we might do prospectively would be on top of what we said.
Okay.
Derik de Bruin with Bank of America. Your line is open.
Hi, great. Thank you and good morning, So just one quick one.
Can you provide a little bit more color on how should we think about the margin progression.
Throughout 'twenty, one and particularly how much of your <unk>.
Good with the core business still being down how much of that is the margin.
Headwind.
Just thinking about the dynamics as we go from the first half the second half with.
Covid volume testing coming down and you returned to price would be more normal for the core business just wanted to get some thoughts on the margin progression of work flow. Please. Thank you.
Sure. So it depends when you when you say is it a headwind it depends on what you're comparing it so as we expect the base business to improve that's a significant margin tailwind versus the prior period because we are in.
Given window of time, a highly fixed cost.
Operations on our base business and while we took some significant cost actions.
Second quarter of last year in response to the significant downturn in our volume and we've continued to manage our costs very very tightly to the back half recovery to not get out in front of ourselves.
We're not planning on any significant restructuring in the near term with volumes that are down single digits. At this point. So we our cost structure on the base business is to some extent what it is and we'll add small pieces that are necessary as it recovers but that.
Growth in recovery and that base business sequentially is a nice tailwind on the other side as we talked about you know.
Back to erosion in our Covid volumes, you know that creates headwinds and how those two pieces offset each other it's hard to predict slightly.
Understood me specifically, but.
I would at this point expect that the COVID-19 reduction more than offsets the base, but at least they do partially offset each other as we as we move forward and then the other dynamic is obviously reimbursement on the PCR test and we shared that we expected some pressure on that as we go from the first quarter into the second quarter.
Sequentially, and then likely even more so in the back half of the year.
So without getting into specifics those are kind of the things you should you know specific numbers. So those are kind of the things you should think about as you think about where margins are free to go to the first half and into the second half of 'twenty 'twenty one.
Thank you.
Lisa Gill with J P. Morgan your line is open.
And thanks very much good morning, and thanks for taking my question I just wanted to follow up on your comment around the acquisition opportunities. Steve you know one of the things that was anticipated that with Panama there'd be a lot of pressure and you'd see more acquisition opportunities with Pam are now being pushed out does that change anything number one and number two.
When we think about reimbursement as we've been talking about from molecular tests et cetera, I would think a lot of these labs have done well. During this period of time does that change what their expectations are at all around what their business is worth.
As we think about acquisition opportunities.
Yeah. So thanks Louise for the question so.
So.
The first part is really about acquisition opportunities around hospitals.
And you know you see that'll be announced a couple of deals last year that we were happy we did and that's going to help us we could continue to see.
A nice funnel for for 'twenty, one as well.
And as you all know hospital volumes up and down through 'twenty.
They have recovered for us however.
Well, we do see is a lot of renewed interest of looking at their lab strategies.
Which includes.
Acquiring their outreach business includes professional lab services agreements like we just announced in the fourth quarter.
No. That's a relationship we announced in the fourth quarter with Packsack Meridian health system is the largest we've ever done.
I can tell you it took a long time to get there and I believe.
Prospective reality of what's happening in the health care.
Market. This year helped bring that to a conclusion.
And I believe that that will happen with a number of dialogues we have going on with hospitals right now so that's one piece.
Second is on the other commercial laboratories, yes, you're right.
A number of more commercial laboratories, if jumped jumped into the COVID-19 testing.
Rina you see it with all the capacity we've added in the country.
Ever as that starts to be pulled back.
Start to see what the prospects are given what were driving as an industry with consolidation with tighter contracts and networks around health plans. We believe that you know there still will be a catalyst in the marketplace for us to continue to consolidate so yes, there's been a short term.
Opportunity for a number of labs to share.
Take advantage, if you will the opportunity to provide COVID-19 testing, but as that starts to change as we get throughout 'twenty. One we believe the realities of what the new world will be with tighter networks more consolidation will play nicely into our strategy will allow us to acquire.
Lawyer, more going forward and obviously, given our cash position a strong balance sheet. We're in a very nice position to continue to do that.
It also at least theres been a lot of discussion around all this additional capacity out there.
People that are new systems and potentially.
This.
Does this prevented a risk for us that these people are going to get into other businesses outside of Covid like women's health.
We are watching it obviously some hospitals have moved their molecular capacity due to COVID-19 and we help them with some will be able to work, but for other commercial laboratories and hospitals to to use that capacity to get into competing with us by the way a good sample wounds. So.
That's a long stretch I mean, there's a lot to lot more to getting our clients to flip over than the lab capacity you have to have a sales force out but it was just the capabilities you have to do electronic.
