Quest Diagnostics Incorporated (DGX) Earnings Call Transcript
September 10, 2020
Earnings Call Speaker Segments
Hello, everybody. Thank you for joining us for the fireside chat today with Quest Diagnostics. Joining us from the company are Mark Guinan, CFO; and Shawn Bevec from Investor Relations. I'm Dan Leonard, the life science tools, services and diagnostics analyst with Wells Fargo. The format is fireside chat. So if you have a question for management, please raise your hand in the Zoom function or you can just shoot me an e-mail, and we'll try to address it. I'll kick off the Q&A. And first off, welcome to you, Mark and Shawn.
Thanks, Dan. Glad to be here.
So it wasn't on my kind of prepared list of topics, which is what I want to address off the bat is your guidance update, since you put out a press release this morning, updated your views for 2020. Mark, maybe can you talk about the highlights there? And then I have 1 or 2 specific questions.
Sure, Dan. So we laid out at the end of July in our second quarter earnings call, a fairly broad range, talked about some of the key variables that were beyond our control, somewhat difficult to predict. One of them was overall utilization. We were kind of early in the Texas and Florida spike. And we had mentioned, we saw a little bit of downturn in that business. We weren't sure how much that would continue. We were concerned, could we see utilization impact that we saw in the East Coast in New England, which was very, very significant in -- starting in March through April and May. Obviously, it was a little bit different because the shelter-in-place rules weren't quite as restrictive as they were there is, but there was a lot of uncertainty. So we didn't get into a ton of detail through the whole guidance range, but we talked about the bottom end of the range being an assumption, we'd average down 20% for the balance of the year. We've now got a couple of months under our belt. We shared that it's been more in the high single digits. So I think a combination of utilization trend for the last couple of months being more favorable, but also a confidence that it's unlikely to see another utilization hit like we saw in the spring, even if there is a surge in the COVID cases in certain geographies, says that it's unlikely that we would average down 20%. So we brought up the low end, but obviously better utilization also impacts the mid-range and the high range as well. And so really, differing some of those variables we talked about was the core business, the base business utilization and it being stronger in its recovery that we could predict to that the timeline we gave last guidance in late July.
Okay. So bottom line, really no change in your COVID testing assumptions and no change in your assumption that COVID PCR reimbursement would get cut at the end of October.
Yes. So I will qualify that to say that PCR volumes, I'd say no change for the back half of the year. I think the -- what we had said was we expected to continue in Q3 at levels that we're performing at around the time of that earnings call and that we expected it to drop-off in Q4. Now where we're at, kind of, if you look at the midrange. And of course, there's a range. So it could be worse than this, it could be better than this. We are doing a little bit less than we expected to do right now, but we no longer think that it necessarily will drop-off in Q4. And so it's more likely to be consistent with Q3 than the drop-off in Q4. So kind of the average amount or the total amount of PCR testing, we're doing in the back 6 months, it's still pretty consistent with what we thought back in July.
Okay. And then the assumption you included on guide around PCR pricing, is that still like the effective assumption?
It hasn't changed. Everywhere from the bottom to the top of the guidance, assume it changes. In October, I want to reiterate that we don't have any inside information or intelligence to suggest it will. We don't think it should, but just because it's so impactful, and there's lack of certainty until we get closer and they communicate, whether they're going to extend or we just thought the safe ground you assume it to date.
Okay. And then kind of a more nuanced change in the guide, somebody already flagged this to me this morning on the EPS side. So there was a change seemingly in your COVID adjustment that was reflected in a much bigger change in your reported EPS compared to your adjusted EPS. Is there anything that -- is there like a simplified dumb down way to explain it to me on what the difference is there?
The vast majority of that is we got a second tranche of CARES Act emergency funds. And just like we did with first tranche, we're not planning to leave that in our adjusted earnings. So it will be in our GAAP earnings, but not in our adjusted.
Okay.
We also had a gain on the MACL acquisition.
Okay.
Yes. So recall, we were already a part owner on the MACL, so, yes.
