奎斯特診斷 (DGX) 2021 Q1 法說會逐字稿

Good morning, and welcome to the Quest Diagnostics' Fourth Quarter -- First 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.

Now I'd like to introduce Shawn Bevec, Vice President of Investor Relations for Quest Diagnostics.

Go ahead, please.

Thank you, and good morning.

I'm 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 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 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 COVID-19 pandemic on future operating results, cash flows and/or financial condition will be primarily driven by the pandemic severity and duration, health care insurer, governments and client 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 government responses to the pandemic, 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.

References to base testing volumes or base business refer to testing volumes, 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.

Quest had a strong first quarter with our base business continuing to recover to near pre-pandemic levels.

Contributions from acquisitions and PLS relationships accelerated growth in the base business have helped offset the reduction in demand for COVID-19 testing, which was in line with industry trends.

In March, for the first time since the pandemic began, monthly 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. exits the pandemic and people return to normal activities and address the routine care issues that have been neglected over the past year.

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 an accelerated share repurchase, or ASR, in the amount of $1.5 billion in the coming days.

This morning, I'll discuss our performance for the first 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.

But before we get into the details of the quarter, we wanted to share our perspective 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 PAMA.

COVID-19 testing remains critical as supplies of vaccine continue to be available to all Americans.

Testing will help control the spread of the virus in addition to reducing hospitalization and saving lives.

Continued testing will be key to helping segments of the economy reopen as more Americans become vaccinated.

Vaccination is front and center in the minds of most people now and testing remains a critical element of safely returning to life.

I'd also like to share our perspective on some of the most recent development regarding PAMA.

So we're encouraged that MedPAC recently reported that it is exploring alternative data collection methods under PAMA that are less burdensome for laboratories.

One of the alternatives mentioned is surveying a representative sample of independent hospitals and physician office laboratories instead of reporting all laboratories to submit data.

We've been saying for years that CMS got the data collection process wrong and didn't follow the intent of Congress.

MedPAC found that hospital outreach and physician office labs reported higher payer rates than independent labs, and that independent labs were overrepresented in the first round of PAMA data 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 if CMS had used a more representative sample that included more data from hospitals and physician office labs.

The findings refute the claims that CMS collecting more hospital outpatient and physician office lab data would not have impacted the rate calculated by CMS.

We believe that access to accurate and reliable testing remains critical, not just as part of our nation's ongoing response to the pandemic, but also for the millions of seniors who have delayed routine screening and care over the past year.

We need to fix PAMA to avoid the Medtronic cost (inaudible) in 2022 and to help ensure seniors have continued access to critical lab services they need and rely on.

Additionally, we were disappointed by the recent dismissal by a U.S. district court of ACLA's challenge to PAMA.

We are working with ACLA to determine next steps with respect to this litigation.

We continue to work with policy makers to establish a clinical laboratory fee schedule that is truly representative of the full market and supports continued innovation and access in vital laboratory 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 reported basis to $3.46 and nearly 300% on an adjusted basis to $3.76.

Cash provided by operations nearly tripled to $731 million.

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, reflecting an industry-wide trend.

We performed an average of 101,000 COVID-19 molecular tests a day in the first quarter, which is well below our current capacity of approximately 300,000 tests per day.

We are engaged on several fronts to bring needed testing to 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 pooling.

We want to help get kids back to school, and we're working with a range of partners to get it done quickly and efficiently.

We continue to make progress on our 2-point strategy to accelerate growth and drive operational excellence.

We discussed our strategy in detail a few weeks ago at our Investor Day.

So we thought today, we'll take you through a few highlights of the quarter.

We are excited about our agreement to acquire the outreach laboratory services business of Mercy, one of the nation's most highly integrated multi-state health care systems, and as we indicated at Investor Day, we're having a board discussion with leaders of larger health systems like Mercy.

The Mercy outreach laboratory services business currently operates from 31 hospitals and clinical laboratories serving 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 contributing revenue for the quarter.

