奎斯特診斷 (DGX) 2020 Q3 法說會逐字稿

Welcome to the Quest Diagnostics Third Quarter 2020 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 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 of 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 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 financial condition will be primarily driven by the pandemic's severity and duration; the pandemic's 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, which are drivers beyond the company's knowledge and control.

For this call, references to reported EPS refer to reported diluted EPS from continuing operations, and references to adjusted EPS refer to adjusted diluted EPS from continuing operations.

References to base testing volumes or base business refer to testing volumes [expressing] COVID-19 molecular and serology testing volumes.

Finally, 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.

Now here is Steve Rusckowski.

Well, thanks, Shawn, and thanks, everyone, for joining us today.

Quest had a very strong third quarter, benefiting from continued demand from COVID-19 testing as well as the rapid recovery from health care utilization.

We have performed over 22 million COVID-19 molecular and serology tests to date, more than any other provider.

We've also developed and introduced several new innovations that are contributing to enabling the country's ability to return to work, the classroom and in the athletic field.

I'm extremely proud of all that Quest Diagnostics has accomplished through the COVID-19 pandemic.

And I'd like to thank our 47,000 employees for their hard work and dedication.

So this morning, I will discuss our performance for the quarter, our role in the COVID-19 pandemic and update you on our non-COVID base business.

And then, Mark will provide more detail on the third quarter results and in our updated financial outlook for the remainder of the year.

Our financial performance in the third quarter was very strong.

For the quarter, total revenue grew by more than 42% to $2.79 billion.

Earnings per share increased by more than 164% on a reported basis to $4.14 and nearly 145% on an adjusted basis to $4.31.

These results reflect continued demand for COVID-19 testing and continued recovery in our base testing volumes as health care systems resume nonurgent care and elective surgeries.

Organic base testing volumes orders declined high single-digits in July and improved in the quarter to mid- to high single-digit decline in September versus the prior year.

Demand for COVID-19 testing came from several areas: clinical testing ordered by health care providers as the virus spread throughout much of the country, especially for non-COVID-19 pre-surgical patients and people of high-risk populations like nursing homes and prisons; in retail testing in our extended network access points, such as our drive-through sites offered across the country by CVS and Walmart; workplace testing as employers sought to return employees to their job and their offices; university testing to facilitate the return of students to campus life, including sports; and our consumer testing, direct testing offered by QuestDirect.

We've also demonstrated innovation and agility in bringing COVID-19 testing to our nation.

In the quarter, we were granted an emergency use authorization or EUA to offer unobserved self-collection.

We were the first provider to receive the EUA during the pandemic for specimen pooling.

And then finally, we teamed up with Walmart and DroneUp to pilot a program for contactless delivery of specialty kits using drones.

Also in the quarter, we announced an initiative, along with our Quest Diagnostics Foundation, to address and reduce health care disparities in underserved communities, including those impacted by COVID-19.

This value-based commitment builds on our existing work with federally qualified health centers, and will focus on serving people of color, elderly and underserved populations in locations throughout the United States.

Quest plans to donate testing services and fund a range of initiatives, estimated to total more than $100 million.

Our goal is to improve access to testing, drive awareness of value of diagnostic innovations and managing health.

Now before updating you on our base business, what I want to do is on -- comment on a recent CMS change to Medicare payment for COVID-19 testing and our decision to return the CARES Act funding to the government.

So in conjunction with our trade association, we've been currently reviewing how the new reimbursement policy for high throughput COVID-19 molecular testing from CMS will impact laboratory and patients we serve.

Last week's announcement removes uncertainty that was an overhang on COVID-19 testing reimbursement.

Finally, we're grateful for the CARES Act funding for last spring, which provided us the support and time in great uncertainty for our country.

Now (inaudible) to the pandemic, we no longer required this funding.

And as a result, we believe returning these funds to the government now is the right thing to do.

We're making progress on our strategy to accelerate growth in the base business.

So as a reminder, the 5 elements of our strategy to accelerate our -- to grow more than 2% per year through strategically aligned accretive acquisitions; expand relationships with health plans and hospital health systems; offer the broadest access to diagnostic innovation; be recognized as the consumer-friendly provider of diagnostic information services; and then finally, support population health with data analytics and extended care services.

Now I'll share a few highlights from our strategy to accelerate growth.

Our M&A pipeline remains strong.

Since the second quarter, we closed our acquisition of Mid America Clinical Laboratories, or referred to as MACL, which is within Indiana, and we did a couple of 2 small tuck-in acquisitions.

Our recent acquisitions have been performing well during the pandemic.

For example, our Memorial Hermann and Outreach acquisition, announced earlier this year, as well as this recent MACL acquisition, have driven growth in both COVID-19 testing and our base business.

We've also seen growth in advanced diagnostics from our acquisition of Blueprint Genetics.

The second growth driver, expanding relationships with health plans and hospital health systems, is also delivering.

Our hospital reference testing volumes, excluding COVID-19, have returned to growth year-over-year.

Given the challenges that hospitals are facing, we expect many more to be open to discussions about how Quest could help them achieve their lab strategy.

So with Professional Lab Services this year, we have logged a record amount of bookings, requisite larger and longer-term agreements than in the past.

We also continue to make progress on our health plan strategy.

Within the UnitedHealthcare preferred network, we're helping United reduce added PLN lab spending through the previous announced 0 out-of-pocket benefit.

In addition, United has added enhancements that reduced the administrative burden for order physicians and patients related to those tests requiring pre-authorization.

And then in August, we entered into a new strategic relationship with Anthem and 12 states.

We're working with Anthem to improve quality and efficiency in delivery of laboratory services.

And then finally, additionally, we're working with major national payers to enable their members to access COVID-19 testing through Quest's relationships with major retailers.

We've made progress on the third element of our strategy, to accelerate growth, by offering the broadest access to innovation.

