Quest Diagnostics Incorporated (DGX) Earnings Call Transcript & Summary

Hi, good afternoon. Welcome to the 2020 Jefferies Global Healthcare Conference. I'm Brian Tanquilut. I'm the health care services analyst here at Jefferies. So our next presenter is Quest Diagnostics, the leading lab provider here in the U.S. And joining us this afternoon are Mark Guinan, the company's Chief Financial Officer; as well as Jim Davis, the company's Executive Vice President for Diagnostics.

So Mark, we'll just jump into it right off the bat. I'll throw it to you. If you don't mind, just maybe giving us the latest update. I know you filed an 8-K this morning. Just what are the things that people need to know about Quest at the moment?

Thanks, Brian. Just a little color on the 8-K. I think there's a couple of important things people have been asking about they haven't been able to interpret that I can answer now. So first off, where our volumes. So if you look at our core volumes ex the COVID testing in April, as we mentioned, they were down over 50%. In May, they were down over 30%. So a market improvement, but still a long way to go to get back to the overall utilization level we were at prior to COVID. And then we do about 550,000 requisitions a day. So people can do the math on what it means to be down 30%, and then you add on top of that the COVID to offset some of that to kind of get a sense of where our volumes are at right now. That was one piece of color I wanted to share. And the second one is we've had some questions about the CARES Act, the emergency relief funding that we got, and we may be getting additional funding as well next week. When we gave out the adjusted earnings guidance in the 8-K, that excludes any of the benefit from the Emergency Relief Act. We haven't decided yet specifically what we're going to do with those funds, but what we have decided is we're not going to count those in our adjusted earnings regardless of whether we invested or something or we drop it to the bottom line on our GAAP earnings. That was not in the breakeven to somewhat positive guidance. So that's -- as people know, up $0.35 in our GAAP earnings, and then it could be more than that if we get additional funding.

No, that makes a lot of sense. So Mark, just on what you mentioned. Obviously, people are thinking about the impact on the business and there's a testing side. So I'll start with the impact on the business. I mean, the update you gave is showing improvement clearly, but is there a variation geographically that you're seeing? I mean, as we look at the states that have opened early, Texas, Tennessee, Georgia, anything you're learning from those markets in terms of the re-ramp in the business?

Yes. There's a -- Brian, there's significant variation. If you look at the recovery over the last 6 weeks, it's been primarily driven by the areas that have opened up. But while we've seen a little bit of improvement in the areas that are still closed down, have high restrictions, there's some hospitals that have opened up for elective surgeries in those markets and we get some testing, primarily that 50% to 20% -- or it's 50% to 30% down has really been driven by the areas that have opened up. So if you look at 4 states we talk about being most critical to us, California, Texas, Florida and New York, Florida and Texas have opened up, and they've come back dramatically. California, New York, New Jersey and then Massachusetts are states that are still down significantly in terms of the core volume. Now the offset to that, obviously, is that those are the states where we're getting some of the greatest COVID testing volumes. So there is a little bit of a hedge against the depressed utilization of health care.

That makes sense. So I guess, Jim, I'll pass it over to you. So I guess the other part of the question is COVID testing, right? So where are we now in terms of capacity? I know you guys came out with your at-home test the other day. Anything you can provide to us in terms of the update on the COVID testing side of the business?

Sure. So we indicated in our last press statement on Monday, our last media statement, that we now have in place capacity to perform up to 100,000 molecular tests per day. And we had several days last week where we were over 90,000 specimens a day. You're not going to see 90,000 every day of the week. It does slow down on the weekends, but we certainly need to capacitize to hit those peak days on a Tuesday, Wednesday and Thursday so that we don't get an unhealthy backlog that builds up. So from a low point, we started from 0 to 50,000 units of capacity, went up to 100,000. And we announced plans to further increase our capacity upwards of 150,000 tests per day by the end of this month. And we're working hard towards that and we're doing that because we see the demand coming our way.

So since you mentioned demand, right, I mean, as I think about it, Steve Rusckowski was on TV the other day talking about the employer approach and the offering that you guys have for employers. So as we think about return to work and sort of a return to normalcy, how are you guys approaching the sizing of the demand for the tests? I mean, I know there's the molecular side, obviously, and there's serology, but maybe we could split that up. I'm sure, and fairly, you're thinking about kind of like the TAM so to speak for COVID testing?