We recently announced the sale of our 40% minority share in Q2 Solutions to IQVIA for $760 million.

IQVIA had a strategic vision and ability to lead Q2 Solutions on the next phase of its journey as a global leader in essential lab services.

And Quest will support it as a strategic lab partner.

We've made good progress taking advantage of health plan access within the first quarter.

UnitedHealthcare implemented an initiative removing out-of-network benefits for insured groups in selected states.

We also (inaudible) in redirection efforts with Anthem in 8 more states during the quarter.

And we're seeing benefits from these initiatives.

And then finally, we've renewed our long-standing strategic relationship with EmblemHealth to provide comprehensive clinical laboratory services for more than 3 million members of EmblemHealth and it's affiliate, ConnectiCare.

Turning to our strategy to drive operational excellence.

We are on track to once again deliver 3% savings across the business.

In the process, we're also improving the customer experience and quality and in the quarter, we achieved year-over-year improvement in 14 of 19 top tier quality metrics, which we track to gauge our operational performance.

Now I'll turn it over to Mark to provide more details on our financial performance.

Mark?

Thanks, Steve.

In the first quarter, consolidated revenues were $2.72 billion, up 49% versus the prior year.

Revenues 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 2.5%.

Compared to our first quarter 2019 baseline, total base testing volumes increased 1.5% and 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, base testing volumes 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 in 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.

Importantly, these volumes have stabilized over the last several weeks.

We resulted approximately 9.1 million molecular tests and nearly 900,000 serology tests, contributing nearly 21% to volume growth in Q1 versus the prior year.

We exited the first quarter averaging approximately 73,000 COVID-19 molecular tests and 8,000 serology tests per day.

Revenue per requisition increased 20.5% 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, or 24.3% of revenues compared to $175 million or 9.6% of revenues last year.

On an adjusted basis, operating income in Q1 was $708 million or 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 $0.73 a year ago.

Adjusted EPS was $3.76 compared to $0.94 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.

Included in 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, we now have the ability to execute approximately $2.5 billion in additional buybacks this year.

We expect to launch an accelerated share repurchase transaction of approximately $1.5 billion in the coming days.

Turning to guidance.

We've updated our outlook for the first half of 2021 as follows: revenues expected to be between $5 billion and $5.2 billion, an increase of approximately 37% to 43% versus the prior year.

Reported EPS expected to be in a 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 and capital expenditures are expected to be approximately $200 million.

Before concluding, I'll briefly review some assumptions embedded in our updated 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 50,000 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.

Return-to-life testing such as the K-12 school testing program should partially offset declining clinical 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, COVID-19 molecular reimbursement held relatively steady in the first quarter, and we currently expect this trend to continue through Q2, 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 volumes shift from clinical diagnostic testing to return-to-life surveillance testing.

I will now turn it back to Steve.

Thanks, Mark.

And to summarize, we're off to a very strong start in 2021.

Our base business continues to recover back to near pre-pandemic levels as people address the routine care issues that they have neglected over the past year.

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

And so with that, we'd be happy to take your questions.

Operator?

(Operator Instructions) Our first question comes from Kevin Caliendo with UBS.

So I guess some of the commentary around 2Q, I sort of want to understand the expectation.

It looked like March, the base business was sort of up year-over-year, and your guidance is suggesting that 2Q would be down year-over-year.

You don't expect it to recover fully.

Is there anything that sort of changed?

Or was March an anomaly sort of take us through what you're seeing in the base business in terms of the volumes?

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 it's the total base business.

It was not an organic number.

What we tried to do was 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 new significant PLS wins and M&A where that base business performance is.

So when we talk about it expecting to be slightly down in Q2, that's that organic non-PLS kind of utilization, same-store number, not our total base business performance.

So Mark, it would be good to share kind of our implied view on what's going to happen with COVID testing in Q2.

Yes.

So we talked about 100,000 a day in Q1.

We talked about an expectation about 50,000.

We also shared that we exited Q1 over 70,000, 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 out, we'll get more and more people who'll be protected, and less and less clinical demand.