In the quarter, we launched 3 new combined COVID-19 and respiratory virus tests, reducing time for physicians to diagnose and to treat patients by identifying nearly 20 viral and bacterial infections from a single swab.

We also launched our automated next-generation sequencing solution that enable individuals to access use of genetic testing insights about hereditary diseases at consumer price points through Ancestry Health.

Finally, we grew our direct-to-consumer services in the quarter.

QuestDirect test offerings continued to resonate with consumers.

In the quarter, we launched our COVID-19 active infection test, offering consumers a choice of using an at-home kit or getting their specimen collection done at a drive-through location.

Also, we made remarkable progress in the surge of sign-ups to our MyQuest Patient Portal.

Today, roughly 13 million patients have a MyQuest account to make appointments or receive their results through their smartphone or their computer.

In the third quarter, on average, more than 100,000 patients per week signed up for the service.

This is more than double the rate we've experienced before the pandemic.

And now the second part of our 2-point strategy is to drive operational excellence.

We continue to pursue our goal to reduce our cost base by 3% per year.

We also see more opportunities ahead to drive further productivity gains, while at the same time, enhancing our customer experience and overall service levels.

So here's a couple of examples.

We have standardized our Siemens immunoassay platform in 14 of our 18 regional laboratories.

This solution drives workflow efficiencies and has enabled more than a 50% reduction in our equipment footprint.

We are still in the early stage of this realized savings, but so far, we're pleased with its progress.

And then also, our new flagship laboratory in Clifton, New Jersey is being prepared to go live in early 2021.

When complete, the state-of-the-art facility, the most highly audited in our laboratory network, and will represent the final regional lab to be converted to our standard operational IT system, which we call [QSuite].

This will mark the culmination of a multiyear initiative to simplify, streamline and standardize our regional laboratory operations.

Now I'd like to turn it over to Mark to take you through the results and update you on our outlook.

Mark?

Thanks, Steve.

In the third quarter, consolidated revenues were $2.79 billion, up roughly 43% versus the prior year.

Revenues for Diagnostic Information Services grew approximately 44% compared to the prior year, which reflected significant demand for COVID-19 testing services, offset by a modest decline in base testing volumes.

Volume, measured by the number of requisitions, increased 19.7% versus the prior year, with acquisitions contributing approximately 3%.

We continued to experience improving performance in our base business in the third quarter.

Orders for organic base testing compared to our pre-pandemic business declined high single-digits in July and improved to a mid to high single-digit decline in September versus the prior year.

For the entire third quarter, base testing volumes declined roughly 5% versus the prior year and benefited from recent M&A and the new PLS wins that Steve highlighted earlier.

We also experienced a significant contribution from COVID-19 testing during the third quarter, performing approximately 9.9 million molecular tests and 1.5 million serology tests.

We exited the third quarter averaging approximately 93,000 COVID-19 molecular and 11,000 serology tests per day.

Revenue per requisition increased 20.9% versus the prior year, driven largely by COVID-19 testing.

This was partially offset by unit price headwinds of approximately 1.7% in the third quarter, in line with our prior expectations.

This includes the ongoing impact of PAMA.

Reported operating income was $718 million or 25.8% of revenues compared to $313 million or 16% of revenues last year.

On an adjusted basis, operating income was $831 million or 29.8% of revenues compared to $349 million or 17.9% of revenues last year.

The year-over-year increase in operating margin was driven by the strong revenue growth in the third quarter, reflecting a relatively high drop-through of an incremental volume in our business.

Reported EPS was $4.14 in the quarter compared to $1.56 a year ago.

Adjusted EPS was $4.31 compared to $1.76 last year.

Cash provided by operations was approximately $1.46 billion year-to-date through September 30 versus $895 million in the same period last year.

Cash from operations for the third quarter includes approximately $138 million of provider relief funds under the CARES Act.

As a result of our strong financial position, we are planning to return the entire CARES Act funding we received, which Steve noted earlier.

Additionally, we are accelerating the redemption of our senior notes maturing in April of 2021.

We will use the proceeds of the bond offering that we completed in May 2020 to repay these notes.

We expect to complete the early debt redemption in November.

Turning to guidance.

We raised our full year 2020 outlook as follows.

Revenue is now expected to be between $8.8 billion and $9.1 billion, an increase of approximately 13.9% to 17.8% versus the prior year.

Reported EPS expected to be in a range of $8.22 to $9.22 and adjusted EPS to be in a range of $9 to $10.

Cash provided by operations is expected to be at least $1.75 billion and capital expenditures are expected to be approximately $400 million.

We continue to operate under the uncertainty caused by the COVID-19 pandemic.

Continued recovery in the base business as well as demand for and duration of COVID-19 molecular testing are significant swing factors that remain challenging to forecast.

With that high degree of uncertainty in mind, please consider the following.

The midpoint of our full year outlook generally assumes base testing volumes to remain modestly below last prior year levels as we exit 2020.

COVID-19 testing volumes averaging nearly 90,000 tests per day for the molecular test and 10,000 tests per day for the serology test in Q4.

COVID-19 molecular reimbursement, generally stable with recent trends.

Our performance from mid-October is slightly above these assumptions.

But again, our guidance reflects the uncertainty of the current environment.

Finally, as Steve mentioned, we are currently in the early stages of launching our recently announced initiative with the Quest Foundation to reduce health disparities in underserved communities.

As we move forward, we expect to exclude the costs associated with this multiyear initiative in determining our adjusted results.

While we aren't prepared to share a detailed outlook for 2021 today, I'd like to offer some considerations for next year.

First, we are likely to have an easy compare in our base business for much of the year, especially in Q2.

Second, demand for COVID-19 testing is likely to persist well into 2021.

We believe that molecular PCR testing will continue to play a very important role in diagnosing, tracking and tracing active COVID-19 infections and that there will eventually be a growing need for serology testing as vaccines and additional therapies come to the market.

