Q1 2021 Quest Diagnostics Inc Earnings Call
Yes.
[music] O'neil Robert.
Welcome to the <unk>.
Good morning, welcome to the quest diagnostics for quarter first quarter 2021 conference call.
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Now I'd like to introduce Shawn today.
Vice President of Investor Relations for Quest Diagnostics go ahead. Please.
Thank you and good morning I never.
See risk out of our chairman 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 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 of 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.
The company continues to believe that the impact of the COVID-19 pandemic on future operating results cash flows and the words financial condition will be primarily driven by.
The pandemic severity and duration healthcare insurer governments and clients here of reimbursement rates for COVID-19 molecular tests.
And then the impact on the U S health care system in the U S economy, and the timing scope and effectiveness of federal state and local government responses 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 and references to adjusted EPS refer to adjusted diluted EPS Rep.
References to based testing volume for base business referred to testing volumes, excluding the COVID-19 testing.
The 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 for.
Finally revenue growth range from acquisitions will be measured against our base business now here of Steve Russ Koski.
Thanks, Shawn and thanks, everyone for joining us today of course.
The strong first quarter with our base business to continue to recover to near pre pandemic levels.
Contributions from acquisitions, and Pls relationships accelerated the growth in the base business, that's helped to offset the reduction of demand for COVID-19 testing.
In line with industry trends.
In March for the first time since the pandemic began mark.
Mostly organic revenue in the base business grew versus our 2019 baseline.
As we noted at our recent Investor Day Quest is well positioned to grow as the U S assets the pandemic of people return to normal activities.
And address the routine care issues that have been the blood test over the past year.
Yes.
Also as you saw in our press release this morning.
Our board of directors increased the company's share repurchase authorization by $1 billion.
For the second time this year.
And we expect to launch and the accelerated share repurchase or ASR in the amount of $1 5 billion in the coming days.
This morning, I will discuss our performance for the first quarter of 2021.
<unk> perspective on industry dynamics.
And update you on our base business that Mark.
<unk> will provide more detail on our financial results.
But before we get into the details of the quarter, we wanted to share our perspectives on the ongoing role of COVID-19 testing.
More than a year into the pandemic as well as provide our thoughts on recent news regarding Panama.
COVID-19 testing remains critical.
The supply of vaccines continue to be available to all of Americans.
Yes.
Testing will help control of the spread of the virus in addition to reducing hospitalization.
Of the lives.
The new testing will be key to helping segments of the economy reopen.
As more of Americans become vaccinated.
That's what the issues from the center in the minds of most people now and testing remains of critical element of safely returning to the life.
I'd also like to share our perspective.
The most recent developments regarding Panama.
So we're encouraged that debt.
<unk> recently reported that the.
It is exploring alternative data collection methods underpinned by the the less burdensome for laboratories.
One of the alternatives mentioned the surveying of representative sample of independent hospitals and physician office laboratories.
The set of reported all laboratories to sort of data.
We've been saying <unk> got the data collection process wrong did it fall of the intent of progress.
Ned passed all of that hospital outreach June physician office labs reported higher payout rates of independent labs.
And the independent labs were overrepresented in the first round of timber the Ada reported.
We agree on both counts.
The independent analysis by Medpac also provides evidence that the Medicare clinical lab fee schedule would have been 10% to 15% higher.
The FCA mouse had use of more representative sample of that included more data from hospitals and physician office labs.
The findings refutes the client that CMS collecting more of hospital outpatient.
The physician office lab data would not have impacted the range calculated by CMS.
Okay.
We believe that access to accurate and reliable testing remains critical.
Now just as part of our nation's ongoing response to the pandemic.
But also from the millions of seniors of the Lady.
Routine screening of care over the past year.
We need the fixed camera to avoid the next round of cost of on the horizon in 2022.
And to help ensure seniors have continued access to critical of lab services the deep <unk>.
Additionally, we were disappointed by the recent dismissal.
The U S District court of <unk> challenged the camera.
We are working with Asian delays of the disturbed as excess with respect of this litigation.
We are continuing to work with the policymakers to establish a clinical laboratory fee schedule. The schedule of those truly representative of the whole market and supports continued innovation and access to the Pfizer Laboratory service services as Congress originally intended.
Now turning to our results for the first quarter.
Total revenues grew by more than 49% to $2 7 billion.
Earnings per share increased by more than 375% on a reported basis to $3 46.
And nearly 300% on an adjusted basis of $3 76.
Cash provided by operations nearly tripled to the $731 million.
Yes.
As I mentioned earlier in the first quarter, our base business performed at its highest level since the start of the pandemic.
And continue to recover throughout the quarter.
Demand for COVID-19 testing slowed in the quarter requesting an industry wide trend.
We performed an average of 101000, the COVID-19 molecular tests per day in the first quarter, which is well below our current capacity of approximately 300000 tests per day.
We are engaged on several fronts to bring needed testing for schools businesses and industries by travel and entertainment.