And of course, we'll see how that plays out, but that is certainly within the guidance that we're providing today, and how we see the next several months.

So you assumed Kevin that our base business, when we say base business, it would include acquisitions and PLS and organic growth.

But let's just focus on organic growth.

The steady improvement that we've seen in Q1 continues in Q2.

And then it's somewhat offset by what we are anticipating with COVID, and that gives us the expectation around ranges of guidance in the second quarter.

So hopefully, that's helpful.

Yes.

And just to close it out, Kevin, I would point to the numbers that we quoted for Q1 of minus 7%.

That's the same-store performance number.

And we -- obviously, March was stronger than that.

February was impacted by weather, as we said.

But that -- we expect that minus 7% to improve, as Steve said, throughout Q2, but not yet to get positive.

Our next question comes from Erin Wright with Crédit Suisse.

Capital deployment is still one of the biggest questions we're getting from investors.

Are there any meaningful changes now in your view from an M&A pipeline perspective?

And what's assumed in guidance in terms of inorganic growth?

And longer term, here over the next few years, do you anticipate the pace of consolidation across the lab industry to accelerate?

Or do you anticipate at a similar pace to what we've seen historically?

And just somewhat tied to that as well, I mean, how should we be thinking about the broader excess capacity across the competitive landscape post COVID?

And how does that impact your positioning?

Yes, Steve, let me take the guidance question first, and then I'll turn it over to you.

So Erin, our current guidance, obviously, is only through the second quarter, and we're not counting on any M&A that hasn't already been transacted.

And even the deal that we announced, Mercy, is not going to close and generate any significant volume or revenue in the second quarter.

So the current guidance does not anticipate future M&A.

Steve?

Yes.

So we feel good about the discussions and the funnel of prospects we have for what we have characterize as our hospital strategy.

There continues to be a lot of pressure on this great delivery systems.

They are considering their last strategy is one of the options to help them.

And we have a number of examples over the past 6 months delivering on the strategies that we've talked about for years.

And so the answer to your question, we do see continuation of interest in the building funnel with more prospects to come.

What we shared at Investor Day is we reaffirmed our outlook that we would grow through acquisition around 2% per year.

What we shared is that we historically have delivered on that 3 years prior to '21.

And we believe that's still a good guidance number for us for this year and going forward, it is implied in our outlook for growth.

So finally, as we do see the trends in general, just like all health care around consolidation.

We do see systems interested in thinking about what's most important to them and what's their strategy and Quest help them with their lab strategy.

And likewise, we see, if you will, fewer and fewer in-network providers with the health plans.

And if you want to think about that, that is a consolidation play as well.

And when those 2 forces happening, there will be more share in the hands of fewer, and our plan is to gain share.

So all the megatrends and changes that are happening in the industry, we believe have actually improved to support what we've said for some time, and that our view is both for what's happening with hospitals and also what's happening with health plans.

Our next question comes from Pito Chickering with Deutsche Bank.

Within the routine market, can you give us some more color on strength and weaknesses in different parts of the country?

Looking at your customers, can you give us some color on dock offices versus hospitals versus the baseline in their routine tests?

Any details you can give us on what types of tests are normalizing and sort of what are the laggard areas?

Sure.

Sure.

So let me take a run around all the different customers the way we look at the market.

So geographically, we have seen good recovery in Texas and the South West.

We're actually seeing, really in the last several weeks, starting a much better recovery in California in the West Coast, which is good news.

We see the South East starting to recover and get us back to almost 2019 levels that we spoke to earlier.

So I would say those are moving in the right direction.

Now the offset to that is, one is you've seen the spikes and the hotspots in the Midwest and when that happens, there's lockdowns and people are concerned about going into health care delivery, that's going to affect our business.

So we've seen some of that, let's say, in the Midwest.

And then finally, the Northeast, and the Northeast, including New York and Pennsylvania and going into New England.

It's still behind, and it's recovering slowly, but we're the most off, if you will, in the Northeast.