Third, we are working to understand the details of the recent CMS announcement regarding COVID-19 molecular reimbursement for 2021.

And finally, as a reminder, there will be no Medicare reimbursement costs under PAMA in 2021 given the 1-year delay included in the CARES Act.

I will now turn it back to Steve.

Well, thanks, Mark.

And to summarize, we had a very strong third quarter and have performed over 22 million COVID-19 molecular and serology tests to date.

We've also developed and introduced a number of new innovations along the country to get back to work, get to the classroom and on the athletic fields.

We've seen further signs of recovery in health care utilization, as our base testing volume continued to recover rapidly throughout the third quarter.

And finally, again, I'm extremely proud of all that Quest Diagnostics has accomplished through this very difficult time.

And I thank all the 42,000 (sic) [47,000] people at Quest Diagnostics for all their hard work and dedication.

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

Operator?

(Operator Instructions) First question is from Ann Hynes with Mizuho Securities.

So I just want to touch back on your comments, Mark, about the reimbursement for next year.

I know that [a lot are] still is unknown.

But just for modeling purposes, maybe can you talk about your current turnaround time, what you expect your molecular capacity to be by that time in January.

And should we assume would you need to make any more further investments be able to get that $100 reimbursement per molecular test?

And my second question is just about cash flow.

Obviously, it's very elevated because of all the testing.

What do you expect -- how do you expect to deploy that once you're able to?

And maybe about timing of the cash deployments since it's very elevated.

Yes.

Let me start with the operational piece of that, Ann.

First of all, we're running about a capacity of 200,000 tests per day, even though what you heard from our guidance is we're running less than that in terms of actual results.

And we've done that for 2 reasons.

One is to be prepared for the fall, where we're anticipating further demand for COVID-19 testing.

And then secondly is, when we have more capacity and we [result less], it helps us with turnaround time.

So I'm happy to share that, right now, we're averaging less than 2 days for testing for COVID-19.

Now what I'll also say, as I said in my early introductory remarks, we're trying to understand the exact guidelines, and I'm sure there'll be more detail from CMS in terms of recovery -- excuse me, reimbursement changes.

When we're looking at turnaround times, we're looking at the day from specimen collection to results, and that's also by calendar day.

And there'll be more specificity based upon this from CMS, but there'll be more clarity around that.

So we're performing well.

We've got big capacity versus our demand.

And we're not stopping there.

We're actually increasing our capacity as we speak.

We're working out some of the last capacity we can get out of some of the new systems we put in place.

And second is we're looking at applying pooling to some of our IgG platforms.

So that should get us to eventually, coming out of this year, at 250,000 per day versus the 200,000 today.

So we should be able to meet the demand and keep our turnaround times at the level I've already indicated.

So Mark?

Yes.

So just to add to that.

Ann, the devil's in the details.

We need to understand exactly when the clock starts on turnaround time.

Based on what we think it should end up, we expect to be in very good shape around meeting the criteria that we -- at this point, assume we have to get more than half of those tests turned around in 2 days or less.

But obviously, we need clarification and certainty around that.

And that's for, obviously, Medicare, where we still have to work through some of the issues with the commercial player -- payers as well to understand how it's going to work with them.

So that's why we're cautious in terms of committing too much to what this pronouncement by CMS means.

A little work to do, but certainly more optimistic as we look at it that we should be able to meet that requirement.

On cash flow, as you see, we're obviously feeling much better about our cash flow at this point.

The fact that we're repaying the debt early from April that we issued in -- a pre-issuance in May shows our confidence returning the $138 million, which, of course, is deducted from our projection when I said at least $1.75 billion.

So we're expecting a very strong cash year.

And Steve mentioned we have a very strong M&A pipeline.

And as I have said many times to investors, I would prefer to do M&A, because when we do it, we're highly confident that that's a better return for our shareholders, but we do have very strict criteria.

We have to find deals that meet those criteria.

So I'm optimistic that we will deploy a chunk of that for M&A.

And then at some point, you can expect us to return to our normal capital strategy as we move forward throughout the calendar year or early next year.

Next question is from Stephen Baxter with Wolfe Research.

I wanted to ask you about the progression of core volumes for the quarter.

I believe you said August core volumes were down mid to high single-digits.

And then in today's release, I think it also has the September exit rate at about the same level, down mid-singles to high singles.

So this really seem to suggest that the baseline volume return to normal slowed a little bit.

Is that consistent with what you guys have actually experienced?

And if so, what do you think need to happen to see it improve further?

If it's not, what's the nuance that I'm missing?

And then just to put a final point on it.

Does guidance assume that you see a continued improvement from the September exit rate or basically a continuation at that level?

Sure.

Thanks for the question, Stephen.

As we mentioned, volume improved from July.

But really, September versus August, it was fairly flat.

So yes, there was a little stagnation and improvement in the base volumes.

Not completely surprising given the recent uptick in COVID again.

So it hasn't gotten worse for us, but it did not continue its improvement.

And that's why when I talked about what we expect in Q4, we don't expect the full recovery any time this calendar year.

So obviously, we have a very broad range, $300 million.

So within that range, there's moving variables.

But in terms of the base business, we're not counting on in the middle of that a complete recovery.

We're not expecting it to move materially away from where it's been the last couple of months.

But that would kind of get to that lower end or upper end operating of the range, depending on that, going along, of course, with COVID testing as well, where they go from that midpoint.

So not counting on anything, but certainly, improvement could lead us toward that upper end.

And if it wearied a little bit, it could lead us toward the lower end of our guidance.

Yes.

And we're watching it carefully.

If you go back and hear what I said, we started off July at high-single digits.

And then also, as I indicated, in September, it was mid to high.

So slight improvement there, but we're watching it as the -- we've entered the fourth quarter and as we sit here in the fourth quarter in October.

Next question is from Ricky Goldwasser, Morgan Stanley.

