Good morning. Welcome to the Quest Diagnostics 4th 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 was all rights reserved. Any redistribution, retransmission or rebroadcast of this call in any form without the written consent Quest Diagnostics is strictly prohibited.
Now I'd like to introduce Sean Durek, Vice President of Investor Relations for Quest diagnostic. Go ahead, please.
Thank you, and good morning. I'm here with Steve Ruszkowski, our Chairman, Chief Executive Officer and President and Mr. Geinan, 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 these are 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-nineteen 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 ks and subsequently filed quarterly reports on Form 10 Q and current reports on Form 8 ks. The the company continues to believe that the impact of the COVID-nineteen pandemic on future operating results, cash flows and or its financial condition will be primarily driven by the pandemic severity and duration, healthcare insurer, government and client data reimbursement rates for COVID-nineteen molecular tests, the pandemic's impact on the U. S. Healthcare 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 from base business refer to testing volumes excluding COVID-nineteen testing. Growth rate associated with our long term outlook projections, including total revenue growth, revenue growth from acquisitions, organic revenue growth this is a significant increase in adjusted earnings growth, our compound annual growth rate.
Finally, revenue growth rate from acquisitions will be measured against our base business. Now here is Steve Orkowski.
Thanks, Sean, and thanks, everyone, for joining us today. McClus had a strong this quarter was our base business continuing to recover to near pre pandemic levels. Contributions from acquisitions and TLS relationships accelerated growth in the base business that helped offset the reduction in demand for COVID-nineteen 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 in our recent Investor Day, Quest is well positioned to grow as the U.
S. Exits the pandemic, the people returned to normal activities and addressed 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 is a significant portion of our earnings call. We expect to launch an accelerated share repurchase this is the Q1 of 2019 or ASR in the amount of $1,500,000,000 in the coming days. This morning I'll discuss our performance for the Q1 of 2021, provide perspective on industry dynamics an 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-nineteen testing more than a year into the pandemic as well as provide our thoughts on recent news regarding PAMA. COVID-nineteen testing remains critical as supplies of vaccine continue to be available to all Americans. This testing will help control the spread of the virus. In addition to reducing hospitalization and saving lives, continued testing will be key we're helping segments of the economy reopen as more Americans become vaccinated.
This is
the case. 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 developments regarding PAMA. So we're encouraged that MedPAC recently submitted to under PAMA this is a very 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 long and didn't follow the intent of Congress. MedPath found that hospital, outreach and physician office labs reported higher payer rates than independent labs and that independent labs were overrepresented in the 1st round of PAMA data reported. We agree on both counts. The independent analysis by MedPAC also provides evidence that the Medicare clinical FFP schedule would have been 10% to 15% higher if CMS had units of more representative sample that included more data from hospitals and physician office labs. The Department's refused to claim that CMS collecting more hospital outpatient and physician office lab data would not have impacted the rates is conducted 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 related routine screening of care over the past year. We need to fix PAMA to avoid the next round of cuts on the horizon in 2022 and to help ensure the senior have continued access to critical lab services they need and rely on. Additionally, we were disappointed by the recent dismissal this is a subject
to a U.
S. Risk report of ACLA's challenge to PAMA. We are working with ACLA to deter the next steps with is a significant portion of this litigation. We continue to work with policymakers to establish a clinical laboratory fee schedule that is truly representative is a full market and supports continued innovation and access to vital laboratory services as Congress originally intended. Now turning to our results for the Q1.
Total revenues grew by more than 49% this compares to $2,700,000,000 Earnings per share increased by more than 3.75% on a reported basis to $3.46 and nearly 300% on an adjusted basis to 3 point this $0.76 Cash provided by operations nearly tripled to $731,000,000 As I mentioned earlier, in the Q1, our base business performed at its highest level since the start of the pandemic And continue to recover throughout the quarter. Demand for COVID-nineteen testing slowed in the quarter, reflecting an industry wide trend. We performed an average of 101,000 COVID-nineteen molecular tests a day in the Q1, which is well below our current capacity of approximately 300,000 tests per day. We are engaged on several fronts to will 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, this cost affected classroom PCR testing using pooling.
