奎斯特診斷 (DGX) 2021 Q2 法說會逐字稿

Welcome to the Quest Diagnostics Second Quarter 2021 Conference Call. At the request of the company, this call is being recorded. The entire contents of the call, including the presentation and question-and-answer session that will follow, are the copyrighted property of Quest Diagnostics with all rights reserved. Any redistribution, retransmission or rebroadcast of this call in any form without the written consent of Quest Diagnostics is strictly prohibited.

And I'd like to introduce Shawn Bevec, Vice President of Investor Relations for the Quest Diagnostics Group. Go ahead, please.

Thank you, and good morning. I'm here with Steve Rusckowski, our Chairman, Chief Executive Officer and President; and Mark Guinan, our Chief Financial Officer.

During this call, we may make forward-looking statements, and we'll discuss non-GAAP measures. We provide a reconciliation of non-GAAP measures to comparable GAAP measures in the tables to our earnings press 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; governments and clients payer reimbursement rates for COVID-19 molecular tests; the pandemic impact on the U.S. health care system and the U.S. economy; and the timing, scope and effectiveness of federal, state and local governmental responses to the pandemic, including the impact of vaccination efforts, which are drivers beyond the company's knowledge and control.

For this call, references to reported EPS refer to reported diluted EPS, and references to adjusted EPS refer to adjusted diluted EPS. Any references to base business, testing, revenues or volumes refer to the performance of our business, excluding COVID-19 testing. Growth rates associated with our long-term outlook projections, including total revenue growth, revenue growth from acquisitions, organic revenue growth and adjusted earnings growth, are compound annual growth rates. Finally, revenue growth rates from acquisitions will be measured against our base business.

Now here is Steve Rusckowski.

Thanks, Shawn, and thanks, everyone, for joining us today. Well, we had another strong quarter and continue to build momentum, thanks to faster-than-expected recovery in our base business.

Organic base testing revenues grew compared to 2019 levels in the quarter. This is the first quarter since 2019 that organic base testing revenues grew. The growth was driven by contributions from new hospital lab management contracts as well as people returning to health care systems. We are well positioned to continue our momentum and support the return to health care in the coming months, which is reflected in the outlook we have provided for the remainder of 2021.

This morning, I will discuss our performance for the second quarter of 2021, provide perspective on industry dynamics and update you on our base business. And then Mark will provide more detail on our financial results and talk about our outlook and underlying assumptions.

First, with regard to COVID-19 testing. We are closely watching the rapid spread of the Delta variant, where our testing continues to help control the spread of the virus. In recent weeks, we have seen PCR volumes stabilize and begin to increase modestly. Positivity rates have increased in all geographies served by our performing laboratories over the last 2 weeks.

COVID-19 testing also remains critical as employees return to the workplace, and students return to the classroom in a few weeks. And whilst we experienced another milestone, we expect people to return to pre-pandemic health care and, in some cases, catch up with health care they might have postponed during the pandemic.

Now turning to PAMA and the recent MedPAC report mandated under the LAB Act. We were pleased that MedPAC found it feasible to change the CMS data collection process to a statistically valid sample of private payer rates for independent labs, hospital labs and physician office labs. This approach would produce an accurate, representative market view of laboratory rates, while reducing the burden of reporting laboratories, which is consistent with the charge of the LAB Act in the original intent of PAMA.

The MedPAC report estimates that Medicare spending for the top 100 tests on the Clinical Lab Fee Schedule could increase by 10% to 15% over current rates based on certain rate and volume assumptions. And separately, our trade association recently appealed its legal challenge to PAMA, which was dismissed by the U.S. District Court in late March. ACLA has asserted its right to challenge the regulatory overreach by HHS in the implementation of PAMA.

Along with our trade association, we will continue to work with policymakers to establish a Clinical Lab Fee Schedule that is truly representative of the market and supports continued innovation and access to vital laboratory services for Medicare beneficiaries, as Congress originally intended. Now is the time to strengthen our laboratory infrastructure and support continued access to high-quality lab services that patients depend on.

Turning to our results for the second quarter. Total revenues grew by nearly 40% to $2.6 billion. Earnings per share increased by more than 264% on a reported basis to $4.96 and nearly 124% on an adjusted basis to $3.18. Cash provided by operations increased by more than 30% to $460 million.

In the second quarter, we continue to see a better-than-expected recovery in our base business, with organic base testing revenues essentially returning to pre-pandemic levels in June. We're seeing strong recovery in most of the country and a slower recovery in the Northeast. Demand for our COVID-19 testing slowed in the quarter as expected, reflecting an industry-wide trend, though the last few weeks of June, demand stabilized and has since increased modestly, which we believe is attributable to some extent to the emergence of the Delta variant.