So I have a question on the gross margins.

You came in meaningfully higher than last.

Clearly, we're seeing the benefit of the return of core volumes.

But can you maybe help us quantify?

Of the gross margin that we saw in the quarter, what is coming from the return of core versus realized price for COVID testing?

We understand the reimbursement.

But also, we're hearing you talk a lot more about direct-to-consumer testing that I'm assuming come with a higher price point, so if we can just get and maybe more clarity on that.

Sure.

So Ricky, first, I'll confirm that direct-to-consumer does come with a higher price point.

Certainly, there are other expenses that go with direct-to-consumer.

We've actually invested incrementally in some marketing to drive awareness and so on.

But from a gross margin perspective, the consumer testing is higher than our core business.

But recall, even though we feel good about that business, it's still a very small part of our overall enterprise.

And then between COVID and base, obviously, we don't get into gross margins on specific test offerings.

But the one benefit I will point out on COVID is that there's no patient responsibility.

So when you think about it, and I don't have the precise numbers, but just, let's say, because of overall enterprise, about 20% of our revenues coming from patients, if we collect, as we've shared, [$0.30] [$0.70] on the dollar, you can imagine that there's about a 6% higher margin on that particular business because it's 100% reimbursed by payers instead of having any patient responsibility.

So there is some benefits in the gross margins on COVID that really is unrelated to price and really has everything to do with the coverage policies and not having that inability to collect all the money that were due.

Great.

And just one follow-up, if I may.

You gave us some early puts and takes for 2021.

We're starting to see some companies that are accelerating hiring in preparation for next year.

When you think about the increased need for serology associated with COVID vaccine, et cetera, should we assume a step-up in costs related to increased hiring in preparation for that?

Yes.

So Ricky, we have managed our workforce carefully over the last 6 to 9 months.

As you recall, in the second quarter, we've had to trim down our workforce.

So we furloughed over 6,000 people.

We've reduced work schedules.

We've cut down the (inaudible), our sales and marketing, our Board.

And then we saw the steady recovery in our base business, coupled with the COVID testing that we've done.

So we've restated salaries, and we brought back full work weeks.

We brought back the vast majority of the furloughed employees.

And actually, we've hired people.

So we've hired people where we need to hire people, particularly in areas like specimen processing.

You can see what the volumes are seeing, you have to have a lot of people to receive all these specimens to sort it out before they go into a lab.

But I'll tell you, we're still being very, very careful before we add another person.

We're being very careful in overhead, and Mark can go through exactly what's in our in our expenses.

But we've been very limited in hiring in our expense categories.

And we'll continue to be very prudent with our hiring for our overhead within our laboratory operations and our operations in general.

And the reason for that is we want to make sure we don't get ahead of ourselves.

We feel we had good leverage in the third quarter, as you see.

And we believe we have a workforce in place to manage the demand we're getting right now.

And we're constantly looking at what we think the future demand will be, but we want to make sure we don't get ahead of ourselves.

So we indicated what we think the fourth quarter is going to be.

We are building capacity to get more COVID-19 testing done.

We got plenty of capacity available for serology without adding a lot of staff, with the exception of some of the volume-based jobs, as I mentioned.

And so as we get into deeper into the fourth quarter and the beginning of next year, we'll then assess if we need to add some people.

But so far, we got some modest hiring.

We're back to full workforce.

And were watching it frankly daily.

And we want to make sure we don't add people before we do.

Yes.

So we don't have any proactive plans to add resources, Ricky.

We're going to continue to monitor demand in our business.

And we have the flexibility generally to react in a fairly short window as volumes move in one direction or the other.

So I can confirm, no plan to add to the expense base in Q4 in anticipation of anything next year at this point.

Interesting enough is the last point, since we do have this natural hedge on this, is despite where we are with the economy, we still have attrition with some of our jobs.

So we're -- we felt like we're still trying to keep up.

There are other options for people, particularly with some of our nonexempt employment jobs.

And therefore, if things turn down, we could cheerfully turn off our spigot as well.

Next question is from Ralph Giacobbe from Citi.

I want to go back to the sort of reimbursement comments.

And specifically, in your prepared remarks, on the CMS reimbursement tweaking, it removing an overhang.

I guess I just want to be clear on what the expectation is now sort of post the PAG period.

Assuming you meet those turnaround time, does it sustain the $100 level?

Am I sort of interpreting that right or not?

And then second piece is related just post that PAG period, my understanding is the commercial rate for COVID will either default to your contracted rate or there's a rate negotiation that takes place.

Is that correct?

And then how should we think about commercial rate off the $100 base line?

Yes.

So let me start with where we saw some uncertainty, and therefore, the words we used, overhang.

First of all, for this year, we had some uncertainty, as you know, in the third quarter about the emergency order that's in place, and that was extended to October.

We were hopeful that the rate would continue at $100.

And it's our expectation, given that the new rate changes with the incentives that we've outlined, [a base] on January, therefore, we're certain $100 for reimbursement for the remainder of this year.

Up until we've heard this, there was some uncertainty about 2020.

And then secondly, in 2021, remember, the original rate was at $51, and it went up to $100.

And so therefore, the new reimbursement that's being spoke of, again, is if you get the turnaround time for 2 days, you're at $100.

If you don't, it's $75.

So that will remove some of that uncertainty as it's going, reverting back to what it was before, we got the bump, from $51 to $100.

So Mark, do you want to take it on the commercial side?

Yes.

Generally, it's a negotiation, Ralph.

We have provisions in our contracts for new tests, and certainly, the high throughput COVID-19 molecular test is one of those.

So there is no provisions for it to fall automatically to any sort of relationship in CMS or what have you.

We had to negotiate that, and we're highly successful in getting it to match CMS' rate.

But certainly, as we go forward, we're going to have to continue to talk to our commercial payers and negotiate.

There's no saying in sort of this point where commercial reimbursement spike up.