Sure. Okay. All right. So moving right along to COVID testing. You mentioned that you already addressed that volume -- PCR volumes are down from where they were when you reported earnings. I think what has some investors concerned is that this whole circulating narrative that we've seen the plateau or we've seen the peak of COVID testing and the trend is on the down slope. It doesn't sound like the house view at Quest though is consistent with that. Is that the case, you expect kind of steady PCR test volumes between now through year-end?
We do. I think we were surprised like many people that demand dropped out, but you've seen it's not just at Quest, it's across the market. But some of that also was, we had to step back from some of our retail arrangements because we were getting overwhelmed, our turnaround times were getting unacceptable. And so we purposefully slowed some of that down and turning that back on takes a little bit of time. So we certainly expect some of that to give us a little bit of a tailwind going forward in terms of where the overall rest of it positioned, hospital business, which makes up a vast majority of the non-retail piece. I can't predict where that's going to go exactly. But if it dips a little bit, we think that, that's going to be offset by an increase in retail that we have good view in our pipeline.
Okay. And then what about the more nontraditional settings of demand, back-to-work, back-to-school, those types of settings. Do you have any funnel you're willing to speak to on that front?
Yes. So those make up a much smaller part of our overall volume. As I said, the big 3 I just covered, but we've got return to work. We've got -- actually, we'd say we do some work for prisons, we do some work for long-term care. And those are all much, much smaller pieces. In terms of return to work, return to school, a lot of what we had in our pipeline has already been performed for return to school. Return to work, some of that has been slowed down, delayed or canceled because I think people's view of when they'd be returning several months ago is not the same. So some of that work may still come, but returning to school, not a lot in front of us, return to work can come and go and because we all know that companies are struggling with that decision. So it's a small piece, but still every amount of volume is important.
Okay. And then another one of the topics du jour, as it relates to COVID is how all the different testing modalities will interact. What do you see as the impact on your business from things like an increasing number of rapid antigen tests gaining FDA approval?
So for the most part, there's 1 exception. For the most part, the antigen tests are approved to screening assays. And that is a clinical health care approach, you do screening. And then depending on how the screening comes out, you were very potentially doing diagnostic like a PCR test. And we expect that it should be neutral to positive. And the reason for that is, certainly, we get some volume where they're asymptomatic people, and the result is negative. And you could do that through screening, and that doesn't require any additional steps. But if asymptomatic patients or people are given an antigen test, and it's positive, it's supposed to revert to a PCR, so therefore, the more broader use of antigen testing could, in fact, help drive more PCR testing for people that wouldn't have had it otherwise. And then, of course, if an antigen test is used on a symptomatic patient, which we're not sure why you'd want to do to that. Whether it's positive or negative, it should revert to a PCR for confirmation. So that's not a headwind. So the only case where antigen tests could negatively impact PCR, if you follow the guidelines would be for asymptomatic with negative results. We don't know it precisely how much of our volume that is today, but we don't think it's a vast amount of our volume today based on where we're getting the orders from, and then you have an offset, which you think is equal or larger, which is more broadly screening is done, generally diagnostics benefit.
Okay. Yes. I'm actually surprised to hear you say that the asymptomatic testing is not a big part of your volume today. So did I hear that correctly? Most of your testing today is symptomatic? And is that the case?
We don't know exactly, but I'd say the amount of asymptomatic that would have a negative result. So remember, it's not just all the asymptomatic testing because asymptomatic screening that has a positive should still come to a PCR test. So that realization would come from asymptomatic testing we're doing today that has a negative.
Okay. And then where do you see various pooling methods? Like what role is that going to play in your overall strategy and your overall capacity plans for COVID?
We're currently pooling on our -- only on our laboratory developed test. And that has been a major driver of the increase in our capacity that we achieved over the last number of weeks. Obviously, the efficiency of doing that is dependent on the positivity rate. So we're really focusing on samples from low positivity geographies. We do have the ability to work on pooling on the other platforms, which could also greatly expand capacity. And it's something that we're ready to do, should we look like we're going to need capacity beyond the $200,000 that we're getting to very near term. So pooling is possible beyond our LDT, but right now we're only doing on our laboratory developed test.
Okay? I mean if we ended up in a scenario, whether it would be in the fall because of flu or whatever might drive an increase in COVID testing. How quickly, I mean, I feel like it's been yeoman's work to get from 50,000 a day to 200,000 a day. And you have made great strides there. How heavy a lift would it be to get from 2,000 -- 200,000 to something higher?