We performed an average of 57,000 COVID-19 molecular tests a day in the second quarter, well below our current capacity of approximately 300,000 tests per day. We have engaged with businesses in the travel and entertainment sectors in the quarter, and working with partners to support a safe return of students to the classroom. We're also collaborating with CIC Health, Ginkgo Bioworks, Battelle Memorial Institute to make testing easy, fast and affordable for school systems and other group settings across the country.

We continue to make progress on our 2-point strategy to accelerate growth and drive operational excellence. And here are some highlights from the second quarter.

We continue to execute on our M&A strategy. In June, we announced the completion of our acquisition of an outreach laboratory services business with Mercy Health, one of the nation's most highly integrated multi-state health care systems with providers and patients in Arkansas, Kansas, Missouri and Oklahoma. With this acquisition, we are on our way to grow our base business revenues approximately 2% from accretive strategic acquisitions this year, and with additional M&A opportunities in the second half of the year.

We continue to grow our health plan business, and made progress in the quarter with value-based programs with UnitedHealthcare and Anthem. Our volumes of these health plans are growing faster than the company average. We have also invested an additional employee headcount to better support these important relationships.

During the quarter, we were also pleased to renew our long-standing contractual relationship with one of our largest health plan customers, Aetna. We remain a preferred laboratory provider and partner of Aetna's network. In addition, for the first time in over a decade, Quest is one of Highmark Delaware's in-network nonhospital-affiliated preferred labs, serving more than 450,000 members.

It's good to be back in the market, competing on the basis of quality, service and value. We're helping all of us be focused on health care's Triple Aim of improving population health, enhancing the patient experience and reducing costs. And towards that aim, we are launching a new campaign designed to remind customers of the value that Quest brings to health care.

Our Powering Affordable Care campaign speaks about our leadership in clinical innovation; our ability to enable better clinical outcomes for quality, speed and accuracy of test results; our improved patient experience with accessible, easy-to-use patient resources; and finally, our ability to reduce cost of care.

Base consumer-initiated testing revenues continued to grow in the quarter. Today, more than 17 million patients have an account on the MyQuest app and patient portal, with nearly 100,000 patients enrolling each week. Finally, in Advanced Diagnostics, we're pleased to see full recovery in the growth drivers we're investing in, which we discussed at our recent Investor Day and are tracking to accelerate growth.

Now turning to our second strategy. We made progress driving operational excellence. We're on schedule to complete the full transition to our new flagship laboratory in Clifton, New Jersey next month. This highly automated facility has consolidated testing previously performed in Teterboro, Baltimore and Philadelphia.

There continues to be intense effort and energy around our Invigorate productivity initiatives, and we're on track to deliver our targeted 3% improvement across the business. We are focused on getting paid for what we do, and have made steady progress in reducing payer denials. Also, patient concessions for our base revenues were down in the second quarter to 2019 levels, driven by a focus on collection improvements.

One positive outcome of the pandemic has been the patient and physician acceptance of the digitization of our experience. We are more customer-focused and efficient today with more self-serve options for customers, and we have moved a greater percentage of volumes to digital paperless transactions.

Now I'd like to turn it over to Mark to provide more details on our financial performance and our outlook for the remainder of 2021. Mark?

Thanks, Steve. In the second quarter, consolidated revenues were $2.55 billion, up approximately 40% versus the prior year. Revenues for Diagnostic Information Services grew 40.2% compared to the prior year, which reflected the strong recovery in our base testing revenue, slightly offset by lower revenue from COVID-19 testing services versus the second quarter of last year.

Compared to 2019, our base DIS revenue grew nearly 5% in the second quarter, and it was up more than 1%, excluding acquisitions. Volume, measured by the number of acquisitions, increased 45.2% versus the prior year, with acquisitions contributing approximately 5%. Compared to our second quarter 2019 baseline, total base testing volumes increased nearly 7%. Excluding acquisitions, total base testing volumes grew approximately 2% and benefited from new PLS contracts that have ramped up over the last year.

Importantly, compared to our 2019 baseline, our base testing volumes were nearly fully recovered in June. However, as Steve noted earlier, the geographic recovery continues to be somewhat uneven, with positive growth across most of the U.S., except the minorities which remains below the 2019 baseline. With that said, we continue to see steady recovery in the Northeast.

COVID-19 testing volumes continue to decline as expected in Q2, in line with broader trends across the industry. We resolved an approximately 5.2 million molecular tests and nearly 700,000 serology tests in the second quarter. COVID-19 testing volumes stabilized over the last several weeks, and we averaged approximately 43,000 COVID-19 molecular tests and 7,000 serology tests per day in the last 2 weeks of June.