So that's the geographic swing.

As far as physician business versus hospital business, the hospital business is actually very close to where we were.

We're encouraged by that.

We see admissions getting back to '19 levels.

We see all patient procedures getting back to '19 levels.

So that business is tracking nicely compared to where we were.

And then the physician side, it all depends on what site is physician.

Primary care is starting to turn on.

Oncology, particularly those that have postponed diagnosis and treatment for oncology starting to turn on.

And at the same time, we still see our prescription drug monitoring business or mental health and behavioral health and drugs and abuse still down versus where we were in '19.

And that's an issue that varies by state and we're working on that.

So I gave you a feel for what's going geographically, what's going on by physician, but also by what we describe as our clinical franchises.

Mark, anything you like to add to that?

No, I think that's a good summary, Steve.

Thanks.

Our next question comes from Ralph Giacobbe with Citi.

The higher revenue guidance, just want to understand, is that upside from 1Q?

Because it sounded like COVID was maybe lower than you had expected.

So just trying to understand if it reflects 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 just based on the revenue increase and running through recent margin performance, it doesn't look like that's factored in?

Or otherwise, there would be an assumption of much lower margin.

So I'm just trying to reconcile that as well.

Yes.

So let me take a shot at that, Ralph.

The higher revenue is absolutely driven by stronger-than-expected recovery in the base business.

So as you point out, we've acknowledged and we record every couple of weeks, COVID 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 stronger, certainly more than an offset on the revenue side.

In terms of the ASR, it is in the guidance.

I just want to remind everyone that we had committed to $900 million in share repurchases that was already a 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 our 40% ownership in our JV with IQVIA, and that is slightly accretive when you consider the loss of the equity earnings.

So you need to look at over $600 million of the ASR as really offsetting the foregoing those equity earnings.

We had already committed to $900 million in the previous guide in the first half.

So almost $500 million there.

So when you combine that, the share repurchases are really just up by several hundred million.

So I want to make sure everyone is clear on the math there.

So it is reflected in the guidance.

Our next question comes from Brian Tanquilut with Jefferies.

I guess my question for you guys, Steve, as you think about what you saw in Q1, specifically in March with the resumption of volumes in the core, what are you seeing in terms of acuity levels kind of like number of tests per req or even revenue per req that you saw in March, is that carrying over already into April?

Just any color you can share with us on that.

Yes.

So thanks, appreciate the question.

March was encouraging and we are watching April carefully.

We do look at the number of tests per requisition to see if we're getting more density, if you will, of testing per requisition.

And we talked about the main explanation for the increase in the calculation of revenue per req had to do with the COVID mix, the straight calculation.

But we have historically seen a, let's say, modest expansion of the number of tests for a variety of reasons.

We offer more secondary if there is a higher level of acuity and chronic disease and aging of the population.

So we have generally seen a general increase in that, but nothing that was really notable that's standing out within March.

Our next question comes from Jack Meehan with Nephron Research.

I was wondering if you could give us an update around, your thinking around COVID 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 can give us an update as to how you think the school testing opportunity could shake out?

You referenced that at the beginning.

How do you feel your positioning is for the upcoming awards there?

Yes.

So if you go back to where we started off the year, what we said is we do expect COVID PCR testing to decline throughout the year and we mentioned in our remarks, we did see that in Q1, and we see it happening in the country.

So as Mark said earlier, we do expect that continuing trend in Q2 and that will continue into the second half.

Now with that all said, we do see this transition from what we said is more clinical uses of the PCR testing, rule in and rule out COVID from hospitals, rule in and rule out patients seeing their physicians and moving it to return-to-life activities, and there's a lot of activity around that, Jack.

A lot of activity.

I mentioned in the remarks, what's going on around schools.

There's 2 funding mechanisms for that from the U.S. government.

We've actively engaged with a number of, let's call it, systems integrators that will be coordinating the efforts beyond the laboratory testing.

We're well positioned there.

Secondly, corporations are now thinking about how they get people back physically into their places of work, maybe albeit not as full-time as they want for.