We want to help get the kids back in school and we're working with our many departments to get it done quickly 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'll talk today with Anthony through a few highlights of the quarter. We are excited about our ability to acquire the outreach laboratory services business of Versailles, one of the nation's most is highly integrated multi state healthcare systems. And as we indicated at Investor Day, we're having board discussion with leaders of larger health systems like Mercy.
The Mercy Outreach Laboratory Services business currently operates from 31 hospitals and clinical laboratory serving providers
this is the
first time we have completed the Q1 and the full year of fiscal 2019 and we're on track to complete this is a good start to contribute revenue for the quarter. We recently announced the sale of our Q2 solutions, Dykeubia for 7 is a $160,000,000 of strategic vision and ability to lead Q Select Solutions on the next
this company has faced
the journey as a global leader in central lab services and Quest will support it as a strategic this strategic lab partner. We made good progress taking advantage of this call will be recorded in the Q1. UnitedHealthcare implemented this initiative for moving out of network benefits for insured groups in selected states. We also brought in leakage and 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 execution for more than 3,000,000 members of EmblemHealth this is affiliated to EndoCare.
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 this 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 the financial performance. Mark?
This concludes today's conference call.
Thanks, Steve. In the Q1, consolidated revenues were $2,720,000,000 up 49% this quarter was $1,000,000 versus the prior year. Revenues for Diagnostic Information Services grew approximately 52% compared to the prior year, which reflected ongoing demand for COVID-nineteen testing services and to a lesser extent continued recovery in our base testing revenue, which increased versus the prior year, acquisitions increased 25.6% versus the prior year with acquisitions contributing 4%. The impact of severe wet winter weather during the quarter negatively impacted volumes by approximately 2.5%. Compared to our Q1 2019 baseline, total base testing volumes increased 1.5% this quarter benefited from M and A and new PLS partnerships that began in 2020.
Excluding the net impact of weather in the Q1 as well as M and 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. While COVID-nineteen testing volumes declined faster this quarter was a significant increase in the quarter and was slightly higher than expected throughout Q1. The decline coincided with reduced demand across the industry. Importantly, these volumes have stabilized this is a very strong quarter over the last several weeks. We resulted in approximately 9,100,000,000 electric tests and nearly 900,000 serology tests, is a record quarter of approximately 21% of the prior year.
We exited the Q1 averaging approximately 73,000 is a company that is currently in the range of approximately 70 3,000 COVID-nineteen molecular tests and 8,000 serology tests this quarter was $1,000,000 per day. Revenue per acquisition increased 20.5% versus the prior year, driven largely by COVID-nineteen testing. Modest unit price headwinds were in line with our expectations. Reported operating income in the Q1 was 660,000,000 this quarter was 24.3 percent of revenues compared to $175,000,000 or 9.6 percent of revenues last year. This quarter was $708,000,000 or 26 percent of revenues compared to 225,000,000 the fiscal year ended December 31, 2017, or 12.3 percent of revenues last year.
The year over year increase in operating margin was driven by the strong revenue growth this quarter was due to continued demand for COVID-nineteen testing and the ongoing recovery in our base business. The reported EPS was $3.46 in the quarter compared to $0.73 a year ago. Adjusted EPS was 3 point compared to $0.94 last year. Cash provided by operations was $731,000,000 in the first this is $247,000,000 in 2020. We completed $410,000,000 in share repurchases in Q1, and we ended the quarter with approximately $1,200,000,000 in cash on the balance sheet.
Including the net proceeds from the Q2 divestment, following the $1,000,000,000 increase in our share repurchase authority that we announced today, we now have the ability to execute approximately there's $2,500,000,000 in additional buybacks this year. We expect to launch an accelerated share repurchase transaction of approximately $1,500,000,000 in the coming days. This Turning to guidance. We've updated our outlook for the first half of twenty twenty one as follows. Revenues expected to be between $5,000,000,000 and the company is $5,200,000,000 an increase of approximately 37% to 43% versus the prior year period.