Well, it depends on what you meant by higher. I mean, we're not going to be able to double that in any reasonable time. But if we get another 50,000 a day in capacity through some of the things we have line of sight to, absolutely.
Okay. And when you say line of sight, does that again refer to pooling? Or is that with what you know of different vendors and their capacity expansion plans with vendors, where there might be bottlenecks today?
Well, there's multiple levers we would pull. I don't think pooling is probably the biggest lever that we would look to pull on the IBD platforms that we already have installed and that we're doing PCR testing on. But also there are some other things, including accessing more equipment, but also access to noncompeting labs where we've now set up interfaces and so on. So if we have volume beyond our capacity, we can actually send it to them and utilize them to expand our capacity. So there's a number of things we can do. But probably the biggest one of those would be the ability to pool our other platforms. But again, that would also be dependent on positivity rates being reasonable because once the positivity rates get up into the low teens, you start to lose the impact. I think our math is, once it's above 14% or so then it doesn't make sense to...
Okay. And how do you feel another dynamic in the market is, we've seen the entrance of a number of new competitors, both new technologies, new service providers? How do you feel about your share position on the PCR testing market and this mosaic of new entrants?
Yes. So when you say share, it depends on how the market is defined. So for the rapid PCR tests that have very limited volume to the extent that people are starting to utilize that, it's going to grow the denominator. It's not a market we truly have access to. I don't think it's a market that's going to significantly replace the volume we're doing today because it is -- does have limited capacity in any given geography. And so therefore, I think that's good for society. I don't see that as a threat to us if some of that testing is being done. I think our core PCR testing in the volumes it comes from, we haven't seen any significant changes, by source. So if you look at the percentage of the volume we're getting from physicians versus hospitals versus retail, retail came down a little bit, but some of that, as I said, was by intentional actions we took, it really hasn't changed much. So really just the overall demand where PCR testing which has got, I think a lot of people scratching their head has just dropped. And some of that could be because our turnaround times were so poor as an industry for a while, and some people just decided it wasn't worth getting it or ordering it. So that may be one of the drivers. But we haven't seen any material changes in demand by source, which to me says, there's not a technology or a new platform or something that's replacing our role within COVID testing.
Okay. So maybe that for now is enough on PCR testing. Let's shift over to antibody testing. What do you see is the ultimate role for COVID antibody testing and how you'll participate in that?
Yes. I see -- I think there's 3 purposes of roles for antibody testing. I think a lot of it is behind us, which was curiosity. So we had a huge surge when we first launched the antibody testing. A lot of it came through our consumer direct because people in areas of high prevalence wanted to know. And that's fallen off significantly. It kind of reached a steady state, above 20,000 tests a day or so. And I don't see that changing dramatically until a vaccine comes out, and I'll touch that in a minute. The second role is really for population and health. So we've already done some work for the federal government, and there's an opportunity for us to do more of that. We have to compete for it, but I know the federal government wants to do that, really understand the disease more by doing the antibody testing on blood specimens that we already have as opposed to ordering antibody testing. So we've got millions and millions of samples of people around the country that we can pull out and retest for in a lighted fashion for antibodies, and we can help the government understand how prevalent the disease was, which is important to understand. The infection rate, the mortality rate and so on. So doing some of that work for government entities, I think is another critical role for antibody testing. And then the third one, of course, we believe is when the vaccine comes out, that may require a quantitative antibody test. You can measure the levels, especially if we -- as we learn more about the disease and the vaccines, there's a certain level of antibodies that you need in order to have immunity or resistance. But one way or another, we would expect if there's limited quantities or if the vaccines themselves are not 100% effective, you don't want to do antibody testing either to prioritize who gets the vaccine by testing for the antibody first, or by testing people post vaccine to see if they have enough antibody or they have the antibodies that made the vaccine effective. So we would expect not a significant change in antibody demand other than some of the work we might do for the government until really the vaccines come out. And at that point, we would expect to step-up in the need and demand for antibody testing.
How should we, as investors try to frame that or try to understand the house view at Quest? I mean if there was -- do you think about number of doses of vaccine and each one might require a pretest and a posttest? Is that what I'm -- am I playing that back correctly? Or are you thinking about just some more modest targeted utilization depending on vaccine usage? Like what's the current house view?