But despite the vaccination progress, they're still going to be testing requirements with the return-to-work activities.

And then let me just say, the entertainment piece of this is big, too.

We see now sports teams want to put pants back in the stands.

We see New York City interested in getting people back.

The tourism as they get into the fall and turning back on the city.

We mentioned in our prior remarks and other calls and meetings that we participated in this pilot study with New York to provide a check if you're willing to provide access for an individual over the course of the day.

So that type of activity will be a larger portion of what we do for COVID testing in the back half.

Now with all that said, we're not providing guidance for the back half, but we do see continued PCR testing in the back half, but it's going to change in its nature.

And also we do believe COVID-19 testing and PCR testing will continue in '22.

This is not going away fast.

Our next question comes from Matt Larew with William Blair.

I guess, maybe a 2-part.

The first would just be a follow-up to Jack's question, Steve, in terms of how much of that return-to-life testing opportunity really is going to be in a sort of a reference lab setting with a day or 2 turnaround time versus a point-of-care setting.

But my question, though, was about the consumer market.

I just wanted to get your take on sort of the PWN-Everlywell combination and if that changes any of your approach or the competitive dynamics in that space?

Yes.

So first of all, as you know, not all tests are created equal.

And PCR still is the gold standard.

And we do provide a solution with antigen testing, okay, as part of appropriate utilization of that testing, particularly for surveillance.

But as we know, the antigen testing sensitivity and specificity is good for, let's say, day 2 through day 5 of a potentially infected person.

But the PCR test is really the gold standard to rule out if someone has been exposed in the early days or rule out if they think they are exposed in 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 how we fight this pandemic.

As far as the consumer, the consumer is trying to figure out to get easy access to testing.

And they will get that access in a variety of forms.

And by the way, our turnaround times now for PCR testing are much better on average than the 2-ish days that we often talk about several months ago.

We're now delivering results in less than a day for many tests that come in.

And the reason for that is, remember the remarks I made, we're testing about 101,000 tests per day, and we have approximately 300,000 per day for capacity.

So that allows us to have much better turnaround times, which we believe, as that becomes more and more visible and people want to get good access to the gold standard, they're going to rely on those places they can get access.

So we continue our relationships with retailers.

We're expanding our relationship with CDS that has gone quite well.

CDS is active on promoting good access to PCR testing around the drive ends, and Walmart as well.

And then also with our direct-to-Quest capability that we talked about at our Investor Day, we have put on that platform, both PCR testing as well as serology testing.

And we are seeing high levels of interest from a consumer perspective of what they could do simply by getting a collection kit in the mail and FedEx envelope to ship it back and have good turnaround time to start out with MyQuest.

So that will continue to build.

And the consumers, as they start to return to life in a safe way, want to be assured that even if they are vaccinated or if they have natural immunity, they are not walking into a situation that they might have been exposed in some ways because they fell through the cracks with all the caveats we have with the effectiveness of the vaccines, the questions about natural immunity, and then also with the new variants as well.

So because of that, we keep on working on better and more efficient and easier ways for Americans to get access to PCR testing.

And we've got now, I think, a lot of the chance to do that, and that will continue to be an opportunity for us in the back half.

Yes.

And Steve, I'd like to add, I want to make sure that Matt and others understand how the surveillance works.

And in this case, when you pool, you get the economics to where it's affordable to do more broadly and more regularly because we are going to be putting up to 10 individual samples in a single well.

And so hence, the cost will be 10% or less per individual.

And 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 have pool that they will know in test tube X who the 10 people are.

And if we come back to them with a positive result, they will apply a real diagnostic to those 10 individuals.

So with that, we also don't have the obligation or the ability to retest.

Whereas today, when we do pooling for clinical purposes, if we get a positive, we have to go back and retest the individual samples.

So it actually is an inefficiency in our process.

In order to get this to work, we don't do retesting of a sample.

We don't have the capability of doing that.