Next question is from Jack Meehan, Nephron Research.

So wanted to dig in a little bit on the commentary around core volumes.

Just a clarification first.

I think you said the core was down mid-single digits.

Does that include M&A?

Just to bridge versus the monthly commentary.

And then as you look out to 2021, do you think routine demand can return to the pre-COVID baseline?

Or is there some reason why you think it might struggle to get back to 100%?

The core volumes, I want to be clear for the core here, were mid- to high single digits, with an improvement from July into August and then fairly flat in September.

And that was an apples-and-apples comparison.

So M&A puts those core volumes in a better place and then also some of the new PLS deals.

But we didn't want to confound utilization by supporting the base business.

We wanted to understand kind of the apples-to-apples, almost same-store analysis.

And that's the one where we're down mid to slightly higher single-digits for the full quarter.

In terms of next year, like everybody else, we're trying to figure out how quickly things might recover and to what extent.

We're looking at all the same report as you are.

Given the continued slight ambiguization, given the potential for the economy to have impact on utilization and other uncertainties, at this point, we're not expecting any time soon to get the base volume back to the pre-pandemic levels.

But with that said, it doesn't mean it couldn't happen.

We're just not at this point assuming it.

And while we haven't given guidance for 2021, we wanted to just give some of our initial thinking.

But obviously, when we come out with guidance, we're going to give you very specific around what those assumptions are.

And at that point, we'll have a lot more information.

Yes.

Just some color around -- we've got variation around geography and around clinical franchises.

So by a way of example, New York City is still not recovered, and we have a fair business in New York.

So as we look at the percentage overall, those affected by New York not recovering, there's other products of the country that aren't fully recovered.

So we're watching that carefully.

And we're watching it by city if things change by city or state.

You can understand the consequence of that.

And then separately, we've got some clinical franchises that are past pre-pandemic levels.

But we still have some drivers.

We have our prescription drug monitoring business, which is still below pre-pandemic levels.

So if you look at it from a couple of different dimensions, you can understand why we're below pre-pandemic.

And then what it takes to get to -- get back to where we were going into 2020 and potentially get above it, it will require some of these areas to get back to normal levels that we saw in the winter months before we hit the pandemic in March.

And to Steve's point, there is a lot of complexity.

We actually do have some geographies that are growing year-over-year, and then we have some like -- and it's really Manhattan.

And if you look at Long Island, you look at Westchester County, you look at New Jersey and other areas well outside of Manhattan, they're in much better shape than Manhattan is.

And we are not sure whether that has anything to do with physician offices and so on.

We think it might be fewer commuters that are going to the city.

They're getting their work done elsewhere instead of while they're at work during the day.

But certainly, we don't have any specific information on that at this point.

Next question is from Erin Wright with Crédit Suisse.

So overall, how are you thinking about the competitive dynamics between the point-of-care rapid testing capabilities and your COVID offerings?

Or should we be thinking about it as testing to get testing in this sort of environment?

And then I guess a broader question here, too.

How are you thinking about consumer behavior when it comes to diagnostic testing in a post-COVID world?

Will this inherently expedite some of your direct-to-consumer initiatives here?

Does it change or affect any of those efforts such as QuestDirect and other consumer initiatives?

And will this be dramatically more meaningful from a financial perspective for you in the coming year?

Yes.

So thanks.

I'll take the first part is around point-of-care solutions.

And as you know, there's 2 point-of-care solutions.

One is the point-of-care diagnostics solutions that were out there for some time, provided by IVD manufacturers.

And for all intents and purposes, they were there for a number of months.

And they provided a role.

But that most recently, I believe you're referring to what's happening with antigen testing.

We do believe there will be a role for antigen testing, particularly for monitoring and surveillance of a population.

But we do understand, for a lot of reasons, why PCR and the return to the lab model is going to continue to be the gold standard.

And one of the reasons for that, depending upon the quality of the antigen testing that might be applied, there are requirements around reflex testing to PCR for both positives and negatives.

And in that also, we believe that physicians do prefer PCR testing.

And when we're offering these flu respiratory panel in COVID tests, that will be a PCR.

And we think with the flu season coming out, that we're going to get some demand for it as well.

So we believe that the antigen testing will be a necessary part of our portfolio.

And we do expect to be bringing out a solution for antigen testing as part of our services we offer.

But it will be complementary to the PCR testing that we're currently doing.

And so hopefully, that provides some clarity of what we think the role will be.

And then finally, on the consumer piece, we do believe that there is increased interest in our direct-to-consumer offerings just for the basic testing.

As you all know, a number of patients have not gone to their doctors as they should.

We do believe there's an opportunity for them to have their lipid panel check for their cholesterol, make sure the cells working properly, a competent glucose A1c, sexually transmitted diseases.

As we've mentioned, we brought up serology testing direct to consumer.

Then most recently, COVID-19 testing.

We believe there is interest in a very convenient approach to getting testing.

And we couple this with a telehealth physician consult as part of our service.

And we do believe, going forward, there's going to be increased demand for full telehealth in terms of its role in our business overall.

And then secondly is testing and getting that either indirectly through QuestDirect or getting that through a telehealth provider as well.

And we're very, very well positioned in that regard with our relationships with telehealth companies, but also with QuestDirect.

Before the pandemic, we kicked this program off, and so we have a nice platform that's been building up volume, and we feel that there's going to be more opportunities in front of us as does demand given the circumstances that we continue to and have a lot of interest for consumers.

Next question is from Donald Hooker from KeyBanc.

Great, great.

So there's a lot being talked about here, a lot of topics.

But one thing that jumped out to me in your prepared remarks was the record bookings in PLS.

And I was wondering, I mean, if it's possible to sort of maybe size or scope that.

And I suspect I know why that might be the case, but I'd also love you to hear your perspective of what you think is going on there, as it speaks to maybe the health of the hospital environment as well.