Revenue per acquisition declined 3.6% versus the prior year, driven largely by recent PLS wins and acquisitions. Combined, these 2 factors amounted to a decline of nearly 5% in revenue per req in the quarter. Unit price headwinds remained modest and in line with expectations.

Reported operating income in the second quarter was $533 million or 20.9% of revenues compared to $283 million or 15.5% of revenues last year. On an adjusted basis, operating income in Q2 was $584 million or 22.9% of revenues compared to $294 million or 16.1% of revenues last year. The year-over-year increase in operating margin was driven by the strong revenue growth in the second quarter due primarily to the ongoing recovery in our base business.

Reported EPS was $4.96 in the quarter compared to $1.36 a year ago. The second quarter of 2021 benefited from the gain on the sale of our minority ownership interest in Q Squared Solutions in April. Adjusted EPS was $3.18 compared to $1.42 last year. Cash provided by operations was $1.2 billion through June year-to-date versus $602 million in the same period last year, which included $65 million from the CARES Act funding that we eventually returned to the government later in 2020.

Turning to guidance. We have established our full year 2021 outlook as follows: revenues expected to be between $9.54 billion and $9.79 billion, an increase of approximately 1% to 4% versus the prior year; reported EPS expected to be in a range of $11.48 and $12.18, and adjusted EPS to be in a range of $10.65 and $11.35; cash provided by operations is expected to be at least $1.9 billion; and capital expenditures are expected to be approximately $400 million.

Before concluding, I'll briefly review some assumptions embedded in our outlook for the remainder of 2021. Our outlook continues to assume a decline in clinical demand for COVID-19 molecular testing throughout the back half of the year. Return-to-life testing, such as the K-12 school testing program, could partially offset declining clinical demand later in the year.

Reimbursement for clinical COVID-19 molecular testing continues to hold relatively steady. We currently expect this trend to continue, assuming the public health emergency is extended throughout 2021. However, average reimbursement is likely to trend lower in the second half as our mix of COVID-19 molecular volumes shift from clinical diagnostic testing to return-to-life surveillance testing.

As you consider the EPS outlook we have shared today, keep in mind the following. At our Investor Day in March, we discussed making approximately $75 million in targeted investments to support our long-term strategies to accelerate growth. These investments are ramping, with $50 million expected to fall in the second half.

We also continue to incur expenses to comply with CDC guidelines, address supply chain challenges and maintain staffing levels to ensure high levels of service and quality as the base business recovers faster than expected. We forecast these expenses to be approximately $30 million in the back half of the year.

Finally, the low end of our outlook assumes an average of at least 20,000 COVID-19 molecular tests per day and 3,000 serology tests per day. It also assumes low single-digit revenue growth in our base business in the second half of '21 versus 2019. The midpoint of our guidance assumes slightly stronger COVID-19 molecular testing volumes and a modestly faster recovery of the base business. And the high end of our guidance assumes both a greater level of COVID-19 testing and the strong continued recovery in the base business.

I will now turn it back to Steve.

Thanks, Mark. Well, to summarize, we had another strong quarter, with a faster-than-expected recovery in our base business. We are well positioned to continue our momentum and support the return to health care in the coming months.

And then finally, I'd like to thank all Quest employees and the team, who serve the needs of people who rely on Quest every day.

Now we'd be happy to take any of your questions. Operator?

(Operator Instructions) Our first question, from Ann Hynes, Mizuho Securities.

I just have a question on -- I think you just said your guidance assumes about 20,000 molecular tests per day. Is that average for the entire second half? Or is that exiting the year? Also, can you just talk about what your guidance assumes for any kind of labor and inflation pressures for the second half? And do you see that both getting worse? Or are they stable throughout the year?

Yes. So Ann, that 20,000 is not the exit rate. It is the average for the back half. The 20,000 was the baseline for the low end of guidance. To get to the middle part of this guidance, we would expect somewhat stronger than 20,000. Of course, there's moving pieces because it's also dependent on how the base business moves. And then the high end of guidance would be significantly more COVID testing. And then the stronger base business recovery, more in the mid-single digits revenue. So that's how we try to dimensionalize the range for you.

In terms of labor pressure, we certainly saw some of that, and we responded to it. That's built into the whole year. It's not accelerating at this point in our outlook in the back half. So we have a process where we make annual salary and wage adjustments that was implemented earlier in the year. We certainly make some market adjustments periodically, which we've done, that's not unusual. So there's nothing extraordinary in the back half of the year in terms of labor inflation.

Our next question is from Brian Tanquilut with Jefferies.