Which rely on bringing people back together safely and in large numbers.
With the current focus on schools quest is well positioned to help with our extensive logistics network as well as our ability to offer high quality cost effective classroom PCR testing using Poland.
We want it all just the kids back in school and we're working with the range of partners to get it done quickly and efficiently.
Yes.
We continue to make progress on our two point strategy to accelerate growth and drive operational excellence.
We've discussed our strategy in detail a few weeks ago of our Investor day. So we talked today will take you through a few highlights of the floor.
We are excited about our agreement to acquire the outreach laboratory services business. So firstly.
One of the nation's most highly integrated multistate healthcare systems.
And as we indicated at Investor Day, we're having board of discussion with leaders of larger health systems like Mercy.
The Mercy outreach Laboratory services. This is currently operates from 31 hospitals and clinical laboratory service providers and patients in Arkansas, Kansas, Missouri and Oklahoma.
And we're on track to complete this acquisition by midyear.
Our professional laboratory services relationship with Hackensack Meridian Health began in January and is off to a good start contribute revenue for the quarter.
We recently announced the sale of our 40% minority share in Q squared solutions to IQ Leah for $760 million.
<unk> for the strategic vision and ability to lead Q squared solutions on the next phase of the journey as the global leader in Central Lab services.
And quest will support it as a strategic lab partners.
We made good progress taking advantage of health plan and access in the first quarter.
The Unitedhealthcare implemented an initiative for moving out of network benefits for insured groups and select the stakes.
We also project leakage of the redirection efforts with anthem and eat more states during the quarter and we're seeing benefits from these initiatives.
And then finally, we renewed our long standing strategic relationship with them will help to provide comprehensive clinical laboratory services for more than 3 million members of emblem health.
The affiliated get out of here.
Turning to our strategy to drive operational excellence.
We are on track the once again delivered 3% savings across the business.
In the process, we're also improving the customer experience the quality.
And in the quarter, we achieved year over year improvement in 14 of 19 top tier quality metrics, which we track to gauge of our operational performance.
Now I'll turn it over the Mark to provide more details of the financial performance Mark.
Thanks, Steve.
In the first quarter consolidated revenues were 2.72 billion up 49% versus the prior year.
For diagnostic information services grew approximately 52% compared to the prior year.
Which reflected ongoing demand for COVID-19 testing services and to a lesser extent continued recovery in our base testing revenue, which increased versus the prior year.
Volume measured by the number of requisitions increased 25, 6% versus the prior year with acquisitions contributing 4%.
The impact of severe winter weather during the quarter negatively impacted volumes by approximately two 5%.
Compared to our first quarter 2019 baseline total base testing volumes increased one 5%.
<unk> benefited from M&A and new Pls partnerships that began in 2020.
Excluding the net impact of weather in the first quarter as well as M&A and new Pls wins over the last year.
Testing volume declined approximately 7% in the first quarter.
Versus the 2019 baseline and down 5% in March.
This represents more of a same store view of the recovery of our base business since the pandemic began.
While COVID-19 testing volumes declined faster than expected throughout Q1, the decline coincided with reduced demand across the industry.
Accordingly, these volumes of stabilized over the last several weeks, we resulted approximately $9 1 billion of molecular tests and nearly 900000 serology tests contributing nearly 21% of volume growth from Q1 versus the prior year.
We exited the first quarter, averaging approximately 73000, COVID-19, molecular tests and eight thousands to relative tests per day.
Revenue per requisition increased 25% versus the prior year, driven largely by COVID-19 testing.
Modest unit price headwinds were in line with our expectations.
Reported operating income in the first quarter was $660 million for 24, 3% of revenues compared to $175 million or nine six percentage of revenues last year.
On an adjusted basis operating income in Q1 was 708 million for 26% of revenues compared to 225 million or 12, 3% of revenues last year.
The year over year increase in operating margin was driven by the strong revenue growth in the first quarter due to continued demand for COVID-19 testing and the ongoing recovery in our base business.
Reported EPS was $3.46 in the quarter compared to 73 cents a year ago. Adjusted EPS was $3 76 compared to 94 last year.
Cash provided by operations was $731 million in the first quarter versus $247 million in 2020.
We completed $410 million in share repurchases in Q1, and we ended the quarter with approximately $1 2 billion in cash on the balance sheet.
Including the net proceeds from the Q squared divestiture in April we currently have more than $1 8 billion in cash available for deployment.
Following the 1 billion increase in our share repurchase authority that we announced today.
All of the ability to execute approximately $2 5 billion in additional buybacks this year.
We expect the launch an accelerated share repurchase transaction of approximately $1 5 billion in the coming days.
Turning to guidance, we have updated our outlook for the first half of 2021 as follows revenue is expected to be between five and $5 2 billion, an increase of approximately 37% to 43% versus the prior year.
Reported EPS is expected to be in the range of $7.51 and $8.01.
And adjusted EPS to be in the range of $6 30 and.