Yes.

Well, we're encouraged.

As I mentioned in my prepared remarks, our hospital business is actually growing again versus last year, and that's encouraging.

And that's without COVID-19, so that's an encouraging trend.

We see hospitals back in business.

And we're seeing the testing that you would expect in those hospitals.

And we're doing well on that marketplace.

And this is where what we traditionally hold our reference testing business.

And in addition to this, over the years, we have built up a Professional Lab Services business.

This isn't just a new program.

We've been working on it for over 5 or 6 years.

And we've built up a nice portfolio of principal accounts, and that's serving us well.

And so we are planning a number of long-term multiyear contracts this year that will provide growth for us in '21 for certain.

And we see continued growing interest from integrated delivery systems on how we can help them with their lab strategy.

As you know, many of these hospital systems are having a difficult time through the pandemic.

And now speaking with many of the CEOs, I actually had a conversation on Tuesday with one, they are looking at a variety of options to get more efficient, get more effective.

And one of the areas that we've talked about for years, and I think it's going to keep building momentum, is walking in and having a conversation around their lab strategy, which includes the reference testing, the sophisticated testing send out, how we can help safely monitor their acute care laboratory.

And then, now it begs the question of what they do with their outreach business.

And in some cases, they sell that to us.

And that's what we did with Memorial Hermann this year, with MACL.

And we'll see more and more prospects.

So it continues to receive strong interest.

And this year was really a banner year for bookings, and we'll see that kind of grow into '21.

So Mark, if you like to add to that?

Yes.

Don, as you know, we don't generally prospectively announce the size of a contract.

But what we will see as we report our quarterly results and we talk about our organic growth and where it's coming from, the PLS contribution.

So certainly, moving forward, you're going to see the evidence of what Steve just talked about in some of these very large bookings and deals that we're just starting to implement, and that will accelerate our growth into 2021.

Next question is from Kevin Caliendo with UBS.

I have a sort of a 2-part question here.

I guess I don't understand why you expect COVID volumes to sort of be down from your current levels given COVID is likely to increase.

We're already seeing the outbreaks sort of 4Q.

And -- but even if they are, let's just say it's $90 versus the $100 sort of pace that we're at now, the margin assumption for 4Q is still meaningfully lower.

I -- maybe Ricky was asking about this earlier.

But are there any additional cost, bonuses or anything that maybe you're going to do in the fourth quarter that you didn't do a year ago that would suggest the margin sequentially falling given your guidance?

Yes.

So I did not intend to imply that PCR volumes will be reduced in Q4.

We're actually the midpoint of the guidance assumes it stays where it is, where we are right now.

And as I shared, through the first couple of weeks of October, we're actually slightly ahead of the midpoint of guidance.

So I would want to just clarify that.

In terms of margin, really nothing of significance.

We did have in Q3 a significant catch-up expense on our bonus.

As I'm sure you can imagine, early in the year, we were projecting to significantly miss our targets.

And then Q3 really reversed that and got us to a point where we're expecting to exceed our targets.

And so in Q4, we would just have, assuming we deliver the Q4 proportion of that.

So actually, there was in Q3 a significant incremental expense to catch up our bonuses that are not coming through even in Q4.

So there's nothing of huge significance other than there are some of the cost actions that Steve referenced that we reinstated to normalcy.

So we did have some reductions in July on salaries.

And so in Q4, those will be pulled where they were pre-pandemic.

And then we did reinstate the 401(k) match rate in Q3, and that will be fully reinstated in Q4.

So there are a couple of, I'd call, headwinds, but those are really just replacing us to pre-pandemic levels.

And then normally, in Q4, we just have some other margin pressures given the holidays and some other things that we manage through.

But nothing of note.

And finally, there are -- there is a small amount of incremental investment.

I referenced some of the things that we're doing around supporting our consumer business.

We want to continue to build that business.

We think it's going to be increasingly important.

And so we do have the opportunity, given our business performance, to invest.

And so there's a little bit of commercial investments in our consumer business in Q4 that's a step-up from where it's been in Q3.

Next question is from Pito Chickering from Deutsche Bank.

Two quick ones for you.

I know that you're more experienced with the preferred lab networks, what leverage do you think plays a bigger impact with changing this sort of behavior?

Is it the 0 co-pays for the consumer, or is it the lower admin burden from the referral sources?

And also, a quick follow-up on the core organic volumes.

You mentioned seeing geographic pressure in New York City.

Is geographic weakness the primary driver that you're seeing across your book of business?

Or is it a more broad based specialties like pain and tox that haven't recovered yet?

Yes.

So we continue to work on our relationship with UnitedHealthcare.

As we said in '19, we've made some really good progress of picking up share related to the PLN.

We had a lot of things to do in the fall of 2019 with -- related to employers.

There are a lot of pocket, and there's preauthorization work.

And then we really felt good about January and February.

We actually did see a nice progression of our volumes, and then we hit the pandemic in March.

So we continue to work those programs.

As a matter of fact, this week, I'll be spending time with United on this.

So we continue to work on everything we can do to move more of their lab purchases to the PLN, and obviously, specifically to us.

And there will be other programs that we're working with them by geography, by state to be able to make sure that employers and patients and integrated delivery systems understand the value of what we deliver.

And remember, if you go back to where we started, now we believe that by the improvement in access with United and Horizon and Anthem in Georgia, this is the time of our last Investor Day, it afforded us about a $4 billion opportunity in the market.

And we believe that we should be able to get about 25% of that.

We received some of that in 2019, and we believe there's more opportunity in front of us.

So what I'm going to share with you is we continue that work in 2020, and we do expect it will continue to help us pick up some share in '21 to accelerate our growth.

Yes.

I just want to remind everyone, Pito, that the 0 out-of-pocket still has a way to go.

So they started with their fully insured small plan and then expanded it, and then it is going to go out to the sponsored plans.