We notify the submitting entity that we had a positive in 1 of the pooled collection specimen tubes, and then they go forward and test those individuals.

Our next question comes from Tycho Peterson with JPMorgan.

Sorry about that.

This is Casey on Tycho.

Can you give us some color as to what the implied operating margin is for the EPS guide and sort of what's the upside is from the ASR?

And then just on serology, can you talk a little bit about -- you're not modeling a decrease in 2Q from 1Q, 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 is there?

Mark, do you want to talk the ASR?

Well, the ASR is in our updated guidance.

So there's not upside per se relative to before we announced the ASR, as I tried to walk through the math, about a little less than $400 million of the repurchases are truly incremental in terms of an EPS lift because we had already committed to the full $900 million, and we had about $500 million remaining in Q2 that was already in the guidance.

So that $1.5 billion goes down to $1 billion incremental.

A little over $600 million of that is the proceeds from our divestiture of our stake in Q Squared, that's slightly accretive, but not materially relative to the force majeure of the equity earnings there.

So it's really less than $400 million of share repurchases that were incremental to what we guided to previously.

And that is built into the updated guidance.

In terms of implied operating margin, obviously, we have a range.

So we can't answer that with precision.

But if you take the midpoint, you can all do the math.

As we get a lower mix of COVID testing at our assumption of the $100 reimbursement, obviously, realization in AWR that's less than that, but $100 price point.

And that mix is toward the base business that will erode the margin slightly.

But kind of the offset to that is as the base business recovers, we're very leveraged.

So the variable drop-through on that base business recovery is certainly much higher than our enterprise and historical fully loaded operating margin, but it's not quite as high as the COVID PCR.

Also, on serology?

Yes.

Serology, we imply that it will continue at the same level.

We are pushing on the value of serology going forward.

We believe that the semi-quant capability that we offer has nice insight into what response is happening in patients in general with the virus and therefore, that has value.

We also believe that between historic PCR and serology, knowing that 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 tests beyond that or the immune response long-term includes T-cells, we don't have that, but we continue to look at that as being the prospect.

So you should assume for now it's stable with what we've seen so far, but we continue to believe this is more and more valuable in the quarter.

We continue to work on developing the tests to support that.

Our next question comes from Ricky Goldwasser with Morgan Stanley.

So I have 2 questions because I wanted to follow up.

So when we think about the first half guidance, it does imply that meaningful operating income sequential decline.

I fully realize you're still not giving second half guidance.

But just to give maybe everybody on the call, sort of some sort of a framework as we think about a more normalized pace of the core business, how should we think about that margin headwind?

I think it's just going to help us still as we think about the second half modeling.

That's first.

And then second, more is kind of like long-term strategically.

We're hearing the payers talk a lot about digital-first strategies and being sort of kind of like the front door to health care.

You guys talked about expanding relationship with payers like Anthem.

So are you having any conversations with payers on how you can be part of that digital-first strategy in those kind of like digital networks?

And if so, do you see that kind of like as an opportunity to accelerate sort of more narrow networks that will drive volumes toward you?

And lastly, would that require any additional investments or you think you have the infrastructure for that already?

Mark, you want to take the first one, I'll take the second one?

Sure, Steve.

Thanks for the question, Ricky.

So again, just to reiterate, first half, we delivered over 100,000 PCR COVID tests per day.

We're assuming half that in Q2.

So that's certainly contributing to the margin decline, as you talked about, implied in the guidance for the first half, implicitly in Q2.

When you think about the base business, we're still uncertain how all 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 is 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 through the growth pillars and back to a margin level pre pandemic and then obviously improving beyond that, as we talked about a CAGR where our bottom line grows significantly faster than our top line by several hundred basis points.

So we feel very confident in the earnings power of the base business.

Certainly, we're going to have a step down from the pandemic bubble where we did several billion dollars of COVID testing last year and significant COVID testing this year.

But the base business should be very healthy coming out of the pandemic.

Once COVID testing drops to a minimal level, we'll be right back to the operating rhythm.