Yes. So on the employer side, the return to work initiative. So first, we had 2 sales and marketing channels that went into employers today to do routine drug testing, preemployment screening and then also to do wellness events that are typically done once or twice a year. So we have strong sales and marketing channels into employers. What's different is the amount of outreach, employers reaching out to us. And as employers think about return to work strategies, lab testing is what we would call a necessary but not completely sufficient way for returning to work. There's a lot of things employers have to do to ensure a safe environment, from temperature checking, symptom checking, social distancing, all the normal hygiene practices that we've been learning and talking about over the last several months. So when it comes to demand from an employer standpoint, there's really 2 ends of the spectrum. The one end is really what I would call episodic testing. So a manufacturing plant with 200 people, they can practice safe social distancing. And so they may test if an employee is symptomatic or if an employee tests positive, they may test the other 199 and call that more episodic agreements in place. On the other end of the extreme is airlines. It's retail companies that have employees that are in frequent contact with customers and in frequent contact with the general public. And these employers are really thinking more about routine testing with a frequency basis. So some employers are actually going to be testing once a week. And these are high-touch employees, so flight attendants, pilots, retail workers, especially in areas where there's been high incidence rates like New York, Connecticut, Massachusetts. So really, from an employer's perspective, it really depends on, do my employees have a lot of retail? Do they have a lot of consumer touch? Or can they be more isolated in the workplace? That's really is what driving -- is what's driving it.

Yes, that makes a lot of sense. So how are you thinking about -- because obviously, they are the frontliners, right, when we hear about hospitals. And I guess there's the HHS mandate now in nursing homes to start testing basically on a weekly basis for their employees, right? And we've heard it this morning, a senior housing operator, the large one, Brookdale, just talked about how they need to test their residents and their employees as well. So how do you balance the thinking that some of this would be mandated and then some of this will have to be driven by proactive approach from the employers? And what's that discussion like with those guys to say, "Hey, this is best practice?"

Yes. So a significant portion of our demand is coming from states that are taking initiatives with nursing homes, long-term care facilities and prisons, jails and other areas where people are confined. So that has been a big chunk of our most recent demand. And this is where serology testing can come into play. So picture a nursing home that's had an outbreak in the Northeast. They have 150 residents. The serology test can identify those in the nursing home that were affected, that have exposure to the virus. And then based on that, those residents can be set off into a different area versus other residents. And then it establishes a frequency. No one's suggesting that we know 100% of the answers when it comes to an antibody standpoint. What is the duration? How long is the protection? But we know it confers some immunity. Every virus known to mankind where antibodies develop, we know it offers some protection. And so states and employers are using that information to establish frequency levels for employees that have the antibodies versus employees that may not. Brian, you're on mute.

Yes. You're on mute, Brian.

Sorry about that. Yes, one of the questions we've been asked by investors is -- actually 2 questions, right? So incrementally, who are the people who are going to get tested, right? I mean, what drives that? And I think you touched a little bit on it, but is this going to be -- do we need to get a broader mandate, right? Because the states obviously are agreeing with HHS on how many tests they're going to run. And then the second part of it is, you mentioned how some people are testing once a week depending on who -- what they do, right? But what are you seeing in terms -- or how are you thinking about the frequency of tests going forward per -- on a per capita basis maybe is one way to think about it?

Well, I'm not sure if we have an estimate on a per capita basis, but we believe, as does the CDC, that as long as the virus is out there, as long as both the herd levels have not been obtained and we're not anywhere near a herd infection level, that there's going to have to be frequency established. And again, that frequency is going to be dictated by the kinds of environment that the employee is working in, the amount of interaction that employee has with people outside of their work environment, so the retail workers. And it's also going to depend on the other safeguards that the employer or we have put in place in terms of temperature monitoring, symptom trackers, contact tracing, all the other things that have to be wrapped around lab testing in order to ensure that safe environment.

Jim, you talked a little bit about serology. And that's something that, I think, early on there was a lot of high -- or a lot of interest in serology testing. But how do you think about the driver to get that going, to get the momentum and the traction in serology testing? Because, obviously, right now, it's more PCR, right, more molecular than serology.