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

Yes. So we're feeling good about the programs we've put in place over the last couple of years, Brian. We started this with United, as you know. And then we mentioned that we have a program that we're working with Anthem across the country, and we feel good about it. We continue to work on the programs with other payers that see this as an opportunity as well.

And what I said in my remarks, we do see those payers and the volume going through those payers growing faster than our other base recovery. So we feel we're actually getting some traction with everything we've put in place. And I can tell you, the engagement between us and those organizations are quite good.

And I've said before in my remarks, we see an opportunity to get a variation to move with a high-quality, low-cost, high-value laboratory like Quest Diagnostics and then tighten up the network to what we described as preferred lab network. And it's really all about what we've talked about in my remarks around the Triple Aim and Powering Affordable Care. So good progress. What we've done already is making depth in the opportunity, and we see more opportunities in front of us.

Our next question is from Jack Meehan with Nephron Research.

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

So we are seeing a nice step-by-step improvement in base business. So I would say it's been a nice recovery over the sequence of the first half. If you remember, we entered the half with our base business being down somewhat, around high single digits, and kind of improve throughout Q1 and that continued into Q2. And yes, there's different ways we look at it, one is the clinical cost.

And we actually see good recovery in our general health business, in our cardiometabolic business. I mentioned in my remarks our Advanced Diagnostics business, which includes a portion of cancer and genetic and molecular testing to recovery. We still see our prescription drug monitoring and toxicology business being somewhat a little hybrid, but they're actually starting to recover, not back to '19 levels, but it's coming along.

And then on geographic basis, we do see much of the accounts are back to '19 levels. And as I said before, the Northeast is stubborn. We see -- we have started to move in the right direction. Massachusetts and Connecticut and New York City being the slowest recoverer, if you will, and that's all boroughs, not just Manhattan.

And we're hopeful, as the opening continues, as people get back into life within Manhattan and New York that, that will recover as well. So to answer your question, it started with -- it has a more of a nice steady progression clinically and also geographically. Mark, anything you'd like to add to that?

Yes. No, the only thing I'll add, Jack, is that it is somewhat uneven, even though it has been steady naturally. And we do have a couple of regions that are actually back to the volume growth we had in those first couple of months of 2020 before the pandemic.

So that's why we're feeling good of not just about utilization recovery, but we're feeling good about getting back and working on the things with our key partners, such as the PLN, other relationships that we've called out with some of the payers around value-based contracting and then really continuing to have our strong relationships with hospital systems. And we've talked about how much progress we've made around POS.

So the good news is that things are open for business. We're able to go back in to the offices, not completely, but much more than we were over the last 12 months plus. And therefore, we're getting back to what we were doing before the pandemic started.

Great. And was there anything relating to pent-up demand that you saw?

You know, it's hard to tease out. What we talk about in our calculation of revenue per req is that we are seeing more tests per requisition. So one could assume that some of that is tagged on the test because the patients just shows back up in the office if they haven't been there for 16 months. So hard to tell. You got to believe there's a little bit of that in my prepared remarks as people return and catch up on pre-pandemic levels.

But we've also -- to Mark's point, that we're better than '19. But remember, when we started '20, yes, it has a nice growth in the first couple of months. And so we've got more opportunities in front of us to continue with recovery and also build on top of what we see to gain that share that we're planning for.

Our next question is from Ricky Goldwasser with Morgan Stanley.

So my question -- I mean just a quick follow-up and then sort of my main question. Just on the follow-up, you mentioned that you renewed the Aetna contract. So just wanted to understand how should we think of the model, how should we think about the pricing impact for the next 12 months?

And then when we think about the value-based programs that you're now signing with payers, I think, Steve, you mentioned that it's actually growing faster than the rest of your book. Can you maybe give us some color on where you're seeing these value-based relationships? Is it mostly focused on commercial versus Medicare? And also, what's the framework? Are you sharing upside from the savings? Or are these more sort of fixed price contracts with some downside protection?

Yes. Mark, do you want to talk about Aetna?

Yes, sure. So yes, so first off, the Aetna contract was extended. It will be invisible to you because there was no significant change in the pricing. And in that contract, we continue to build stronger elements of what we call value-based programs, and I'll touch on that in a minute, Ricky.

So it's more focused on commercial, although, obviously, Medicare Advantage as well. There are certain things you can do in the purely commercial that are harder to do in Medicare Advantage because of some of the rules around that program. But the framing is not us sharing our upside with them, but really, they're sharing their upside with us. So we win together.

So as we show greater value for their membership by getting more work to a better value lab, like ourselves, relative to out-of-network providers or, in some cases, other high-cost providers in network, they -- obviously, their members or for their fully insured book, they themselves, they might. And then we earn upside to a base level contract, and that base level contract is not at a discount. It's really been kind of the historical levels.