Our expectation is that you saw early in 2019 when we were growing a business January, February, more than 5% on a volume basis, and you saw strong improvements in our operating margin.

Steve?

Yes.

Yes.

Just to transition.

So as you'll recall in our Investor Day, we went through a walk, if you will, to bridge you from the pandemic years of '20 and '21 into '22.

Mark went through chart with some math, which gave you kind of our indication for '22.

And also, as I said earlier, is we do believe there would be some COVID testing, but the base business will be recovering and we'll get growth going forward in '22 based upon our outlook.

So the last question you had, Ricky, it had to deal with the digital front end and digital-first and we're excited about this because we're very well positioned.

This isn't 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 a large provider like Quest, we're very much embedded in the ecosystem of connectivity already.

We have over 500 interfaces of all the different electronic medical records, obviously, that's the big players like Epic and Cerner, but there's hundreds of others.

And so therefore, we have a real strong interoperability capability.

And that's helpful because when you're in the workflow, because from a physician perspective, it allows you to more streamline the different service offerings like laboratory to a fewer players.

And then secondly, this past year, we've seen the acceptance, if you will, of telehealth.

It has been growing nicely but out explosively, and we did see explosive growth in 2020 and we believe that overall, that acceptance, if you will, of that front end being an accepted way to first engage with the health care system will continue.

And the payers are working on that and providers are working on that, and they're working with other partners, and we're very well positioned with those other partners.

Who are those partners?

Those partners are some of the telehealth companies that you know.

And those telehealth companies, as they become much more embedded in health care delivery, let's call the digital Bradman, will rely on a fewer number of laboratory service providers, and therefore, we're very well positioned as more of a small handful of what just described as the preferred lab network that we are already with United, but for this new world that we see.

And with all that, we do believe that our direct-to-consumer initiative will have an opportunity as well because consumers equally are wanting to engage with health care delivery.

They not always need to engage with their physician.

And therefore, with the prospects we see of growing that business and the opportunity for consumers to serve themselves, if you will, seems to be a big opportunity for us.

As far as investment, we are investing.

We were fortunate enough to have the capabilities in 2020 and '21.

If you again go back to what we shared at Investor Day, we said we're investing about $75 million over a period -- over the last 2 years, 2021.

Some portion of that is related to what we're discussing here.

And so we're not rate limited by investments.

We're rate limited by logistics time to get some traction, and we're very well positioned with the telehealth companies, very well positioned with the plans.

And yes, we do see a change.

And yes, this will allow us, again, to gain share as we go forward because they can't do this with tens of laboratories, they could only do it with a select group like us.

So we have another question?

Operator?

Our next question comes from Derik De Bruin with Bank of America.

So 2 questions.

One is, I was on the Danaher call just before this, and they actually pretty sharply raised their COVID testing guidance for the year and also surprisingly gave a very bullish outlook for 2022 and sort of backing that number.

So I think the first question goes to is some of the -- this is a question on the point-of-care shifting from decentralized testing, shifting to point-of-care.

Is some of the volume you're seeing coming down just because there are more of these point-of-care platforms out there and just as they ramp capacity, you're seeing volume shifting out of the central lab?

That's the first question.

And I think the second question is, when you look at your -- you're at 100,000-ish tests, you've got 300,000 capacity.

How are you using -- how are you utilizing that capacity?

Is it more -- are you ramping down your IVD platforms versus your LDT platforms?

Just to assume that it's more of the IVD because the LDT isn't more profitable.

But just would love some idea as like how you're utilizing your installed base.

Yes.

So the first part, yes, we did see an increase in the availability and use of the antigen testing and point-of-care testing throughout the last 12 months.

Clearly, it has picked up in the back half of 2020.

We see that continue in '21.

So if you look at the industry trackers on how much testing we are doing in this country, clearly, it has dropped off, and therefore, volumes have dropped up as well.

We believe in those tracking mechanisms.

It's predominantly PCR.

However, we think there could be some point-of-care antigen testing in there, but we believe it does not include all the testing that's happening.