Obviously, they have to market that to the employers who are paying those bills.

And the good news is we're collaborating with them on that and trying to demonstrate how that will save employers a lot of money.

So to this point, most of the movement has been through other activities in that it has done to encourage physicians to stop using out-of-network providers, having us go in and show them the benefit of moving that plan before into us and the PLN member will still a lot of runway in front of us in terms of how that might benefit be, lower burden is really just a new thing.

They we're putting in some pretty significant requirements around some of the higher cost testing.

And labor wise, that -- 2 things.

One is that the PLN members generally have more responsible panels or an approach to clinical testing.

The second is, obviously, we have good prices compared to some of the other providers.

And we've mentioned in the past that some of the managed Medicaid payers still outside of United and used this approach in specifically toxicology to drive better value.

They were -- with toxicology exploding over the last couple of years, they put in some very tight restrictions on utilization.

And seeing that the national labs tend to do this responsibly and have better prices, they exempted us from their pre-op.

So not only does it make it easier on physicians and patients, but it tended to steer more work to us because the administrative burden is lower.

So United sees that in the same areas where they're trying to control some of the growth in high-cost testing, but that the benefit to us is to come yet.

Next question is from Matt Larew with William Blair.

We're in the early weeks of the traditional flu season, so I had a couple of question.

First, what are your expectations going in with respect to potentially higher vaccine rates or social distancing?

What are you hearing from physicians about approaches to flu versus potentially flu COVID or flu RSV COVID combos in symptomatic versus asymptomatic?

And then what are you hearing about with respect to reimbursement on those combo offerings versus the individual NOIs?

Yes.

So Matt, we're watching it carefully.

We believe that when somebody presents themselves with symptoms, they want to rule out COVID.

And we believe that PCR testing will be the option.

As we've mentioned, we brought out a new solution which we feel really good about.

With the single swab, you can test for influenza.

You can also test for other viral and bacterial issues.

And that is going to be very convenient for physicians just to quickly diagnose and then treat the patients effectively.

Now what you bring up, we're watching it carefully, with all of us being socially distanced and all of us doing a better job of hygiene and [school] is not being currently back until session, it might actually lower the infection rate this year, but we're not certain of that, and so we're watching that.

So Mark, do you want to talk about reimbursement for some of the ...

Yes.

It's still to be determined.

Basically, for reference, CPT code in 87631, which is the respiratory multiplex panel, with 3 to 5 targets is $142 today.

87632, which is -- with [6 to 11] targets is at $218.

And then 87631 reflux, with 12 to 25 targets is $416.

So still to be determined exactly where we come out on this.

Still have negotiations with the commercial player -- payers, but at least we could reference in the pack for some of these multiplex panels, the reimbursement is reasonable.

Next question is from Brian Tanquilut from Jefferies.

Congrats.

I guess my question for you guys, you talked about serology and how that plays into the 2021 outlook.

How are you thinking about the ramp of that?

And what are the conversations right now with payers on potential coverage or likely coverage of serology once the vaccine's out?

Yes.

We're doing -- our share of serology, running around 10,000 per day.

We've got plenty of capacity in front of us.

We believe it's going to play an increasingly important role as we get into 2021, as the vaccine becomes available.

We're actively engaged with those pharmaceutical companies that are doing the trials for the vaccine, and trying to understand where we might play the role, the go-forward role, either with a vaccine or post vaccine, and serology has a role there.

We're also doing some serology population health testing.

We've done some work for states, and we're doing work for the CDC.

And we believe that, that work will continue to get -- to have a good handle on what's happening with progression of the disease and have an early warning signal if they're moving in the wrong direction.

So more to come.

We're working through that.

We do believe it's going to be a growing and bigger opportunity in '21.

And more visibility of that as we understand what the vaccine is, understand the progression of where we are with the pandemic.

And then also, we will be bringing new solutions out to the marketplace that will provide more and more utility around serology.

And more to come on that, but we're working on the science.

And we believe it's going to be more we can do to contribute towards the pandemic as we go in time, particularly as we see how the COVID pandemic progresses.

And in terms of discussion with the payers, it's still early, Brian.

This is not clarity around the exact role that serology is going to play.

And while we believe there's going to be an important role, it's not at a point where we're in detailed discussions with the payers yet.

Next question is from Derik de Bruin with Bank of America.

Just a question -- a quick question on the impact on the business from pooling.

How much of the samples are being pooled right now?

And what are the economics on that and the reimbursement for that?

I mean, how much is your cost savings?

And I guess how much of the volumes do you think can ultimately be pooled?

I mean realizing the fact is you've got to have low pandemic areas to do that.

Just some of your thoughts on that for the business.

Yes.

Sure.

So remember, we talked about 200,000 tests per day for capacity, and preferably, that resulted in the third quarter about 100,000 per day.

Roughly 20% to 25% of that volume is done on what we call our LDTs.

That's where we've been leveraging the pooling capability.

It's particularly useful.

It has good improvements in productivity and efficiency where you have low prevalent populations, because when you do the pooling, when one well lights up, you have to test for that well, and you get to 14% to 15% positivity rates and -- in locations, and that doesn't work out anymore.

So we're applying it in the right way.

It's primarily around our LDT portion of our capacity.

And what I mentioned in earlier comment was we're looking at applying that to our IVD platforms as well, and that will be helpful in moving our capacity from 200,000 up to 250,000.

Yes.

And just to remind everyone.

As Steve said, the efficiency is really highly dependent on the positivity rate.

And while we do save on reagents, it's not in order of magnitude less expensive.

The real economic benefit of pooling comes from capacity increase.

So there's our ability to do more testing.

And the margin we get on that testing, not a huge difference, there isn't that -- not a huge difference in the cost for individual test that we pool.

Next question is from Lisa Gill with JPMorgan.

I just want to go back to the guidance that Mark gave or kind of preliminary thoughts for 2021 and just to understand just a couple of things a little bit better.