$6 80.
Cash provided by operations is expected to be at least $1 billion in capital expenditures are expected to be approximately $200 million.
Before concluding I'll briefly review some of assumptions embedded in our updated the first half outlook and considerations to think about for the remainder of 2021.
We expect continued steady improvement in our base business throughout 2021.
On a same store view, excluding M&A and new Pls wins, we see the base business remaining slightly below our 2019 baseline in the second quarter.
We continue to anticipate a full recovery in our base business compared to our 2019 baseline in the second half of 2021.
We are assuming COVID-19, molecular testing volumes will average roughly 50000 tests per day in Q2.
And no meaningful change in COVID-19, serology testing volumes compared to Q1.
Given the significant progress of vaccination in the U S. We continue to expect the decline in clinical demand for COVID-19, molecular testing in the second half of 2021 versus our expectations for the first half.
The return to life testing such as the K through 12 school testing program should partially offset declining political demand later in the year.
And while we continue to believe strongly in the value of COVID-19, serology testing, we are not assuming a material increase in demand for serology testing going forward.
Finally, the COVID-19, molecular reimbursement held relatively steady in the first quarter and we currently expect this trend to continue through Q2 with.
With the public health emergency being extended through mid July this is likely to trend lower in the second half of the year as our mix of COVID-19, molecular volume shift from clinical diagnostic testing to return to life of surveillance testing.
Now I'll turn it back to Steve.
Thanks, Mark and the summarized we're off to a very strong start from 'twenty to 'twenty one.
The base business continues to recover back to near pre pandemic levels says people address the routine care issues that they have neglected over the past year.
And then finally I'd just like to thank all of quest employees, who continue to serve the needs of people who rely on quest every day and so with that we havent 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 from back into Q.
To be placed in the queue press star one from your phone to what the.
Press Star two and Dan.
Dan to ask a question press star one.
The first question comes from Kevin Caliendo with UBS. Your line is open.
Hi, Thanks for thanks for taking my call Kevin.
Okay.
Hey, good morning.
I guess, what some of the commentary around <unk> I sort of want to understand.
The expectation it looked like March the base business, the sort of up year over year and your guidance of suggesting that <unk> would be down.
Year over year, you don't expect it to recover fully.
<unk>.
Is there anything that sort of change or with margin anomalies.
Sort of take us through what Youre seeing in the base business in terms of the volumes.
The Mark.
Sure So Kevin when we talk about the base business.
And sorry for any confusion.
It being up in March that included our new Pls wins, which were significant and also M&A. So that's the total base business that was not an organic number when we tried to do with delineate where the what we call same store, so kind of the apples and apples versus 2019 to give you a sense of.
Where we think utilization is so separate from the new significant pls wins, and M&A, where that base business performance and so when we talk about it.
Expecting to be slightly down in Q2 organic net.
Non pls.
Kind of utilization the same store number not our total base business performance.
So mark it would be good to share of kind of.
The implied.
View on whats going out with the Covid testing in Q2.
Yeah, So we talked about.
100000 of day in Q1, we talked about an expectation of about 50000. We also share that we exited Q1 over 70000, so that would imply a significant ramp down throughout the second quarter and that's based on our expectation that vaccines will continue to roll.
Cloud will get more and more people who would be protected.
The less and less of clinical demand.
Of course, we'll see how that plays out but that is.
Certainly within the guidance that we're providing today, how we see the next several months.
So we do assume Kevin the base business.
So the base business.
It would include the acquisitions of Pls and organic growth.
Let's just focus on opioids relative steady improvement that we've seen in Q1 continues in Q2.
And then somewhat offset by what we are anticipating with Covid and that gives us the exposition of out of a range of the guidance of the second quarter. So hopefully that's helpful.
Yeah, and just to close it out Kevin I would point to the number that we quoted for Q1 of minus 7% that's the.
Same store performance number.
Obviously march was stronger than that.
February was impacted by weather as we said, but that we expect that minus seven to improve as Steve said throughout Q2, but not yet to get positive.
Our next question comes from Erin Wright with Credit Suisse. Your line is open.
Great. Thanks capital deployment itself when is that the biggest questions. We're getting from investors are there any meaningful changes now in your view from an M&A pipeline perspective.
What's assumed in guidance in terms of inorganic growth in longer terms here over the next few years do you anticipate the pace of consolidation across the across the lab industry to accelerate or to the anticipated a similar piece of what we've seen historically.
Somewhat tied to that as well.
Should we be thinking about the broader access capacity across the competitive landscape post COVID-19 and how does that impact you.
Air conditioning.
Steve Let me, let me take the let me take the guidance question first and then I'll turn it over to you.
In our current guidance, obviously is the only through the second quarter and we're not counting on any M&A debt.
Hasnt already been transacted and even the deal that we announced mercy is not going to close and generate any significant volume of revenue in the second quarter. So.
The current guidance does not anticipate future M&A.
Yes.