Yes. So I mean, I'd say that's still to come, Dan. I'd be a little hesitant. I mean, we do have a view, but I don't want to suggest that it's going to be the view, and I don't want to suggest that all the key stakeholders will line around it, but I know others share our view, which is, you'd want to prioritize, if it weren't for limit vaccines. One of the ways you could do that was to do antibody testing clearly, because you would want to make sure anyone you're using that limited vaccine for needs it. And then the second thing, of course, is the early data out of some of the vaccine trials is that they're not 100% effective. And so not sure why, but the guess is, either you don't get the antibodies, you don't get sufficient antibodies, that would imply that there's a role for antibody testing, but again, it's still early for me to have anyone build models off of that.
Okay. So trying to think about a world post pandemic, if that's even possible. What do you think are any kind of lasting impacts of the pandemic on your business, both from a positive or negative standpoint?
Yes. So I would not expect, and I certainly hope for society that COVID testing would be an ongoing part of our business. I would hope that at some point through vaccines and some sort of herd immunity and so on that the COVID is greatly reduced. We also hope it's not [indiscernible] as the flu, which one would expect based on the coronavirus, so it wouldn't be. So our expectation and our hope is that it dampens down over time. Don't know exactly when. But obviously, the advent and the availability of vaccine is a key driver. So it might -- I'm sure it will still be around. It might be the level of our flu testing because there's not a ton of PCR testing done for flu. So it's not going to go away, but it's certainly not going to be significant. So really, I'd say, the biggest impact of the pandemic is the pressure -- continued pressure it's putting on consolidation of the industry. I don't have any data, I don't have any facts. But I'm guessing that a lot of the smaller operators have struggled through this. We do have some anecdotal data to suggest that we gain share. We don't have any third-party independent verification of that. But if you look at some of the data around utilization, we tended to be outperforming that pretty consistently, which says we might be picking up share. The other thing is that we have found that we're doing or draws ourselves as a percentage of our testing through the pandemic. And what that would lead us to believe is that telehealth either with third-party telehealth companies or physicians just deciding to see patients remotely. That has benefited us because of our access and the fact that we continue to operate through the pandemic, keep most of our patient service centers open, has benefited us. So we do believe we've gained some share, Dan, and certainly, we would expect to keep that, and not lose that once we get out of the pandemic. And then the third thing, I'd point to, is the ability to invest in some things that maybe we couldn't afford before. So we come in every year, we have to make a decision on near term earnings. We got to deliver and obviously investing in the long term, and we try to do the best we can in that trade-off. There's some longer-term or even somewhat near-term investments that don't make the cut. So as we've had the benefit of the COVID test in this year, and obviously, we're not projecting to significantly outperform what we thought we could do at the end of the year. We've also built in some investments that we couldn't report previously. And so those should help us over the next couple of years as well. But when I say that, none of those things are going to replace more than $1 billion of PCR testing. But at least as we come out of this, we expect to be stronger than we would have been otherwise, had we just had a normal year.
Okay. So maybe moving right along. Can you give us an update and mark us to market on the progress you're making with The UnitedHealth preferred lab network strategy and also conversations with other payers along those lines.