The increase is expected to be in a range of the adjusted EPS to be in the range of $6.30 6.80 cash provided by operations is expected to be at least $1,000,000,000 and capital expenditures are is expected to be approximately $200,000,000 Before concluding, I'll briefly review some assumptions embedded in our updated first half outlook and 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 and A and new PLS wins, we see the base business remaining slightly below our 2019 baseline in the Q2. We continue to anticipate a full recovery in our base business compared to our 2019 baseline in the second half of twenty twenty one. We are assuming COVID-nineteen molecular testing volumes will average roughly 50,000 tests per day in Q2 no meaningful change in COVID-nineteen serology testing volumes compared to Q1.
Given the significant progress of vaccinations in the U. S, we continue to expect a decline in clinical demand for COVID-nineteen molecular testing in the second half of twenty twenty one versus our expectations for the first half. This return to life testing such as the K-twelve school testing program should partially offset declining clinical demand later in the year. While we continue to believe strongly in the value of COVID-nineteen serology testing, we are not assuming a material increase in demand for serology testing going forward. This call will be recorded.
Finally, COVID-nineteen molecular reimbursement held relatively steady in the Q1, and the impact of COVID-nineteen molecular this is a very strong financial position in the Q1 of 2019. We expect to continue to see a significant sequential improvement in our overall financial results and we expect to continue to be in the range of $1,000,000 to $1,000,000,000 to $1,000,000 to $1,000,000,000 to $1,000,000,000 I will now turn it back to Steve.
Thanks, Mark. And to summarize, we're off to a very strong start in 2021. Our big business continues to recover back to near pre pandemic levels as people address the routine the care issues that they have neglected over the past year. And then finally, I'd just like to thank this call Quest employees and continue to serve the needs of people who rely on Quest every day. And so with that, we'll be happy to take your questions.
Operator?
Thank you. We will now open it up to questions. If you have additional questions, we ask that you please call back in the queue. Our first question comes from Kevin Caliendo with UBS. Your line is open.
Hi. Thanks for this concludes today's conference call. Good morning. Hey, good morning.
This is a good question.
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 this year over year, you don't expect it to recover fully. Is there anything that sort of changed or this was March an anomaly. So to 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 and A. So it's a 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 this is where we think utilization is.
So separate from new significant PLS wins and M and A where that base business performance is. So when we talk about it's expecting to be slightly down in Q2. That's that organic non PLS kind of utilization same store number, this is not our total base business performance.
So, Mark, it would be good to share kind of our implied this view almost can happen with COVID testing in Q2.
Yes. So we talked about this is a $100,000 a day in Q1. We talked about an expectation about $50,000 We also shared that we exited Q1 this is over 70,000, so that would imply a significant ramp down throughout the Q2. And that's based on our expectation that vaccines this will continue to roll out. We'll get more and more people who'll be protected and less and less clinical demand.
Of course, we'll see how that plays out, but that is certainly within the guidance that we're providing today, how we see the next several months.
So we do assume, Kevin, that our base business, let's say base business, it wouldn't include acquisitions of POS and organic growth, Let's just focus on revenue 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 acquisition had a range of guidance in the Q2. 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. Obviously, March was stronger than that. February was impacted by weather, as we said. But that's 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 Credit Suisse. Your line is open.
Great, thanks. 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 and 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, how should we be thinking about the broader excess capacity across the competitive landscape post COVID and how does that impact your positioning?
This Steve, let me take the guidance question first and then I'll turn it over to you. So Aaron, our current guidance obviously is only through the Q2 And we're not counting on any M and A that hasn't already been transacted. And even the deal that we announced, the SEC is not going to close and generate any significant volume or revenue in the Q2. So the current guidance does not anticipate future M and A. Steve?
Yes. So we feel good about the discussions and the funnel of prospects we have this for what we have characterized as our hospital strategy, there continues to be a lot of pressure on integrated delivery systems. They are considering their lab strategy as one of the options to help them. And we have a number of examples over the past 6 months this is on delivering on the strategies that we've talked about for years. And so to answer your question, we do see a continuation of interest in the building funnel with more prospects to come.
What we shared at Investor Day is we reaffirmed our this outlook that we would grow Loom through acquisition around 2% per year. What we shared is that we historically have delivered on that
the 3 years prior to
2021. And we believe that's still a good guidance number for us for this year and going forward, it's in lightening our outlook for growth. So finally, as we do see the trends in general, just like all of healthcare around consolidation. We do see systems interested in thinking about what's most this is important to them and what's their strategy and Quest help them with their lab strategy. And likewise, we see, if you will, there's fewer and fewer in network providers to the health plans.