We feel good about the discussions of the funnel of prospects we have for.
For <unk>.
Characterizes our hospital strategy.
The continues to be a lot of pressure on the integrated delivery systems. They are of considering their lab strategy is for the options to help them.
The number of examples over the past six months, Dan delivering on the strategy that we've talked about for years.
So the answer to your question, we do see the continuation of interest in the building funnel.
With more prospects the cup.
What we shared the Investor day as we reaffirmed.
Our outlook that we would grow through acquisition around 2% per year.
While we share it is historically of delivered on that.
For the three years prior to 'twenty one.
And we believe that's still a good guidance number for us.
For this year and going forward in the supply, but in our outlook for growth.
So finally, as we do see the trends in general just like all of healthcare around the consolidation, we do see systems interest in the thinking about what's most important to them what's the strategy.
Quest of them with their lab strategy and likewise, we see if you will fewer fewer network provides us with the health plans and if you want to think about that.
The consolidation play as well.
And when those two forces happening there'll be.
More share in the hands of fewer in our plan is to gain share.
So all of the Mega trends.
Changes that are out of your industry, we believe of.
Actually improved.
To support what we've said for some time.
And we argue as flow for what's happening with outlook and also what's happening with health plans.
Our next question comes from Peter Chickering with Deutsche Bank. Your line is open.
Good morning, guys. Thanks for taking my question.
Within the routine market can you give us some more color on strength or weaknesses of different parts of the country looking at your customers can you give us some color on Doc offices versus hospitals versus the baseline.
The routine tests any details you can give us on what types of tests for normalizing.
One of the laggard areas sure sure. So let me sort of run around all of the different cuts of the way we looked at the market. So geographically.
We are seeing good recovery in Texas.
So les.
We're actually seeing really in the last several of which starting of much better recovery in California, and the West coast, which is the dues.
We see the the south East certainly too.
The recover.
On the stuck to the 2019 levels that we spoke to earlier. So so I would say those are moving in the right direction now the offset to that is one as you've seen the.
Spikes in the hotspots in the Midwest.
When that happens the news lockdowns that people are concerned about Boeing and sales through delivery.
The sector our business. So we've seen some of that let's say in the in the Midwest and the suddenly the.
The northeast in the northeast, including the New York.
The Pennsylvania going into new England, it's still behind.
It's recovering slowly, but we are the most of if you will the north northeast So thats the geographic swing.
As far as physician business versus hospital business is the household business is actually very close to where we were we're encouraged by that.
C emissions getting back the Nike levels, we see outpatient procedures can invest as ICU levels. So that business is tracking.
Nicely compared to where we were and then the physician side of it all depends on what type of the physician.
Ordinary care, starting to turn on oncology, particularly those of the of postpone diagnosis and treatment for oncology is starting to turn of yes.
And.
At the same time, we still see our prescription drug monitoring business for.
The local health and behavioral health of the drove some of us.
Down versus where we were at <unk> 19.
The initiatives that varies by state of the work on that so sluggish for a feel for what's volume geographically.
The only physicians, but also by what we've described as the clinical franchises, Mark if you'd like to add to that.
No I think thats the good summary, Steve.
Our next question comes from Ralph Jacoby with Citi. Your line is open.
Good morning, good morning, good morning.
The higher revenue guidance just wanted to understand the is that upside from <unk> because it sounded like COVID-19, maybe lower than you had expected so just trying to understand.
It reflects the assumption of better core or is it deals just maybe color there reconciling the higher revenue and then second is the ASR included in the guidance because.
Based on the revenue increase in running through recent margin performance. It doesn't look like that's factored in or otherwise.
The assumption of much lower margin.
I'm, just trying to reconcile that as mark thanks.
Yes, So let me let me take a shot at that the.
Higher revenue was absolutely driven by.
Stronger than expected recovery in the base business.
As you point out.
We've acknowledged and we record every couple of weeks.
The testing has ramped down faster than we had anticipated throughout the first quarter. We continue to expect to have that ramp down but the base business has recovered strongly.
Certainly more than an offset on the revenue side.
In terms of the ASR it is in the.
Guidance.
I want to remind everyone that we had.
Committed to $900 million in share.
<unk> that was already in the guidance for the first half we did $410 million in Q1, and then part of the ASR is related to the proceeds from the sale of.
The 40% ownership in our JV with <unk> and that is.
It's slightly accretive when you consider the loss of the equity earnings. So you need to look at over $600 million of the ASR is really offsetting the.
Foregoing those equity earnings we had already committed to $900 million in the previous guidance. The first half so almost $500 million.
There. So when you combine that the share repurchases are really just up by several hundred million zone.
To make sure everyone's clear on the math there. So it is reflected in the in the guidance.
Our next question comes from Brian <unk> with Jefferies. Your line is open.
Hey, good morning, guys. Congrats on the quarter I guess my question for you guys. Steve as you think about what you saw in Q1, especially with the specifically in March with the resumption of volumes in the core what are you seeing in terms of acuity level of kind of like rep number of tests per req.