So we didn't have to give up in order to gain. But it was really more about the case that we've been making for years that's getting more and more buy-in from the payers that were part of the solution. And working with us and not focusing on our price, but focusing on what we can do to drive better quality, better service and better value for their members is good for everybody in that ecosystem.

So that's really the elements we've shared, with steerage, where they give us list of accounts. Where a lot of lab works go into out-of-network or higher-cost providers. We go in with their support to call on those [physicians] and educate for the people who have high deductible plans, coinsurance, et cetera. So the patients are bearing some of that higher cost, which obviously has more influence benefit if they're fully covered by the payer in terms of the doctor.

And then we talked about M&A incentives, where, in the past, when we would buy hospital outreach as soon as we start billing in, it falls to our price, obviously, and a huge windfall for the payers. But that it's good for them if we buy outreach and, therefore, instead of taking that hit immediately, maybe a step down in those rates. And we share some of those savings over those first couple of years. And that's an element we've gotten into just about every one of the major payer contracts.

So it's things like that, Ricky, where we've made the case and they're finally buying in that. When we're successful and they're successful, together, we can do more of that. And therefore, there is upside than in the past we didn't see, that now we have a chance to earn when we prove that we've actually saved the money and driven improvement for their members.

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

Well, it's really -- I'll address the 2 examples I gave. So in the steerage one, where we're moving work, it's really more quarterly. So it's a constant look at that. We have a formula for doing that, and then we're reimbursed more regularly. It's not a once a year catch-up. And that's much better for us for a lot of reasons, not just for more regular rev rec, but also for accounting purposes and so on. For both of us, that's a better approach.

On the M&A, obviously, that would be somewhat invisible to you. Because when we do a deal, what it just means is that we get paid more than we would have historically, a little -- some of the premium over what our negotiated rates would be for the volume that clearly has moved from that hospital system to us, the hospital outreach business. So you are not going to really see that there. Again, that's going to be a regular monthly, quarterly thing, not a catch-up.

Our next question now is from Ralph Giacobbe with Citi.

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

Let me start with PAMA. So remember, we said in our remarks, we're fighting hard to get a better answer on PAMA. And so hopefully, that was clear in the remarks. We do believe that the MedPAC report does give us some data that suggests that we were right with saying that if you collected all the data, it was representative that there'll be a 10% to 15% reduction in the rates versus what we see now. And we obviously have some work to work with the reduction in the price cost, not a reduction in the Clinical Lab Fee Schedule, I think that’s clear, okay, an increase of 10% to 15%, right?

And in that regard, we have some work to do to get that through Congress because it's going to take a legislative fix, but we're going to keep on pushing at that. But with all that said, we'll keep on saying is we're assuming worst case in our outlook that in fact in '22 we'll see another cut, okay? So that's clear.

Then Mark, you want to touch a little bit on the range and whatever we pointed to at our Investor Day.

Sure. So what I did was I laid out the CAGRs from 2018 and said, obviously, the pandemic has clouded issues with the base business and then at some point, we all hope COVID is a much smaller piece of our revenues. And the base business CAGR that we laid out would have suggested $7.40 to $8. And what we were saying is, based on a base business being fully recovered by the end of the year and everything else that we we're confident we should be in that range. And yes, we felt because of everything we knew at that point that it should be in the upper end of that $7.40 to $8.

PAMA was absolutely included in that. As I shared, that at this point, if nothing changes, should be the last year of the sizable reductions that we've had since PAMA was implemented. So based on the current fee schedule and the current methodology, there can be a 15% cut on any CPT code next year. And we estimate our overall book of business is going to be somewhere between 10% to 15%, so higher than 10% but less than 15% based on what we can see.

However, because that traditional Medicare book of business is much smaller than it was when we started, the dollar impact is actually going to be similar to what it was in the first couple of years of PAMA. So it was still a large number, somewhere around 1% of our overall revenues.

And then once you get beyond that, even if PAMA isn't fixed, based on our understanding of commercial pricing, we don't know everything, but certainly, we know our prices. And we've shared that we really stabilized commercial pricing, combined with some competitive intelligence in the marketplace. We feel that, while there might be some cuts with the recalculation, they're going to be relatively small compared to what we incurred for several years.

Yes. We continue to feel good about the investments we're allowed to make with the additional resources. We talked about at Investor Day about $75 million worth of investments. We talked today, that continues in the back half of the year. That’s dialed into the outlook or the guidance we provided. Yes, that's entirely consistent with what we teed up at Investor Day around our growth platforms. We're investing in those health plans, relationships with hospital, opportunities we see.