And if you want to think about that, that was a consolidation play as well. And when those two forces happening, there will be more share and hence a fewer and our plan is to gain share. So all the megatrends and changes that are happening in our industry, we believe have actually improved to support what we've said for some time and in that I would argue it's both for what's happening with hospitals and also what's happening with health plans. This
concludes our next question comes from Peter Chickering with Deutsche Bank. Your line is open. This
concludes today's conference call. Good morning, guys.
Thanks for taking my question.
Within the routine market, can you give us some more color on strengths and weaknesses in this part of the country, looking at your customers, can you give us some color on doc offices versus hospitals versus the baseline? Yes. And the routine tests, any details you can give us on what types of tests are normalizing and for what are the laggard areas?
Sure, sure. So let me get a run around all the different the way we look at the market. So geographically, we have seen good recovery in Texas and in the Southwest. We're actually seeing really in the last several weeks starting a much better recovery in California and the West Coast, which is we see the South, East starting to recover and get us back to this 2019 level that we spoke to earlier. So I would say those are moving in the right direction.
Now the offset to that this is one is you've seen the spikes and the hotspots in the Midwest and when that happens and there's lockdowns and people are this is going to affect our business. So we've seen some of the assets, say, in the Midwest. And then finally, The Northeast, including New York and Pennsylvania and going into New England, it's still behind And it's recovering slowly, but we're really most off, if you will, in 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 work.
We're encouraged by that. We see physicians getting back to 19 levels, we see outpatient procedures getting back to 19 levels. So that business is tracking this nicely compared to where we were. And then the physician side, it all depends on what type of physician. This Primary Care is starting to turn on, oncology, particularly those that have postponed diagnosis and treatment for oncology is starting to turn on.
And at the same time, we still see our prescription drug monitoring business for mental health and behavioral health and drugs and abuse still down versus where we were in 2019 and that's an issue that varies by state of work in So I'll give you a feel for what's going on by physician, but also by what we've described as our clinical franchises. Marvin, if you'd like to add to that?
No, I think that's a good summary, Steve. Thanks.
Our next question comes from Ram Gia Koby with Citi. Your line is open.
Good morning. Thanks.
Good morning. Good morning. 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 So just trying to understand, if it reflects assumption of better core or the deals, just maybe color there reconciling the higher revenue.
And then second, this is the ASR included in the guidance because just based on the revenue increase in the recent margin performance, it doesn't look like that's this is factored in or otherwise, there would be an assumption of much lower margin. So just trying to
reconcile that as well. Thanks.
Yes. So let me take a shot at that, Ralph. Thanks. The higher revenue is absolutely driven by this 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 Q1.
We continue to expect to have that ramped down, But the base business has recovered stronger, certainly more than an offset on the revenue side. In in terms of the ASR, it is in the guidance. I just want to remind everyone that we had is committed to $900,000,000 in share repurchases that was already in the guidance for the first half. We did $410,000,000 in Q1. And then part of the ASR is related to the proceeds from the sale of 40% ownership and 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 600,000,000 this of the ASR as really offsetting the foregoing those equity earnings. We had already committed to $900,000,000 in the previous guidance was $500,000,000 there. So when you combine that, the share repurchases are really up just up by several 100,000,000 this is So I want to make sure everyone's clear on the math there. So it is reflected in the guidance.
Our next question comes from Brian Tanquilut with Jefferies. Your line is open.
I guess my question is 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 rec Or even revenue per rec that you saw in March, is that carrying over already into April? Just any color you can share with us on that. Thank you.
Yes. So thanks. Appreciate the question. Mark was encouraging and we're watching April carefully. And we do look at the number of tests for requisition to see if we're getting more density, if you will, we talked about the main explanation for our increase in the calculation of revenue per RAC had to do with COVID-nineteen,
this is
a strict 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. 2nd, there is a higher level of acuity and chronic disease and aging of the population. So we have generally seen a general there's a decrease in that, but nothing that was really notable that's standing out within March.