Or even revenue per req that you saw in margin is that carrying over already into April just any color you can share with us from that thank you.
Yes. So thanks I appreciate the question Mark was encouraging and we are watching April.
Carefully.
We do look at the number of passenger.
For the requisitions received for <unk>.
Any more density if you will of testing for the requisition.
We talked about my explanation for the increase in the calculation of revenue per req, the COVID-19 mix of the strict calculation.
We have historically seen of let's say of modest expansion of the number of tests for.
Variety of reasons, we offer more secondary.
The higher level of the acuity of the chronic diseases aging of the population. So we have generally seen.
From a general increase in that but.
Nothing that was really notable that standout within March.
Our next question comes from Jack Meehan with Nephron Research Your line is open.
Sure.
Good morning.
I was wondering if you could give us an update around your thinking around the COVID-19 testing for the second half of the year.
What do you expect kind of in terms of the base in terms of testing levels and then also if you could give us an update.
How you think the school testing opportunity could shake out of you referenced that at the beginning.
How do you feel your positioning is for the upcoming awards there.
So you can go back to where we started off of the year.
What we said is we do expect Covid.
PCR testing to decline throughout the year.
We mentioned in our remarks, we did see that in Q1, and we see it happening in the country. So.
Mark said earlier, we do expect that continuing the trend in Q2 and that that will continue into the second half.
No.
Well the offset we do see this transition.
From what we describe as more clinical uses of the PCR testing rule in rule out Covid for hospitals.
We will enroll the patients seeing their physicians.
And moving it to return to the life of activities and Theres a lot of activity around that Jack.
A lot of activity I mentioned in the remarks, what's going on around schools.
The two funding mechanisms for the from the U S government.
We are actively engaged with the number of lets just call of systems integrators will be coordinating the efforts beyond the laboratory testing, we're well positioned there.
Secondly, as corporations are now thinking about how do we get people back physically into their places of work, maybe albeit not as the as full time as they once were but despite the vaccination progress there. So it would be testing requirements for the return to work activities and then I'll, Let me just say the yesterday.
Team of piece of this.
As big two we'd see the sports teams one of them pass back of the stance, we see New York City Interestingly of getting people back for tourism as we get into the fall of turning back on the city.
We mentioned.
In our prior remarks in other calls and meetings that we participated of this pilot study with the New York to provide.
Chuck if you provide access for the individual of of course of the day.
So that type of activity will be of.
A larger portion of what we do for Covid testing in the back half.
All of that said, we're not providing guidance for the back half, but we do see continued PCR testing in the back half was from the change of this nature and also we do believe COVID-19 testing of PCR testing will continue the 22. This is not going away for that.
Our next question comes from Matt <unk> with William Blair. Your line is open.
Hey, good morning, Thanks for yes.
Good morning.
For taking my question I guess, maybe a two part of the first would just be a fault of Jack's question, Steve in terms of how much of that returned of life.
Testing opportunity it really is going to DNA sort of of reference lab setting, but the day or two turnaround time versus point.
Point of care setting.
My question, though is about.
The the consumer market and I just wanted to get your take on sort of the PWM accurately well combination of the if that changes any of your.
<unk> approach or the competitive dynamics in that space, yes, So first of all.
As you know not all test are created equal.
And PCR still is the gold standard.
And we do provide the solution with the antigen testing okay.
Part of.
For a for utilization of that testing, particularly for surveillance.
But what.
No.
The antigen testing sensitivity and specificity is good for.
Let's say day to day five of them.
Potentially infected person.
The PCR test is really the gold standard to <unk>.
Rollout of some of that's been exposed in the early days or rule out of the figure exposed from the late days.
And so the sensitivity and specificity, we have with our PCR testing is quite good and so physicians know that.
And therefore, that's why we're so confident that it will continue to be an important part of what we fight this pandemic.
As far as the consumer the consumers trying to figure out to get easy access to testing.
And we will get that access in a variety of forms.
Oh by the way our turnaround time is now for PCR testing are much better on average.
The two ish days, we also thought about several months ago.
We're now delivering results and west of the day for many for many tests that come in and the reason for that is.
Remember the remarks of the big for <unk>.
Testing of about 101000 ton per day, and we have approximately 300000 per per day for capacity. So that allows us to have much better turnaround times, which we believe as that becomes more and more visible from <unk>.
People want to get good access to the gold standard theyre going to the.
We're going to rely on those places that can get access so we continue our relationships with retailers.
The expanding our relationship with Cvs has gone quite well Cvs is active on promoting good access to the PCR testing around the drive ins of Wal Mark as well and then also with our.
Direct to quest.
Capability that we've talked about at our Investor day, we have put on that platform for PCR testing as well as serology testing and we are seeing.
High levels of entrust.
Sumer perspective of what the.
They can do simply by getting the collection kit in the mail and the.