Interfaces you have to work with the physicians do you have to be on contract with the health plans.
So we are watching it but at the same time, we're a little we're a little.
Yeah, a little.
Little cautious in the belief that some of those will have a significant effect at the same time, we're watching it carefully to make sure it doesn't.
Staying on top of our clients clients to make sure we serve them well.
Thank you so if I if I could add just a couple of things at least around your question around our pipeline and any given point in time, you know we've got multiple opportunities that we're discussing I can tell you that none of the.
Potential sellers that we're speaking to right now are getting and expecting to get paid for that P. C. R. Bard bubble.
Bubble, so fortunately I could see a mentality that you know hey, Mike value has gone up dramatically because of Covid testing, but you know the people we're talking to right now recognize that that short term and that should not be a part of the valuation discussion and then the.
Well, Panama gets a pause this year, there's still some risk but more importantly.
We've mentioned and I'm sure you've seen not just CMS, but the commercial payers are starting to put pressure on these high hospital outreach rates you know re contracting that work that's outside.
Patients who are in the hospital either you know.
Admitted or outpatient at labs independent laboratory range. So it's not this pressure is not just coming from Washington, It is coming from the commercial payers as well and from quite frankly patients who don't like those high prices when they have a high deductible plan. So theres a number of things that are getting the C suites.
Large hospital systems with.
Outreach to think about do they really want to be in this business and will just be a good time to monetize and so therefore, I really don't see the pipeline of interest having been impacted over the last 12 months negatively.
Yes.
Matt the rail with William Blair. Your line is open.
Hi, good morning, as I think about the various components of your response to COVID-19, and your role on testing <unk>.
That stick out a step changes from a pre COVID-19 world Archer and the capacity and then consumer engagement I think the number of patients.
Patients using quest direct has doubled in the last 15 months. So just curious.
What can you do and as you move to sort of a post COVID-19 world to leverage that increased consumer facing presence consumer engagement as well as the added capacity that it sounds like you're still bring it on.
Yeah. Thanks for the question and we're very bullish on our consumer strategy is as you. All know we have five strategies for growth one of which is the consumer strategy.
Our direct to consumer.
Business that we built over the last several years.
That was done quite well and we do believe that the pandemic has now been an accelerator for that.
We're providing COVID-19 testing through that platform.
We're going to look at using it for consumer genetics.
And you know as I said in my interest comments interest in part of the pandemic has brought to the forefront the strong role of testing and overall health care.
Quest name has been out there more than ever and our brand has been built.
And where brand is really second to none in our industry and we coupled that with our service performance and so we have this strong foundation, coupled with the change in the marketplace and we do believe there's going to be a continuation of a number of consumers.
Gage that will engage differently with healthcare delivery systems, and all day engage with the physician with telehealth, we have a very strong presence with telehealth providers.
With integrated delivery systems offer up the total health of option, but at the same time, a lot of a lot of patients as well when consumers will want.
To receive their basic health checks and testing online as they buy so much else in their real lives and we're so we're very well positioned with reputation with capabilities and so we are investing in that in a significant way more so than we would have if we did not have the pandemic and so.
We think about the growth drivers going forward and we'll talk about this some word on Investor day, we're very bullish about the opportunity we have in front of us around our quest reps, but also the consumer opportunity in general.
Dan Leonard with Wells Fargo. Your line is open.
Thank you just one quick one on the deal side possible you could frame for us the hackensack opportunity the contribution to growth and in 2021 in the first half guide. Thank you.
Mark you want to take that.
Yeah. So we are.
You know, we don't typically announce the Oh no.
The revenue impact of deals.
Like this and again I want to remind you. This is organic so this is not something we bought we worked with Hackensack demonstrate to them that we can perform the same work they do in their lab and at a better cost better value and you know for a system of that size.
There are significant lab spend so this is gonna be quite impactful and beneficial to them and we see that as a you know opportunity obviously to also get other clients, who will get their attention to see hey, a pack. In fact, you know things that are supposed to work well you know in addition to some of the other hospital systems.
That we've learned over the last couple of years. So we're very very excited about it.
It is it is a large deal it's the largest deal we've ever done.
It will be material to our growth and we talked a couple of years ago at our Investor day, and we will like to give an update on this that we thought we could get more than 100 basis points.
We're between 100 to 200 basis points of growth every year from our Pls business and certainly this one.
There's a large contributor to that and might even give us an opportunity to exceed that so you know a very large deal, but we're not going to we haven't had a historical precedent of calling out the exact revenue, but it will be.
Noticeable and material as we go into 2021 and beyond.
Ricky Goldwasser with Morgan Stanley Your line is open.