Our next question comes from Jack Meehan with Nephron Research. Your line is open.
Good morning. I was wondering if you could give us an update around your thinking around COVID testing for the second half this year, what do you expect kind of in terms of the base in terms of testing levels? And then also if you could give us an update 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. 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 continually trend in Q2 and that will continue into the second half. Now with that all said, we do see this transition from what we've tried is more clinical uses of PCR testing, roll in and roll out COVID for hospitals, the Ruland rollout of patients seeing their physicians and moving into return to life activities and there's a lot of activity around that, Jack. There's 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 them, systems integrators that will be coordinating the efforts beyond the laboratory testing. We're well positioned there.
Secondly, as corporations are now thinking about how to get people back physically into the places of work, maybe albeit not as full time as they once were, but despite the vaccination progress, they're still there's going to be testing requirements with return to work activities. And then let me just say the end to team piece of this is this is a big 2. We see the sports teams want to put fans back in the stands. We see New York City this is a very interesting way to get people back, return on them 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 will provide access for an individual over the course of the day.
So that type of activity will this will be a market portion of what we do for COVID testing in the back half. 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-nineteen testing and the PCR testing will continue in 'twenty two. This is not going away fast.
Our next question comes from Matt Larew with William Blair. Your line is open.
Hey, good morning Matt.
Thanks, Robert. Yes, good morning. Thanks I guess maybe a 2 part of
the first would just be
a follow-up to Jack's question, Steve, in terms of how much of that return to life this testing opportunity really is going to be in a sort of a reference lab setting with a day or 2 turnaround time versus 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 this 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 the appropriate utilization of that testing, particularly for surveillance. But as we the antigen testing sensitivity and specificity is considered for, let's say, day 2 through day 5 the the PCR test is really the gold standard to this rollout if someone's been exposed in the early days or rollout if the figure explodes in the late days. And so the sensitivity and substance that we have with our the 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 this is a important part of how we fight this pandemic. As far as the consumer, the consumer is trying to figure out if it has easy access they're just going to be a very good fit for the
Q1 2020 1 conference call. At the request of the company, they're just going to be a very good fit for the Q2 of 2019. 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 this is on average and the 2 ish shade that we often thought about several months ago. And we're now delivering results in there's less than a day for many tests that come in. And the reason for that is that, remember the remarks today, we're testing about 101,000 this is a very strong quarter
of the company. 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 when people want to get good access to the gold standard, They're going to rely on those places that can get access. So we continue our relationships with retailers. We're expanding our relationship with CVS has gone quite well. CVS is active on promoting good access to PCR testing on the drive ins and this 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 is a shift to back and if the turnaround types of the start up of my question. So that will continue to build. And if the consumers, as we start to return to this life in a safe way, want to be assured that even if they are vaccinated or they have natural immunity, they are not walking into a situation that they Might have been exposed in some ways if you fell through the cracks with other caveats we have with the 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 this is a very strong quarter to PCR testing, and we've got now, I think, a lot of good chance to do that.
Now we'll continue to be an opportunity for us in the back half.
And Steve, I'd like to add, I want to make sure that Matt and others understand how the surveillance works. In this case, when you pool, you get the economics to where it's affordable
this is to do more
broadly and more regularly because we're going to be putting up to 10 individual samples this is a very good question. 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 told 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 FDA is going to be 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 the sample.
We don't have the
capability of doing that. We notify the submitting entity that we have positive in one of the pools collection the specimen tubes and then they go forward and test those individuals.
Our next question comes from Tycho Peterson with JPMorgan. Your line is open.
Good morning.
Hi, sorry about that. This is Casey on for 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 the PCR is going down. Can we assume the same level of serology testing throughout the back half of the year and explain to me what the resilience is there?
Thanks.
This is our as I tried to walk through the math, this About a little less than $400,000,000 of the repurchases are truly incremental in terms of a EPS lift Because we had already committed to the full $900,000,000 and we had about $500,000,000 remaining in Q2 that was already in the guidance. So that $1,500,000,000 goes down to $1,000,000,000 incremental. A little over $600,000,000 of that is the proceeds from our divestiture of our stake in Q2. That's slightly accretive, but not materially relative to the forfeiture of the equity earnings there. So it's really less than $400,000,000 of share repurchases that are 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, this is a very strong quarter. Obviously, your realization in AWR that's less than that than $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 that 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 QCR.