Fedex envelope for the ship the back of good turnaround times of the startup of my quest, So that will continue to build.
As of the consumers since we start for a return to the play for the Safeway one of the assure the even if they are vaccinated.
Natural immunity the are not walking into a situation that they might get a bit of exposure in some way because we fell through the cracks Robert.
Okay.
The caveat we have.
Of the effectiveness of the vaccines for the questions about natural immunity.
And then also with the new variants as well so so because of that we're keep we keep on working on a better more efficient.
Easier ways for Americans to get access to PCR testing and we've got now I think of lot of good channels to do the net will continue to be an opportunity for us of the back half.
And Steve I would like to add I want to make sure that Matt and.
The others understand how the surveillance works.
And in this case when you pool.
<unk>.
Get the economics to where it's affordable to do more broadly and more regularly because we're going to be putting.
Up to 10 individuals' samples in a single well and so hence the cost will be 10%.
Less per individual.
What you sacrifice is it's not a diagnostic because we're not going to have the individuals identified in that well the school or the entity that provides us the sample will of pool that they will know in tests to bax, who the people are and if we come back to them with a positive result, they will apply a real.
Non stick to those 10 individuals so with that we also don't have the obligation or the ability to re tapped whereas today when we do pooling preclinical purposes. If we get a positive we have to go back and retest. The individual's samples. So it actually is an inefficiency in our process in order to get this to work.
We don't do re testing of the sample we don't have the capability of doing that we notify the submitting entity that we had a positive.
One of the pooled collection specimen tubes, and then they go forward and test those individuals.
Our next question comes from Tycho Peterson with Jpmorgan. Your line is open.
Good morning.
Thanks, Mike.
The young here.
Hi, sorry about that this is casey on for Peco.
Can you give us some color as to what the implied operating margin is for the EPS guide and sort of whats the upside is from the ASR.
And then just on serology can you.
Talk a little bit about you are not modeling a decrease from <unk> from <unk>, but PCR is going down can we assume the same level of serology testing throughout the back half of the year and explain maybe what the resilience of resilience is there. Thanks.
Mark you want to talk.
Sure.
Well the.
The ASR is in our updated guidance, so there's not upside per se.
<unk> two <unk>.
Before we announced the ISR.
As I tried to walk through the math.
About little less than $400 million of the repurchases are truly incremental in terms of a EPS lift because we had already committed for the full 900, and we had about 500 million.
Meaning in Q2 that was already in the guidance. So that $1 5 billion goes down to 1 billion of incremental a little over $600 million of that is the proceeds from the divestiture of our stake in Q squared that's slightly accretive.
But not materially relative to the for mature of the equity earnings. There. So it's really less than $400 million of share repurchases of that are incremental to what we guided to previously and that is built into the.
The updated guidance in terms of implied operating margin, obviously, we have of range. So we can't.
Answer that with precision, but if you take the mid point.
You can all do the math.
As we get a lower mix of Covid testing at our assumption of the $100 of reimbursement obviously of realizations in the AWS, that's less than that about $100 price point and that mixes towards the base business that will erode the margin slightly but the.
The offset to that as of the base business recovers, we're very leveraged so the variable drop through on that base business recovery.
It's certainly much higher than our enterprise and historical fully loaded operating margin, but it's not quite as high of the Covid Pcr.
Kind of on the throne.
Yes serology.
And the supply that.
It will continue of the same level we are.
The value of serology going forward.
We believe that.
The semi quant capability that we offer is nice inside of them too.
And what response happening in patients in general with the virus.
And therefore the value.
We also believe the.
Between the start of PCR and serology.
Knowing the.
You've had the virus is important for Americans to know so we keep on pushing down the value.
And we will continue to look at new test beyond that.
We are of the immune response long term includes T cells, we know.
Add that both the continued to look at that as being the prospects. So you should assume for now it's stable with what we've seen so far of we continue to believe there is more and more valuable in the quarter. We continued to work of developing the tests to support the us.
Our next question comes from Ricky Goldwasser with Morgan Stanley. Your line is open.
Hi, Good morning, Hi, good morning.
The one.
Two questions. Please I wanted to follow up so when we think about the first half guidance. It does imply the meaningful.
Total operating income sequential decline until we realize you still not getting second half guidance, but just.
Could you maybe everybody on the call sort of some sort of the framework as we think about the more normalized pace of the core business.
Should we think about debt.
Margin headwind I think you just kind of help us all the ways, we think about the second half modeling that's first.
And then second more of kind of like long term strategically we're hearing the payers talk a lot about.
No.
Digital first strategies and being sort of kind of like at the front door to.
True health care could you guys talk.
The expanded relationship with the payers like anthem so.
Are you, having any conversations with payers on how you can be part of the digital first strategy.
Of those kind of like of digital network.
And if so do you see that kind of like as it is in the opportunity to accelerate sort of a more narrow networks. It will.
To drive volume towards you.
Would that require any additional investments or you think you have the the infrastructure for that already.