Yeah, Hi, Hi, good morning, So I mean, clearly there is a lot of uncertainty around second half and the trajectory of the comeback from more normalized utilization level, but free.
That's the way from the timing and just think about from margin trajectory. How should we think about core margin trajectory from where they were lets say in the fourth quarter.
To where they can expand to is it your legislation comes back to a more normalized level. So again. The question is more about the margin trajectory.
As it relates to utilization I'm not about the timing and then my second question is more about sort of a market demand. So how do you think about changes in physician behavior patterns, and you're only seeing telehealth, becoming more integrated into the workflow. So do you think that there's going to be any inc.
Mark on longer term lab testing demand curve.
Because of that I don't know if they stay experience early in the year could shed some light on that.
Yeah sure Mark do you want to take the first part of let's say per second.
Yeah, So Ricky obviously the size.
Size of the revenue, we generated from Covid, which more than offsets the base business.
Materially impacted our margins and expanded them greatly relative to our historical margins.
As we progress and we'll talk more about this at Investor day, but we progressed into a future where you know COVID-19 testing is still around for you know for a while as Steve said, we don't expect it to go away completely certainly by 2022, it's going to be less material to our top line into our margin so will our base.
Must be once we get back to.
The pre pandemic levels of 2019.
I would expect our base business to be slightly.
Higher margin than it was pre pandemic.
Pandemic because as you look at you know our invigorate program, which we continue to drive even during the pandemic and you look at the offset to the pay for is that we usually talk about including wage inflation and price erosion given the pause on Panama This year and given the fact that we've done really.
Well in other.
Price concessions despite.
Significant increases in our S. W. B that was warranted during the pandemic as we wanted to reward our employees for their incredible contributions and getting us up and running operating well through it and obviously you're driving strong company results.
Net all those together you know that level of business should be more profitable and then going forward from that when we get back to the growth that you saw in 2019 and you saw in the first two months of 2020, and our ability to leverage that growth.
I would expect to see margin expansion on the base business, but of course that will be partially offset for a period of time as the COVID-19 revenues and margins.
Paul down so longer term. The good news is we were on a good path on growth and margin expansion pre pandemic and we will we will get back there.
But for a while would it be somewhat masked by the Covid decline that's inevitable over the next certainly 18 months or so.
Yeah, and your question about physicians.
Ricky.
We're watching this carefully because we do believe going back to an earlier question about the consumer activity that will there will be a transition here now going forward with with a physician survey the market in a different way.
No as we said before about half the positions of.
Either sold their practices to integrate delivery systems drove strong.
Affiliations with integrated delivery systems.
And you know that will be.
Consistent going forward, but the other half.
Of the market, we believe there will be a growing percentage of the portion of physicians that are served by telehealth.
We have a very strong.
Physician with telehealth providers.
That was before the pandemic and those telehealth providers are not gonna work work with handfuls of laboratories, who will work with a few.
And there will have a real tight for lab network as you would expect.
And as you would expect quest would be one of those options. So we feel good about that secondly, you see more consolidation going on in positions and you see what's happening, particularly with one of the health insurance companies opt them acquiring physicians in a number of those physician practices are our customers.
Do you think about that consolidation and think about their role not thinking about where they add value of bringing all of those physicians together. We believe there will be an opportunity for us to work with a consolidator like optum to provide.
Services more broadly in and really reduce the variation they have with all their physicians and just one last point to show that this world is moving to a tighter network of lab providers in the flow.
For all of last year, United Health care actually announced the removal of out of network benefit for some of their fully insured members and so it's just another example of a major health plan tightening up their networks. So we think the physician side will will change you know there'll be a different way of providing physician services.
Two patients going forward and that trend. We believe is a good trends and we will provide a tailwind for us to consolidate the market.
Erin Wright with credit Suisse. Your line is open.
Great. Thanks. Thanks, so much for squeezing me in just a follow up on that competitive landscape and consolidation. So it sounds like you don't expect there could be any sort of meaningful impact on your opportunity around consolidation just even given the dramatically standard installed bases PCR instruments across the you asked what the capacity I mean, I would assume that.
Customers do you want to monetize those investments to some extent.
Curious, what you're seeing in terms of market share shifting outside of maybe COVID-19 testing that you've seen already is that happening at all.
I mean, it sounds like Everything's still remains an opportunity from an M&A perspective and from foundation standpoint.
Question.
Dan how should we be thinking about the long term dynamics as it relates to Covid testing.
It will obviously diminish with vaccine rollout, but I would.
Could it evolve into something more similar to like flu testing in future years, and can you remind us what are you testing exposure you do have.