We see opportunities to accelerate Advanced Diagnostics, and we feel good about the recovery we've seen there. And then also, the opportunity we see around the consumer and consumer-initiated testing. So our performance was allowing us to make these investments to accelerate growth, to get to that outlook that we provided to you for '22 and beyond, which is 4% to 5% top line growth and high single-digit earnings growth. So we feel good about our ability to make those investments, and we are making them. So we're hiring the people, we're spending the money, and it's included in the guidance in the back half.

And the revenue as well. So some of these are several years in their coming in terms of the return, and some of them, we get much more immediate. On consumer, we've talked about a potential $0.25 million business by 2025. That's coming from small millions before the pandemic. And so you could imagine that with some of the things we're doing, we're going to be building significant incremental revenue to get to that $250 million over the next couple of years. It's not going to all come in the last year or something like that. So we're getting revenue growth upside as well for those investments, not just incremental expense.

Our next question is from Pito Chickering with Deutsche Bank.

Two quick follow-up questions here. On the 2021 guidance, you quantified the COVID assumptions and base business assumptions for the low end of guidance. Can you quantify the same levels for the mid-range and the high range of guidance? And just to clarify, on the last question, the investments that you're making this year, does this continue into 2022 and beyond? Are they onetime in nature? Or do you believe you got to add additional investments next year?

Yes. So yes, I didn't intend to quantify with specificity that -- because it's a multivariable equation. So what I wanted to do was make clear the low end for a lot of reasons. You can imagine, we wanted to make people understand how we might get to that low end. And it's not a base business recovery that stalls or goes backwards. It's really a much slower than what we've seen and that we would expect.

And we don't think there's a high probability for that. But one thing we've learned in this pandemic is, all these things are somewhat volatile and hard to predict. If you saw a lot of retrenchments across the country because of the Delta variant or other things that might cause geographies to shut down, we want to make sure that we provide you guidance that 95%-plus deliverable or even more.

So once you get beyond the floor, there's so many different moving parts that could go in opposite directions. It's kind of hard to give you a point estimate. We wanted to make sure that people also understood that the COVID average per day we’re anticipating for the balance year is significantly lower than we're getting right now.

As you might imagine, we've been working on this outlook for a while. The recent news with, obviously, Delta driving up the positivity rate cases, obviously, our volume is increasing. One thing we've also learned is not to overreact to short term. So we're very transparent. So we give you those volumes every 2 weeks.

So we felt that we can build a reasonably deliverable, highly deliverable outlook, make clear what those assumptions are, and especially around the COVID volumes, you're going to see that every 2 weeks. So you're going to know where we're going in terms of that outlook range that I laid out this morning.

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

And back to Ralph's question, again, Pito, I want to emphasize, those were built into the outlook that I provided at Investor Day. So we've tried to make clear that we see these growth opportunities. The COVID revenue upside has given us the opportunity not just to deliver some record earnings over the last couple of quarters, but actually to invest and accelerate the long-term prospects for our base business.

So we thought it was the right balance between near-term delivery results as well as the long-term growth of the business. And so when I gave you that multiyear outlook for years and then when I frame 2022, those are all fully contemplated in these investments.

So then I just -- just on that one, is it fair to say that you are reiterating the $8 number today for 2022?

Yes. So nothing's changed. Yes. So we would feel compelled if there was something over the last 6 months that would cause us to feel that, that range was no longer appropriate, we would say something, absolutely.

Our next question now is from Dan Leonard with Wells Fargo.

This is actually Tim Daley on for Dan. So I just wanted to dig a bit more on Pito's question. So I believe the back-to-school COVID opportunity has framed it upside in relation to the guidance for the second half of the year. So first, I just wanted to clarify, is there any back-to-school testing baked into the COVID guidance or company-level ranges discussed?

And then secondly, given we are kind of weeks away from kids heading back to school, I'm sure there's been some discussions, but could you give us some insight into the internal or on-the-ground discussions happening? Like are there broad-based general screening, plans for back-to-school and maybe a big one-off push at the start of the year? Just any more additional color there would be really helpful.

Yes. So I've implied and Mark just laid out the expectations around COVID testing. We did assume that the clinical testing would come down and the return-to-life testing would go up, and a portion of that return-to-life testing has to do back-to-school programs. And what we highlighted is we've been working with the different partners with 2 programs that are funded with the funding for testing.

One is the $600 billion program -- $600 million program for return-to-school programs, where we have partners to help us with that. And school systems throughout the United States could apply for that money and get the money to reimburse whatever program they come up. And then there's a larger program of about $10 billion. But as you can understand, and I mean, every school system throughout the United States is going to have its own plan.