Mark I'll take the first of all of them pick the second one.
Sure Steve Thanks for the question Ricky.
So again just to reiterate.
You know the first half we delivered over 100000.
PCR Covid tests per day.
We're assuming half of that in Q2, so that's certainly contributing to the.
On the margin.
The decline as we talked about implied in the in the guidance for the first half implicitly in Q2.
When you think about the pace of business.
We are still uncertain, how all of those moving parts will play out in the second half, which is why we've not provided second half guidance that we want to wait until we can confidently give.
Guidance that we're highly confident will be delivered so what I would point to.
That's the transition period really look at our Investor day, and how we talked about.
2022.
And talking about getting our base business fully recovered by the end of this year back to growth in the <unk>.
Growth pillars and back to a margin level pre pandemic and then obviously improving beyond that as we talked about.
CAGR of where our bottom line grow significantly faster than our top line by South of 100 basis points. So we feel very confident in the earnings power of the base business certainly.
Going to of a step down from the pandemic bubble, we did several billion dollars of <unk>.
Covid testing last year and significant COVID-19 testing the share there.
This business should be very healthy coming out of the pandemic once the COVID-19 testing drops for a minimal level, we'll be right back to the operating rhythm and our expectation is that you saw early in 2019, when we were growing our business 10 by February of more than 5% on the volume basis, and you saw strong improvement in our operating margin Steve.
Yes, yes, just the transition so as you recall in our Investor day, we.
Went through a walk if you will to the bridge you from.
The pandemic years of 2020, one into 'twenty two mark went through.
With the map, which gave you kind of in that our indication.
For 'twenty two.
Also as I said earlier is we do believe there will be some COVID-19 testing, but the base business growth will be recovering and we will get growth going.
Going forward in 'twenty, two based upon our outlook.
So the last question the AD break.
The digital front end of digital first.
We're excited about this because we are very well position of the system is something that we have just started working on we've been working on it for a while.
First of all if you go back to large provider like quest, we're very much in.
Embedded in the ecosystem of connectivity already.
We have over 500 interfaces of <unk>.
All of the different electronic medical records, obviously, that's the big players like of the conservative, but there's hundreds of others and so therefore, we have the ROA strong interoperability capability.
And that's helpful because when youre in the workflow of Zika for for the physician perspective for the allows you to more streamlined the different service offerings like the laboratory to of fewer players and then secondly is this past year we've seen.
The acceptance if you will of total health.
It has been growing nicely for not explicitly and we didn't see explosive growth of 2020.
We believe that overall the bad.
Acceptance, if you will of the <unk>.
The and accept the way to first engage with the healthcare the system will will continue and the payers of working on the other.
Providers of working on that and they're working with the partners and we're very we're very well positioned with those other partners who are of those partners. Those partners are some of the total health companies that you know.
So the companies is to become much more than dozen healthcare delivery of let's call. The digital of present will rely on of fewer.
Number of laboratory service providers, and therefore, we're very well positioned as one of the smaller unfolds.
As described as the preferred lab network that we are ready with the United but for this new world that we see.
And with all of that we do believe that are of direct to consumer.
<unk> will have an opportunity as well because consumers equally or wanted to engage with healthcare delivery the not always need to engage with the physician and therefore for the prospects, we see of growing that business of the opportunity for consumers to serve themselves relative to used to be a big opportunity for us as far as the investments we have.
Our investing we were fortunate enough to have the capabilities of 2020 of 21. If you can again go back to what we shared in Investor Day. We said, we were investing of about $75 million over a period of over the last two years 2020. One some portion of that is related to what we're discussing here.
And so we're not limited by the investments we are rate limited by just takes time to get some traction and we're very well positioned with the telehealth company is very well positioned with with the plans and yes, we do see a change of yes. This will allow us again to gain share as we go forward because the.
I can't do this with tens of laboratories that could all of the deal with <unk>.
Group like us.
So.
The other question.
Yes.
Operator.
Our next question comes from Derik de Bruin with Bank of America. Your line is open.
Hi, good morning, Thanks for taking my question.
So two questions one is.
I was on the Danaher call just before this and they actually.
Pretty sharply raise there.
The Covid testing guidance for the year and also surprised me and gave a very bullish outlook for 2022 and sort of backing that number. So we think the first question goes to <unk>.
This is the question on the point of care of shifting from the decentralized testing shifting the point of care if some of the volume you're seeing.
Coming down just because they are more of these point of care platforms out there and just as they ramp capacity youre seeing volume shifting out of the Central lab. That's the first question and then I think the second question is when you look at your <unk>.
You are at.
100000 ish tests, you've got 300000 capacity how are you using the use of Ids utilizing that capacity is it more are you ramping down your IBD platforms versus your LDC platforms.
I would assume that it's more of the IBD because of the LDC is of more profitable, but just would love some idea of sort of like how do you how you're utilizing your installed.
Yes. Thank you.
The first part, yes, we did see an increase in <unk>.