Yes. We've completed over 1.5 million serology tests. So it's about half of what we've done on the molecular side. But serology has only been out for the last, let's say, 4 to 5 weeks. So the demand has actually been -- has been good. We think about the demand in 4 areas. Number one, initially out of the box, and we're still seeing it today, is really consumer demand. So this is a test that patients and consumers want to get. And they have the ability to come directly to us without a doctor's order to order the test, come in, get your blood draw and you'll get your results the next day. And especially patients in the Northeast that had high prevalence rates in the 20s, 25%, many of the patients and citizens in those areas, they want to know, were they exposed and do they -- do they have the antibodies? So that's a big chunk of demand. The second driver of demand is really public health officials that are wanting to understand that a ZIP code level in New York City, how much has the virus spread? How is Brooklyn different than the Bronx, different from Manhattan? And we really -- we're working very closely with public health officials at the State of New York, City of New York, Federal Health and Human Services in Detroit and New York City to help them establish the underlying spread of the virus. Particularly in states that were not able, for one reason or another, to accomplish the level of molecular testing, serology can help them play a very important role in understanding the underlying prevalence at a ZIP code level. The third driver, as I mentioned, is employers, who, again, you're an employer in the Northeast, you've got 100 people coming back. You would want to know what 25% have the antibodies. And perhaps we put them on a different frequency test, a different frequency basis for molecular testing than those that have no exposure. And so they would rather spend $42 to get their population tested from a serology standpoint. And then if I don't have to spend $100 on 25% that have the antibodies, it can actually save them money. Now the last community that I mentioned, which is always our strongest community, is the medical community. And unfortunately, as serology testing was launched, there was a lot of confusion, a lot of misinformation, a lot of tests that came to market that were not high-quality tests that were not approved by the FDA. I can assure you, the 3 tests that we're using have all been approved by the FDA. They've all been through an EUA process. They have incredibly high specificities, which means very, very low false-positive rates, which is what's important from a serology standpoint.

No, that makes sense. So I guess, I don't know if this is for Mark or for Jim. We've gotten questions about reimbursement on the tests, especially for serology. Is it covered by health insurance? Or does this fall in the same bucket as drugs of abuse testing where it's almost like a surveillance benefit or a surveillance test? I mean, what are you hearing in terms of the willingness of payers, whether it's insurance companies or employers, to reimburse for it under the medical benefit?

Sure. So at this point, our understanding is that the CARES Act requires this is reimbursed. There are no frequency limitation on this point. Given the criticality of the pandemic, the government did not want there to be impediments to people getting access. So I don't think, at this point, there's any sense that testing will be superfluous or unnecessary. And therefore, there's a requirement that the payers pay it. Now when a lot of companies like us are self-insured, in essence, you're making that decision yourself. So in some of the return to work efforts, whether it's run through insurance or it's billed direct to the employer, it's kind of one and the same. Where it becomes a different issue is where there's the underwritten by the payers, we believe that legislation requires that they reimburse that and not put any limitations on it.

That makes a lot of sense. I guess, Jim, I'll get back -- I'll go back to you on the COVID test side. So we're seeing -- the point-of-care test, the rapid tests have been developed and they are out there, right? So as we see more the return to work employer-based testing, whether it's an Amazon saying we need people tested before they go back to work or some of these drive-through strategies, how are you guys thinking about where or which kind of technology will end up doing the test, right? Is it the point-of-care-based ones or is it a central lab strategy like you guys have?

Well, I think the testing we do in our labs, as you know, is all PCR-based testing developed in the 90s, incredibly high sensitivity, right? On the molecular side, you want high sensitivity. You don't want any false negatives. On the serology side, you want high specificity. You don't want any false positives. So the problem with some of these point-of-care devices is that they have low sensitivity. And if you end up then reflexing all the negatives into a central lab and the underlying prevalence is only, let's say, 8%, so 92% get sent to a central lab because they tested negative, you got to question, "Well, what's the value of that spend to do these point-of-care tests?" And even in the flu market, the normal flu, right, with the quick rapid tests, many of those tests are sent to us. Many of the negatives are sent to us anyway. And so we wouldn't expect anything different with these point-of-care devices. So I'm not sure it's going to curtail the demand of PCR testing.

Got you. And then you rolled out at-home testing this week. So how should we be thinking about -- there is the concern that it has a higher rate of false negative, right, because of maybe user error and administering the test itself. And then, I guess, the other question there is adoption, right? I mean, is this going to be another one of those employer-driven pushes to get that volume up on at-home testing?