Yes. Sorology, we look inside 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 this is stopping in patients in general with the virus and therefore that has value. We also believe that between PCR and serology, knowing that you've had the virus, it's important for Americans to know so we keep on pushing on the value and we will continue to look at new tests beyond that where the immune response long term includes T cells, we don't add that, but we continue to look at that as being the prospect.
So It's assumed for now it's stable with what we've seen so far, but we continue to believe this is more and more valuable and we continue to work on developing this You have
the test to support that.
Our next question comes from Ricky Goldwasser with Morgan Stanley. Your line is
Nisga. Yes. Hi. Good morning. So I have two questions, good one as a follow-up.
So when we think about this first half guidance, it does imply that we may incur operating income sequential decline. If we realize you're still not giving second half guidance, 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 all as we think about the second half modeling, that's first. And then second, what's kind of like long term strategically?
We're hearing the payers talk a lot about digital first strategies and being sort of contacted at the front door to healthcare. You guys talked this is about expanding relationship with payers like Anthem. So, are you having any conversations with payers on how you can be this is part of that digital first strategy in those kind of like the digital networks. And so do you see that kind of like as an opportunity to accelerate sort of more narrower 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, do you want
to take the first one and take the second?
Sure, Steve. Thanks for the question, Ricky. So again, just to reiterate, the first half, we delivered over 100,000 PCR COVID tests per day. We're assuming half that in Q2. So that's certainly this is contributing to the margin decline as you talked about implied in the guidance for the the staff implicitly in Q2.
When you think about the base business, we're still uncertain how all those moving parts this will play out in the second half, which is why we've not provided second half guidance yet. We want to wait till we can confidently give this guidance that we're highly confident will be delivered. So what I would point to is that's a transition period. We really look at our Investor Day and how we talked about 2022 and talking about getting our base business this 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 this Our top line by several 100 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 $1,000,000,000 of COVID testing last year and significant COVID testing this year. That 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 this is the operating rhythm and our expectation is that you saw early in 2019 when we were growing our business in February more than 5% on a volume basis and you saw strong improvement in your operating margin.
Steve? Yes, yes, just a transition. So as you recall in our Investor Day, we this went through a walk, if you will, to bridge you from the pandemic years of '2021 into 'twenty two, Mark went through charting some math, which gave you evidence of our indication for 'twenty two. And also, as as I said earlier, is we do believe there will be some COVID testing, but the base business will be recovering and we'll get growth Going forward in 2022 based upon our outlook. So the last question we had, Ricky, has to do with the digital front end and this is a 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 they have to 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 workforce, it gets from a physician perspective that allows you to more streamline the different service offerings like laboratory And then secondly, this past year, we've seen the acceptance, if you will, of telehealth. It has been growing nicely but not explosively and we didn't see explosive growth in 2020. And we believe that overall that acceptance, if you will, of that front end being an acceptable way to first engage with healthcare business system will continue And the payers are working on that and the providers are working on that and they're working with other partners. And we're very well positioned with those other partners. Now who are those partners?
Those partners are some of the telehealth companies that you know. And those held companies as they become much more indebted in health care delivery, let's call it the digital brand, will rely on a fewer this number of laboratory service providers and therefore we're very well positioned as sort of the smaller handful Let's just describe as the preferred lab network that we are ready with United, but for this new world that we see. And with all that, we do believe that our direct to the consumer initiative will have an opportunity as well because consumers equally are wanting to engage with us through delivery. They we do not always need to engage with the physician. And therefore, with the prospects we see of growing that business and the opportunity for this is certainly a big opportunity for us.
As far as investment, we are investing. We were fortunate enough to have the the capabilities in 2020 2021. If you again go back to what we shared at Investor Day, we said we were investing about $75,000,000 over A period of 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 The company is 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 tentative laboratories. They could only do it with a select group like us.
Our next question comes from Derik De Bruin with Bank of America. Your line is open.