When we think about the base business, what's your expectation around unemployment trends?

And as we think about the near term, what we've seen in the last few months, do you think that unemployment is having any impacts on your core volume?

And then secondly, when we think about COVID and we think about PCR testing persisting into 2021, do we think about that just in the first part of the year?

And when we think about a potential vaccine, what are your thoughts around PCR testing?

I understand your comments around serology, but how do we think about PCR testing playing into a vaccine?

Mark, do you want to start with '21 comments?

The economy?

Yes.

Of course.

So Lisa, it's hard to know specifically what's driving the dampened utilization.

Certainly, things have opened up a lot more than they were in the spring.

So whereas physician offices were closed, I think there was a huge fear on the large part of the population around engaging with the health care system at all because of the risk potentially of capturing COVID when you went in the physician office.

And while I wouldn't suggest that's eliminated, certainly, that has improved dramatically.

So there's some overhang left there, certainly.

But the unemployment rate is probably a contributor right now, and we don't know for certain.

And we wouldn't expect that could change dramatically, in certainly the next 6 months.

And who knows how long before it might turn around.

So we're being cautious around our thinking for next year, and we want to just share that.

Obviously, people will form their our opinions.

But we don't -- if we would expect unemployment to have some dampening on utilization going in next year.

In terms of the COVID volumes, we haven't modeled and we haven't given guidance for 2021.

But maybe 3, 6 months ago, some of us had hoped that COVID might be behind us this calendar year.

Clearly, that does not look like it's going to happen, but all is depends on how quickly the vaccine is scheduled out, how effective they are.

And even once they get rolled out, we see a role.

So whether it's the level of testing we're seeing today or something a little less, we expect there to be a meaningful amount of COVID testing, including the PCR testing, throughout a reasonable part of next year.

Yes.

Just to add to that.

Remember, with the economy, and we saw this back in the Great Recession, and whatever happens in the kind of it will affect access.

And so access is important to us in the insured (inaudible).

And the second is consumer confidence.

And now a large portion of the population paid their own pocket.

And therefore, they're going to think twice of utilizing it.

So we are thinking about it as I think about models in '21.

Now with that said, if you look at where we are with our base business versus where it was, and you think about the mass in the full year, it should be an easy comparison, as Mark said in his comment about '21.

Even if it's down versus '19, just to look at the comparison of what the full year will be for '20 versus '21 given where we are right now, that makes for an easy comparison.

And as far as PCR, remember, we brought up our first PCR test on March 9, and we've been ramping rapidly.

So we not had a full year of PCR.

We're hitting our stride.

We're building capacity because we do anticipate more demand.

Winter is coming, and we're all anticipating more demand as we enter the winter, clearly, in the first quarter.

And then we'll start to see hopefully some of the vaccines.

As we all know, those won't be broadly deployed immediately.

And the pandemic and the virus will be with us for a large portion of '21.

And so if you think about the full year of '21 for COVID '19 versus what we did in 2020, there's still going to be a lot of eye in for testing.

And you have the full 12 months, which versus essentially a half year for PCR in 2020.

So it's something to think about as you do your models.

Yes.

And to Steve's point, for this year, based on our guidance expectations, we see our base volume down organically in the high teens.

So even if it's down a couple of hundred basis points in 2021, it will still be easy to compare for the full year.

Last question is from Mike Newshel with Evercore ISI.

Going back to the geographic differences on the core volume rebound you mentioned.

I'm just wondering if you're seeing fluctuations tied specifically to whether new COVID outbreaks?

Like is there patient behavior changing and affecting the core business when cases spike in?

Or is that variation just more correlated to how far along local economies are into reopening?

Is there volatility at the local level?

Or is it just some states are bouncing back faster than others?

Yes.

Well, it's 5 states and really big 4 states.

California shut down first.

And we saw a steady rebound though certainly not back to pre-pandemic levels, particularly in some of the large cities like L.A. If you go into Texas, we actually saw a good rebound in Texas.

We have a great presence in Texas, both in Houston and Dallas.

And despite some of the flare-ups we saw in the summer, they still continued to be in the range of where were pre-pandemic.

If you look at Florida, went down in the spring into the summer.

There's still issues in Florida.

We're still not where they were pre-pandemic.

And then if you go to the Northeast, New York and then go into Boston and Connecticut, actually, we've seen some nice steady recovery, with the exception of, as we've indicated earlier, New York City, but specific to the borough of Manhattan.

We still have a ways to go to recover there.

So we're watching those, particularly related to detection rates.

But what we have said is there are going to be flare-ups.

Interesting enough, like in the state of Texas and Florida in the summer months, you did not have a negative of a consequence to our base business as we saw back in the spring.

And so we're watching it carefully.

But so far, we're getting there.

And then again, you can't onboard that clinical franchise element on this because some portion of the volume effects aren't related to these specific businesses like prescription drug monitoring.

There's other issues related to what it takes to get those back to pre-pandemic levels that are not related to the geography at all.

Yes.

I can't say they're precisely negatively correlated.

But actually, that would be my representation.

The areas with the lowest positivity rates, like New York, actually are down the most.

So as you know, we haven't seen a huge parallel movement between spikes in COVID over the last several months and a current downturn in utilization.

It actually has kind of gone opposite direction.

Okay.

So thank you, all, for your questions.

We appreciate your support on this call today in general.

And we wish you all a great day.

Thank you for participating in the Quest Diagnostics Third Quarter 2020 Conference Call.

A transcript of prepared remarks on this call will be posted later today on Quest Diagnostics website at www.questdiagnostics.com.

A replay of the call may be accessed online at www.questdiagnostics.com/investor or by phone at 1-800-337-6568 for domestic callers or 402-220-9660 for international callers.

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

Eastern Time on October 22, 2020, until midnight Eastern Time, November 5, 2020.

Thank you, and goodbye.