And so they're going to start ramping up soon, getting into the month of August and then September. And I think there is going to be a fair amount of variance across the United States on who does what and when. And I do believe that, given what we see now with the delta variant, I'm sure that will have some bearing on the need for testing to make sure that we're safe when kids return back to school.

And also, return-to-office programs. We do expect that there will be more returning to the workplace, those people that have been working remotely. I think, clearly, there's a heightened level of safety with that happening. And as I said in my earlier remarks, testing is vital to that. So we've embedded that in our expectations as well.

But we assume that clinical testing would come down. We believe that a lot of our capacity is not used for the hospital portion of COVID testing as in the early days of COVID testing. And some of the recent increase that we've seen has been related to some of the effects we see from the delta variant, so far, in the last week or 2. So hopefully, I provided some color on what's assumed in the guidance so far.

Yes. I just want to remind everybody how that surveillance testing works. It's very different than our clinical testing. So if you think about PCR tests today, where we're averaging over $90 per test, that's not economical for surveillance. So what we have come up with and others as well that our methodology is a heavily pooled approach. We pool a handful of samples today when we're testing in low positivity regions for economic reasons.

But it's our responsibility if we have a positive to retest those individual samples. So you don't want to pool too many because the math suggests that you're going to be retesting a lot of samples. And so when you go to surveillance, the assumption is that nobody has it. And so therefore, you're going to do a lot less retesting.

But actually, in this case, we're not obligated to do it because they're not even identified. So what happens is, the collection is done. The entity, in this case, the school knows whose 10 samples, let's say, are in that specimen collection device. It's not shared with us. All we do is test it, and we say this group is negative, hopefully. And in the case where it's positive, then they, the administrators, know which students need to be retested. And then that's a separate order, that's a separate payment, et cetera.

And so the reason that's important is that in order to make this economic and because of the economies of scale we get with this huge pooling, we have to do approximately 10 specimens to equate to a single one for our core PCR business. So the volumes have to be tenfold to have the same dollar value to our top line.

So yes, there's absolutely some contracts we won and got some of that volume. But to really move the needle, it has to be really broadly endorsed and embraced. And while the funding is there, to this point, we've seen some momentum, but not enough to be significant at this point and really move the needle to offset the decline in the clinical testing we've seen over the last several months.

Our next question now is from Derik Brown (sic) [Derik De Bruin] with Bank of America.

So 2 quick questions. Just a little bit more color on the recovery in the base business. Just -- are you seeing anything particular in terms of oncology and esoteric versus routine testing? Just a little bit more color on that. You gave some geographical differences, but I want some mix differences.

And then another question that keeps coming up. In contrast to where you're guiding to, we just got off the Danaher call, and they're talking about -- they did -- they went from 10 million point-of-care tests in the first quarter to 14 million point-of-care tests in the second quarter. So one of the questions we continually get on the central labs is the impact, longer-term, on the business on point-of-care testing is, is this trend going to continue, particularly given the number of players that are sort of entering this market from the point-of-care and at-home space? So I'd love to get your general thoughts on sort of your thoughts on volume shifts for certain applications into the point-of-care market.

Let me start with the first one. So yes, what we said is our general health and our cardiometabolic testing, which is sometimes referred to by us as our General Diagnostics, and I would say, the industry sometimes says routine. Routine has recovered nicely, and that's throughout the United States, a nice recovery there.

Second, as you asked about oncology, we've seen good recovery in our AP business and anatomic pathology business. And as I said in my remarks, our Advanced Diagnostics business, which is our definition of sometimes called esoteric, that has actually recovered nicely and we are making investments there, and we think we're tracking well against our investment accelerated growth plans. So we feel good about that.

And the second question, which has to do with point-of-care. And when I say point-of-care, this is the PCR point-of-care and then also the antigen test. We do believe there's some portion of the testing demand, if you will, that was -- that's taking place with these new approaches. We do believe there is a place specifically with return to work programs through antigen testing and some of the point-of-care applications.

Well, equally, what you see with our volumes that's somewhat stabilized, as you saw in the second quarter when we reported our numbers and the modest increase that we saw is PCR continues to be the gold standard. And so in many cases, they do reflect that to the PCR testing when there is a positive for sure and a questionable negative metric, not the false negative. So we do believe we have a good place in the marketplace, and we do believe there is a place for the point-of-care devices, including antigen as well as PCR going forward.

Our next question is from Tycho Peterson with JPMorgan.

This is Julia on for Tycho today. A lot of my questions have been answered already. So just following up on an earlier question about your payer program. It's great to see that you're having success with United and Anthem and recently renewed contract with Aetna as well. You previously said the volumes through these relationships are growing faster than the rest of your book. Just curious if you can provide some more additional color on how much faster these volumes are growing. And what kind of investments you are making to capitalize on these opportunities?