Of the availability and use of the antigen testing and point of care testing throughout for the last 12 months clearly has picked up for the back half of 2020, we see the continue in 'twenty. One. So if you look at the industry of trackers of how much testing we are doing in this country of clearly it does dropped off and therefore volumes of drop.
The app as well we believe in those tracking mechanisms. It's predominantly PCR. However, we think there could be sort of point of care antigen testing in there, but we believe it does not include all of the testing that's happening.
So if you look at it well topics.
Capex for PCR testing throughout the United States and if you look at the estimates that are coming from these point of care antigen providers Youll see that the actual level of testing is almost at the same level that we were in the summer but of different forms. So the answer to your question. Yes. There is the transition.
From from.
The PCR is exclusively what we have to more of the capabilities around for the vintage of the adjusted however, going back to what I said all test are not created equal and so we're also working with clients to make sure. The realized we're interested in just the could be helpful. For a period of time and also would be viewed the reflects of the PCR and where are you.
Can you just for the care and costs are not all created equal so so.
Come down because of what we described but there continues to be of strong Roe for PCR through the remainder of.
For the remainder of 'twenty, one and also into 'twenty two.
Yes.
Our next question comes from Peter Chickering with Deutsche Bank. Your line is open.
Hey, guys. Thanks for the follow up question here can you give us a little more detailed on the changes what the United Healthcare did in for out of network providers in the quarter, what Mark is did they make.
This change in the what impact did you see in your volumes from the changes. Thanks, so much.
Yes, so we have the.
The marching on is the journey to pick up share if you will be the United.
What we share the.
In March at our Investor Day is we really kicked off the network program in 2019.
All of good progress there, we're actually very encouraged for what we saw in 2020.
For the group early days and then we of the pandemic produced all of our activity. So what we share this we actually.
Picked up some share over that period of time, but we are for shared gain and there is a list of activities, we're working with the United to support picking up share and getting it to at least 25% level one of which is what we've provided you are limiting the other net.
Net work.
Policy of both of the design for their fully insured book.
And where that has happened because we have other examples of the job to get those group share to us while we don't provide specifics on station specifics.
The this contribute to per share, but it did have a nice impact for us to allow us to pick up share and so we continue that mark but I will also share the when the chair of everything we're doing.
There are many other programs. Some of this is working with their point of sponsors the employers for some of this is working with the regions and specific.
<unk> opportunities with providers when we do an outreach.
Purchased from our relationship with the the geography of Booze work out of his expensive venue to a less expensive venue, which is quest and all of those are active relationships that we have for continuing to build share with with the United the other payers.
Equally we continue to work programs with anthem and others.
Sure.
Our last question comes from Eugene <unk> with Wolfe Research Your line is open.
Hello.
Hi, good morning.
So quickly on point of 'twenty two at the Investor Day, The company provided based on EPS remainder of $748 NAV.
Please pointed to the higher end higher end of that range and for what the assumption that base business recovery.
For a return to pre pandemic levels for the end of the year.
With the potentially the recovery come faster than expectation, how should we think about that range that provide ethane got some day.
Thank you.
Sure.
Okay.
The Mark you there.
Yes, yes, so the.
What I would say is.
I'm not in a position to update that we provided at Investor day, because we could get into a rhythm of <unk>.
Constantly getting asked update that so the next time, we'll comment will be when we provide guidance for 2022.
But of course.
We have that broad range, there's a lot of different considerations, what the remaining level of COVID-19 testing, what's the reimbursement level, whereas the base business that when we gave the $748 as we said we're expecting the base business to be fully recovered this year to be back to 2000.
19, baseline and starting to grow but depending on the pace of.
Some of these initiatives that are.
Being rolled out by several payers not just United by anthem and some of the other major payors, depending on the economy depending on them.
The potential expansion of covered lives theres a lot of variables there.
No a lot more about people by the end of the year before we give guidance for 2022 so.
The stronger recovery of the base business good back.
Wouldn't say at this point that the faster decline in the Covid testing yet necessarily implies anything for 2022 around our comments because we assumed it would still be around and you heard from others as well nobody thinks is going away.
And we were not expecting it to be anywhere near the significance than it was in 2020 in 2021, So and then you've got the ASR, we just announced so theres a lot of different.
Moving pieces.
So we will give you an update on 2022, when we provide our guidance for 2022, we just wanted to ground people at Investor day, because of the pandemic really confounded everyone's ability to understand our long term earnings power and Thats why we thought it was important to make a specific comment in 2022.
So I think we've covered all the questions. We appreciate you joining the call. We appreciate your continued support and have a great day, everybody take care of it.
Thank you for participating in the quest diagnostics first quarter of 2021 conference call.
The transcript of prepared remarks on this call will be posted later today on quest diagnostics website at Www Dot quest diagnostics Dot com a replay of the call may be accessed online at Www Dot quest diagnostics dotcom slashed investor for them by phone at eight eight.
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