Sure so.
Said earlier, we believe that hospitals will be no increasingly looking at their options to become more efficient given the pressures of the pandemic put on any of them.
And we're encouraged by the level of discussions we had in the deals. We close is an example that this is happening. So we think that's good on the commercial laboratory side, we believe that some have gotten into the COVID-19 testing opportunity is.
Provided somewhat of a non op.
An opportunity for them to get through this year, but as you know the dust settles and testing volumes go down.
The reality of what we've talked about doing him. If he doesn't change and we think there would be many of those that we'd be looking at their options and we do believe that COVID-19 testing will continue into 'twenty two.
We believe that this will be.
So we'll have to manage so it will be more flu like and something that will will be behind us in the end.
'twenty one yes.
And you know it's hard for us to scale at this time, what that will be.
But you should not think that this is gonna be.
The testing opportunity that will go away at the end of this year, but we do believe there'll be with us in 'twenty two as well.
As far as the.
The flu.
We talked about in prior earnings call that we have offered up.
A combination panel.
Patient presents itself with symptoms.
The physician wants to rule out.
Flu and also Covid.
So we have seen that.
It's be accepted but as you all know.
The incidents of flu this year is down considerably because of all our behaviors in the United States. So so that has changed somewhat.
Shawn or Mark you want to add something to flu testing in general our exposure to answer the question a point of the question.
Yes, I don't have anything to add Shawn.
Our last question comes from Brian <unk> with Jefferies. Your line is open.
Hey, good morning, and thanks for squeezing me in I guess, just one quick question Mark as I think about capital deployment, obviously, you're generating a lot of cash and it sounds like you're the hospital acquisition opportunities are the pipelines, there, but maybe a little slow in coming through so how should we be thinking about your willingness to buy back more aggressively in the front end.
And how should we be thinking about it just other capital deployment.
Opportunities, whether it's in turn it all on the Capex side for growth.
Sure. So we are investing quite a bit internally internally.
As you may have seen or you'll see in our core.
Capital spend for 2020, we ended up at $418 million, which was above the initial range a lot of that was related directly to COVID-19 COVID-19 capital that was necessary.
But we certainly have not stepped back on investing internally because we think it's.
Best way to drive returns a lot of that obviously is related to our invigorate program weird.
All of our.
It's a test to a single platform. We continue to move forward on that and then a big piece of the 2020 and the first half of 2021 was related to quest and our new facility. Although we started operating in early January where we still have some final fit out and equipment to put in and that will.
Drive some of the spending in the first half. So we absolutely have a high priority on internal capital and we'll continue to do so you can see we guided to $200 million in the first half, which as you know about 50% of what we spent in 2020.
As we step back a little bit from Covid capital, but we have some continued spending on Clifton and then also the normal priorities on which we spent on share buybacks as I mentioned I will give a lot more color on the Investor day are the reason for that is we do have some things that we're monitoring around.
Potential cash deployment.
Greater clarity on as we.
We move over the next couple of weeks. We also wanted to get a little more of 2021 Q1.
Behind us to see how that performance continues and what our expectations.
For Q2 look like at that point because every day every couple of weeks every months certainly gives us better line of sight into expectations, but you know by announced by seeking and getting approval and announcing a $1 billion increase in our authorization certainly you correctly here and taking that as a signal and as I said specifically in my prepared.
Our remarks that we're going to do more share buybacks than we have done historically and I'll remind you that our capital allocation strategy, which we have not changed to this point is to give the majority of our free cash flow back to our shareholders through our dividend and our share repurchases, we suspended them for 2020 for a period of time.
But even with the $2 50.
You know we spent in Q4 and the.
Increases in dividend overtime, we're behind that 50%. So we have some catch up to do.
Yeah, Let me just add to.
That's.
Before them, which we had in 2020 and the performance that we're indicating with our guidance from 21.
Is affording us the opportunity to invest.
Invest in our growth strategies and that includes what we've talked about it on this call.
Working on the relationships with health plans are gaining.
Traction was presenting.
Lab strategy view to health systems Hospital Health systems.
We're doing around advanced diagnostics and then finally, what was asked about earlier around the consumer opportunity in front of us. So.
And the guidance is the increase in investment.
For those growth drivers to accelerate growth of our base business within 'twenty, one, but as we enter 'twenty two as well.
So if there are no further questions.
I'd like to thank everyone for again, joining us on this call. We appreciate your continued support and interest and you have a great day day care.
Thank you for participating in the quest diagnostics fourth quarter and full year 2020 conference call a transcript of prepared remarks on this call will be posted later today on quest diagnostics website at Www Dot quest diagnostics Dot com.