Mark, do you want to take that?

Yes. So as you might imagine, there's not an answer to how much faster because they're not all equal. And also there are more -- each of them have more concentration in certain geographies. So as we shared, the Northeast and specifically New York City is growing at a different rate. so you'd assume that payers that have more membership there, we might have a different answer than the payers that are in Texas or Florida, let's say, or even California.

So we've looked that because it's one of our key -- we have a process we call [Oceans] and we have these breakthrough objectives, one of them is growing our share in these health plans. And we look at it regularly and we share information back and forth to understand kind of our share of wallet with those. And so we have a chance to see as they themselves also are recovering in terms of the volume that's going through their membership, whether we seem to be growing at the same pace in that recovery. And that's the basis for saying that we're growing faster.

So you know, in this business, a couple of hundred basis points is a big difference. It's not going to be a percent or double-digit kind -- a differential. But a couple of hundred basis points of share growth is meaningful. That's clearly what we saw before the pandemic started, as you look back to our 2019 performance, what we shared in the first 2 months of 2020. So once the business utilization becomes fully recovered, we're confident that we'll get back to that, you know, not just historical growth with market, but finally getting to growth above that by share gains. And that's what we laid out in our multi-year outlook at Investor Day.

Yes. As far as the investments, what Mark is every one of these plans have a detailed plan of what we're going to do to gain that share. And some of that happens naturally and some of that happens locally, and some of that happens by a line of business. So for instance, we do have some programs to go with the payer to their national accounts and their plans, sponsors and important plan sponsors.

And so a lot of that is local, and so you asked a question where we're making investments, we'll put those investment dollars where we think we need extra capacity to drive those programs by payer. And there's a lot of variation around where those opportunities are by the payer, and that detail is what we're speaking to when we're talking about investments in the health plans.

Yes. I'll just give you one other example, which we've shared in the past, but it's really expanded broadly. So take toxicology and prescription drug monitoring, the payers, as that was starting to grow, and there was some concern on the payers part around the behavior of some of the providers, they put in some really onerous rules in place, such as pre-authorization and so on. Of course, that impacts everybody, including the people like ourselves, who are very responsible around our panels and how we conduct ourselves.

And so we went through some of the payers, talked to them about that. And said, “Hey, not only is that right for us, it's not right for the patient because it can be -- make it more difficult for them to get testing they need. But also if you got rid of that, you would actually steer more work to the good labs.” And when I say, it's not just us, certainly our key competitor and some others, are just like us, very responsible. We do good work in toxicology and prescription drug monitoring.

So they put in rules in place where we were actually exempted from pre-auth. So that's another example where it's really not an investment. It's an investment of time to work with them to get them to understand and get them to change some of these roles and behaviors. But again, it's an example where we're benefiting, but sort of the patients and a lot of other people because it's a more thoughtful approach to rules around lab testing.

Our last question now is from Matt Larew with William Blair.

So the Clifton lab went live in January, and Steve, I think you said the consolidation from that to do a lateral wrap up here next month. In the past, you talked about sort of doubling throughput, 30% more capacity, I think, 50% increase in productivity. Just curious, are there any data points to share so far? And how that consolidation is going? And how we should think about the impact to margins as volumes are consolidated into Clifton?

Yes. so we're pleased with what we are able to do. It's pretty remarkable that we've built this facility in the middle of the pandemic. And for all types of purposes, we're on track. It is up and running. We bring in this facility to do that consolidation. We have to continue our program around harmonization of processes and harmonization around systems because they're all on the same platform within the new facility.

So we're on the final strokes of that implementation, we feel good about it. And then in that facility, we have implemented a lot of the new systems. We put in place our new immunoassay platform from Siemens. We've talked about it, it's a big investment for us. We are getting some pretty good gains from it and more to come such that we put in place new front-end automation and through the lab automation with our partner, Inpeco, and actually Siemens is on the systems integration with that as well.

So we are pleased with the progress made so far and we're looking forward to more productivity from that going forward as we continue to burn-in systems and work out some of the early details. And that's -- those improvements are already part of the 3% productivity gains that we have in our operational excellence program. They are already included in our outlook that we provided at Investor Day.

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

Thank you for participating in the Quest Diagnostics Second Quarter 2021 Conference Call. A transcript of prepared remarks on this call will be posted later today on Quest Diagnostics' website at www.questdiagnostics.com.

A replay of the call may be accessed online at www.questdiagnostics.com/investor or by phone at (866) 360-3307 for domestic callers or (203) 369-0162 for international callers. Telephone replays will be available from approximately 10:30 a.m. Eastern Time on July 22, 2021, until midnight Eastern Time, August 5, 2021. Goodbye.