So if you look at it, well, it is happening for PCR testing throughout the United States and if you look at the estimates that are coming from these point-of-care and antigen providers, you see that the actual level of testing is almost at the same level that we were in the summer, but in different forms.

So the answer to your question is, yes, there is a transition from PCR as exclusively what we have to more of the capabilities around point-of-care or antigen testing.

However, going back to what I said, all tests are not created equal.

And so we're also working with clients to make sure they realize where antigen testing can be helpful for a period of time.

And also when you need to reflex into PCR and where you can use point-of-care and costs are not all going to be equal.

So it has come down because of what we described, but there continues to be a strong role for PCR through the remainder of '21 and also into '22.

Our next question comes from Pito Chickering with Deutsche Bank.

Thanks for a follow-up question here.

Could you give us a little more details on the changes of what the UnitedHealthcare did for out-of-network providers in the quarter?

What markets did they make this change in?

And what impacts did you see in your volumes from these changes?

Yes.

Yes.

So what we have been working on as a journey to pick up share, if you will, with United and what we shared in March at our Investor Day is we really kicked off the network program in 2019.

We saw good progress there.

We're actually very encouraged by what we saw in 2020 at the very early days and then we have the pandemic.

But it didn't stop our activity.

So what we shared is we actually picked up some share over that period of time, but we have more share to gain.

And there's a list of activities we're working with United to support picking up share and getting it to at least that 25% level, one of which is what we're providing is limiting the out-of-network policy and benefit design for their fully insured book.

And where that has happened because we have other examples of the top, it get -- does move share to us.

We don't provide specifics on states and specifics on how much that this contribute to a share.

But it did have a nice impact for us to allow us to pick up share.

And so we continue that in March.

But I'll also share that we didn't share everything we're doing.

We have many other programs, and some of this is working with their client sponsors, their employers, some of this is working with their regions, specific opportunities with providers.

When we do an outreach purchase in relationship within the geography, we lose work out of this expensive venue to a less expensive venue, which is Quest, and all of those are active relationships that we have to continue to build share with United and other payers.

Thus equally, we continue to work programs with Anthem and others.

Our last question comes from Eugene Kim with Wolfe Research.

So quickly on 2022, at the Investor Day, the company provided a baseline EPS range of $7.40 and $8, and I believe pointed to the higher end of that range and that was with the assumption that base business recovery return to pre-pandemic levels toward the end of the year.

With the potential -- I mean, the recovery come faster than expectation, how should we think about that range that's provided at the Investor Day?

Mark?

Mark, you there?

Yes.

Yes.

So the -- what I would say is, I'm not in a position to update that, what we provided at Investor Day because we could get in a rhythm of constantly getting asked to update that.

So next time we'll comment will be when we provide guidance for 2022.

But of course, as we have that broader range, there's a lot of different considerations, what the remaining level of COVID testing, what's reimbursement level, where is the base business at?

When we gave the $7.48, as we said, we're expecting the base business to be fully recovered this year, to be back to 2019 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 players.

Depending on the economy, depending on, obviously, potential expansion of covered lives.

There's a lot of variables that we'll know a lot more about by the end of the year before we give guidance for 2022.

So stronger recovery of the base business, good fact.

I wouldn't say at this point that the faster decline in 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 it's going away.

And we were not expecting it to be anywhere near the significance that it was in 2020 and in 2021.

So -- and then you've got the ASR we just announced.

So there's a lot of different moving pieces.

So we'll give you an update on 2022 when we provide our guidance for 2022.

We just wanted to ground people at Investor Day because the pandemic really confounded everyone's ability to understand our long-term earnings power, and that's why we thought it was important to make a specific comment on 2022.

Good.

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.

Thank you for participating in the Quest Diagnostics' First 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 (888) 566-0490 for domestic callers or (203) 369-3053 for international callers.

Telephone replays will be available from approximately 10:30 a.m.

Eastern Time on April 22, 2021, until midnight Eastern Time, May 6, 2021.

Goodbye.