Okay. So first, we don't believe it's going to have higher false negatives. We had to do a long study to show the FDA that the false-negative rate was no better, no worse than collecting through a physician or through an observed collection. So let me talk about how the best way for these to be deployed. So first of all, it's still a PCR-based test. The only difference is you're going to collect versus -- there's 3 types, either you collect yourself or you can go through a CVS drive-through, the pharmacist will hand you a kit. You still collect, but they're going to observe it. And then the third way is obviously somebody's putting the swab up your nose, okay? On the home-based unobserved collection, the value is the following. We're working, I'll give you an example, with a large medical device manufacturer that has a central headquarters location, several thousand people in their headquarters, but they also have about 500 sales and service people that are scattered around the U.S. and the best way for us to reach them is to mail them a kit, let them observe and collect -- let them do the collection on their own and then they mail it back to us. Now one way we can verify that they've actually done the swabbing and they didn't take anybody out is we have to test for the presence of human cells. So if you actually didn't swab your nose and you wanted to get back to work but really didn't want to do the test, we're going to find it, okay? Because if we don't find the presence of human cells, then we can't give you a result. So that's kind of the value of this. It's -- now the other 2,000 employees at that corporate center, they can go to the health department at the corporate center, get a collection kit and somebody can watch them swab and make sure that they've done it correctly.

No, that makes a lot of sense. So before we leave the COVID lines of questions, I think we have a couple of questions for the audience. Jack will read them to you guys. And Mark and Jim, if you don't mind, just answer the sent-in questions. Jack?

One question, just a clarification on the state-by-state volumes. Can you give some color on how much a Florida or a Texas is up compared to normal volumes? And how much in a New York or a California is still down? Are New York and California still close to that down 50% that you saw in April? Or where are those numbers sitting?

Yes. So I'm not going to give specific numbers, but I'd say order of magnitude, states that have not opened up, certainly the physician volumes are where our volumes were in early April across the enterprise. There's not a reason for them to have recovery significantly when they haven't -- as I mentioned, when the hospitals have now opened up for elective procedures. That's giving us a little bit of volume. And again, this is non-COVID volume. And when you look at Texas and Florida, I mean, they are well on their way to returning close to where they were pre-COVID. We're not sure we're going to get there at any point this year, and that's one of the unknowns. That is the reason we're waiting before we update our guidance. We've talked to physicians. We've done some surveys. We've done some certifications in how quickly are people -- are all the physicians going to open back up. And we've heard not 100% of them are saying they're going to open back up this year, maybe that will change. And then the second thing is, how quickly will patients feel comfortable? Because we heard anecdotally from some of our hospital customers that few procedures like appendectomies and myocardial infarction procedures are down dramatically. Those are still happening, but people are afraid, though, into the hospitals or into the health care system. So we think there will be significant lag in fully recovering our core volumes. Now on the other side, COVID testing shouldn't go away anytime soon. But even when the vaccine comes forward, we believe there's going to be need -- there's still going to be some PCR testing and there's going to be a need for serology to support the prioritization around who gets the vaccines initially. So how that all adds up, we're not sure yet. But when we're ready, that's when we'll update our guidance.

Great. And then the second question, could you address the emergency nature of higher CMS reimbursements for COVID testing? And what time line do you think any adjustment down in reimbursement would be on? And to what level you think that could go for serology testing specifically?

So the -- I have no idea. I mean, words were as long as there's the pandemic, so your guess is as good as mine. Obviously, for society, I hope that's tomorrow, and I'll live with the current reimbursement rate. But realistically, it's probably going to be a little while. And then from the serology reimbursement, that is not tied specifically to the pandemic. We establish our rate based on a process where we shared a lot of our costs to the trade association, and they figured out what was the right amount to pay based on everything we needed to do to get that serology test done, to get it done with high quality. And there was no premium component of that for the pandemic.

Great. I guess that's it for audience questions.

Got it. So I guess, Mark, just to put this all together, right, to sum that up. While there is uncertainty on COVID testing and what this actually means, I mean, this could be a really sizable opportunity, albeit short-lived, right? I mean, it could be 1 to 2 years depending on what happens. Is that a good way to think about this?

Yes. I mean, we all hope so. So our belief is that when vaccines will come at some point, and that will greatly reduce the molecular testing. As we said, there's still be a role for serology for a period of time. So this is not a long-term business opportunity of the size than it is for the next 6 to 12 to 18 months.

No, that makes sense. So shifting gears real quickly, we have 1 minute left. So just tying it back to the core business. One of the key thesis points that we talked about was the PLN with UNH. Is that still ongoing, that push for them to roll out the PLN given COVID disruption and what it's doing to the health care system?

We have a quick answer, which is things have slowed down for obvious reasons. We have to be able to call on physicians to move work. And everything that was intended, everything that we talked about long-term will continue. It's just that, obviously, it's going to be a little slower in this situation.

No, that makes sense. Well, guys, I really appreciate it. We're at our stop point. Thank you so much.

All right. Bye-bye. Thanks.

Yes. Thanks, Brian.

Bye.