Hi, good morning. Thank you for taking the question. Hey. So two questions. One is, I was on the Danaher call just before this and they actually pretty sharply raised this is their COVID testing guidance for the year and also surprisingly gave a very bullish outlook for 2022 and sort of So I think the first question goes to 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 First question. And then I think the second question is, when you look at your you're at 100000 ish tests, you've got 300000 capacity. This How are you using how are you utilizing that capacity? Is it more are you ramping down your IVD platforms versus your LDT platforms?
I just would assume that it's more the IBD because the LDPs are more profitable, but just would love some ideas like how you're utilizing your
this
is Joel. Yes. So the first part, yes, we did see an increase in the availability and use The antigen testing and point of care testing throughout the last 12 months, it clearly has picked up in the back half of this 2020, we see that continue in 2021. So if you look at the industry trackers with how much testing we are doing in this country, clearly it has this has dropped off and therefore volumes have dropped off as well. We believe in those tracking mechanisms, it's predominantly PCR.
However, we think there could be some point of carrying antigen testing in there, but we believe it does not include all the testing that's happening. So if you look at it, well, For PCR testing throughout the United States, and if you look at the estimates that are coming from these point of care in 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 to answer your question, yes, there is a transition From PCR is exclusively what we have to more of the capabilities around this could be helpful for a period of time and also when you need to reflect into PCR and where you can use blood of care and costs are not operating equal. So it has come down because of what we described, but there continues to be a strong well for PCR through the remainder of 'twenty one and also into this
is 22.
Our next question comes from Pito Chickering with Deutsche Bank. Your line is open.
Hey guys, thanks for the 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 this quarter, what markets did they make this change in? And what impacts did you see in your volumes from Thanks so much.
Yes. So we're kind of working on this journey to pick up share, if you will, if you imagine. Yes, what we shared in March or about 3 days, we really kicked off the In Network this program in 2019 and we saw good progress there. We were actually very encouraged by what we saw in 20 20, early days and then we had the pandemic. This But it didn't stop our activities.
So what we shared is we actually picked up some share over that period of time, but we have more share 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 other network policy and both the design for the fully insured hook. And where that has happened because we have other examples of the traffic, it does move share to us. We don't provide specifics on the stage and this is a specific time how much did this contribute to the share, but it did have a nice impact for us to pick up share. And so we'll continue that, Mark, 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 the purchase and relationship within the geography whose work out of this expensive venue to a less expensive venue, which is Quest And all those are active relationships that we have to continue to build share with United Development payers. Just equally, we'll continue to work programs with Anthem and others.
Our last question comes from Eugene Kim with Wolfe Research. Your line is open. Hello.
Hi, good morning. Just quickly on 2022, at the Investor Day, the company provided baseline EPS of a range of $7.40 $8 this quarter, I believe, pointed to the higher end of that range. And that was with the assumption that base business recovery this is a return to pre pandemic level towards the end of the year. With the potentially I mean, the recovery coming faster than this is a question. How should we think about that range that provides us an update?
Thank you.
Mark, are you there?
Yes, yes. So the what I would say is this I'm not in a position to update that what we provided at Investor Day because we need to get in a rhythm of constantly getting asked to update So the next time we'll comment will be when we provide guidance for 2022. But of course, as we there's a lot of different considerations. What's 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 this is a very strong quarter to be back
to 2019 baseline and starting
to grow. But depending on the pace of some of these initiatives that are this will be rolled out by several payers, not just United, by Anthem and some of the other major payers, depending on the economy, depending obviously, potential expansion of covered lives. There's a lot of variables that we'll know a lot more about this is a very strong quarter 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 will still be around and in Europe, some others as well. Nobody thinks it's going away.
And we were not expecting it to be anywhere near this is a significant number of significant than it was in 2020 and 2021. So and 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.
This concludes our prepared remarks.
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' Q1 2021 conference call. A transcript of prepared remarks on this call will be posted later today on Quest Diagnostics' website at www.questdiagnostics. A replay of the call may be accessed online at www.questdiagnostics.com/investor or by phone at 888-five 66-0490 for domestic callers or 2033 693,053 for international callers. Telephone replay will be available from approximately 10:30 a. M.
Eastern Time on April 22, 2021 until midnight Eastern Time, May 6, 2021. Goodbye.