Sure, Dan. So I'd say, the preferred lab network strategy has been pretty much on hold during the pandemic. And the reason for that is in order for us to execute against that, we have to go in the physician office, talk to them about the advantages of using a preferred lab network, and we've had limited access for periods of time. We had no access and now it's just starting to come back in certain places. There still are some offices that will only allow staff and patients. And it's hard to move forward on that. And then guidance activity around writing letters and some of the other things that they were doing was, I'd say, somewhat on pause as well. That is getting restarted, and certainly, it will continue. And once we're able to go in, again, to our customers and talk to them about value we provide and the advantages of sending lab orders to a PLN, we would expect to continue on that path that we laid out at our Investor Day 1.5 years ago. We feel we have a long way to go to get our fair share. And then certainly, we expect to get there. It's just going to take a couple of years. We have elements of the PLN with other payers. It's not exactly -- there's not been an announcement of another Preferred Lab Network. But some of the, what I call value-based contracting, which is understanding that there's ways to create value beyond cutting our price and that we are positively differentiated around the service. We're really a service business. And everything from the My Quest app, to having our real-time estimation tool, where you can actually find out what a lab costs you before you get the draw done, to the quality of the data we provide to payers. A lot of labs don't even give them the data that we are really positively differentiated. And so therefore, let's work together to get more volume through us and anybody else who meets your criteria, which is the way the PLN works as opposed to you treating us like the commoditized provider of a laboratory test for a long time, but obviously, us getting in the United and the announcement of PLN shows that if you were successful with United. I think some of those elements of what we're doing with them, we're doing with other payers. So even though you haven't seen a public announcement of a PLN. And certainly, with the Anthem announcement, again, this is not a PLN because there's not a group of labs. And there as -- I am sure there's things Anthem is doing with other labs as well. But this is an agreement between the 2 of us. It has a lot of those same elements of working together to drive better patient outcomes, drive better value for their members. And really, we win together. So we partnered to move lab work, the costs from high-cost or less clinically relevant laboratories, and they win, their patients win and we win, but really got the same notion as the PLN, but it's not a PLN precisely.
So Mark, and maybe's there'd be too much specifics involved in the answer here, but how would an announcement like as you described with Anthem would be different than any other network steerage strategy where they would try to steer volume to an in-network lab. Like what are the incremental bells and whistles on a program like that, that are more nuanced?
Yes. So what I would say is a couple of things. One is a commitment from Anthem, do some things that we've told them are absolutely critical to be successful. But there's been some discussion and certainly some activity in the past. And I think the payers and the independent labs have been frustrated because it's only been partially or even not successful. And this is because some of the things that had to be done didn't get done. So it was an absolute commitment on their part to do certain things that we said were critical. And then on our part, it was a commitment in order to save that money through some of this steerage. So it was really a financial commitment that we're very confident we can deliver, which got them motivated to do the activity that we said was essential. And once we meet that commitment, then it's kind of a gain share arrangement beyond that, where again we both benefit and create even more value than these certain level of commitment. So that's very different than the structures and arrangements that we've had in the past.
Okay. So moving right along, I think my question around updating us on the base volume is obsolete at this point, but maybe I'll just double make sure I understand the communication. So the current guide range assumes this negative high single-digit decline for the balance of the year in your core business, right?
Yes. I'd say the midpoint of the range assumes utilization stays about where it is. And obviously, the lower end of the range, and it could -- there is multiple variables, but possibly it could be driven by utilization dipping and then obviously, the upper end of the range, more likely to come from an increase in PCR. But certainly, there could be an improvement in utilization. We still don't expect utilization to return fully by the end of the calendar year. And it's not just COVID, it's the economy, it's the uncertainty with the election. There's just a lot going on. So we don't envision any of our scenarios a full return to pre-COVID levels. So we can be wrong, and we would be happy to be wrong there, and then there could be some upside.
And final question in the minute we have left here. Can you comment on the funnel of hospital lab acquisition opportunities? I know that's a big part of your strategy.
Yes. I mean, it's really deep. And as we said, getting deeper, we always have a pretty good pipeline, but a lot of it has been on our initiative. And in the past, sometimes we've been reluctant, and told, no, no, no, we like this. We want to keep this. We're going to -- we know commercial payers are putting pressure, but we're going to milk this and a couple of the large systems in the past told us they weren't interested in monetizing, have proactively reached out to us, and said, "Hey, you know, the last time you talked to us, we said we weren't interested, but we'd like to start those discussions again." So my guess is that some of them use an influx of cash, they understand that this business is not core. It doesn't competitively differentiate them, actually create some patient dissatisfaction because of the high prices. So -- and that combined with -- although we hope it gets fixed, it hasn't been fixed yet, they typically have more Medicare revenue than we do achieve, and a list of factors. And then combined with the pandemic, and I think some of them are revisiting that question and have expressed an interest in talking about getting out of that business and selling it to us.
Okay. Well, with that, we're out of time. Mark, Shawn, thank you for joining us today. Everybody on the line, thanks for your time and attention, and have a great day.
Thanks, Dan.
Thanks, Dan.
Thanks to everybody.
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