Quest Diagnostics Incorporated (DGX) Earnings Call Transcript & Summary

Thanks for joining us this morning in Day 3 of Morgan Stanley's Global Healthcare Conference. My name is Ricky Goldwasser. I'm Morgan Stanley's health care services analyst. And before we get started, please note that this webcast is for Morgan Stanley's clients and appropriate Morgan Stanley's employees only. It's not for member of the press. So if you are a member of the press, please disconnect and reach out separately. For important disclosures, please see Morgan Stanley's Research Disclosure website at www.morganstanley.com. And if you have any questions, please reach out to your Morgan Stanley sales representative. And with that, I'm very pleased to have the Quest Diagnostics team on with us. We have CEO, Steve Rusckowski; EVP of Operations, Jim Davis; and Head of IR, Shawn Bevec. So Steve, Jim and Shawn, welcome to our conference.

Thank you, Ricky.

Quest has been playing such a critical role during the pandemic, provided COVID testing services across the country and, obviously, seeing kind of like trends that are very relevant for the economy, individuals and investors focus from the COVID trends to return of utilization. To start, Steve, I'm going to hand it off to you for some introductory remarks to frame the conversations, and then we'll take it to Q&A.

Sure. Thanks, Ricky, and thanks, everyone, for joining us. Well, it has been a remarkable year to say the least, just to frame a little bit about the year, we've been through and where we are right now, and as we all know, it's not over. But we came into 2020, extending the work we've done around our strategy. And we're actually feeling quite good about progress made in January and February. And then with the pandemics starting to heat up, we saw a very significant change with our volume from physicians and from hospitals starting in March. And as we shared in the first quarter results, it wasn't quite clear in the second quarter how deep it will go and also how long it will last. And in parallel with all that, in the month of March, we started to bring up our testing for COVID, starting with our own laboratory developed test, molecular test. We brought that up on March 9. And since that time, we've been building capacity and capabilities. And then also in the month of April, we brought up our serology test. So what we shared as we're in the depth of Q2 is that we saw volumes in the month of April, that were down 50% to 60% from the prior year. And we were planning that it would be a long recovery and at the same time, the COVID testing, even though it would be an offset, it would not be nearly as big of an offset needed to recover the base business being down. But as we indicated in our Q2 earnings, it actually surpassed, on most heights, our expectations. The recovery has been stronger of our base business. We actually are encouraged by what we see as we go throughout the summer. The base business continues to recover nicely. The COVID has slowed some as we've gone throughout the summer and is getting into the fall, but it has recovered faster and better than we would have anticipated back in the second quarter. And then second is the COVID testing opportunity is much more significant than we ever expected. So if you look at our guidance right now, it indicates that COVID is more than offsetting the decline that was out for our base business. And the guidance for this year projects a continuation of COVID testing for the remainder of this year and a steady, slow recovery of our base business and that will position us nicely as we get into '21. So with that as an introduction, Ricky, I'd like to take this conversation anyway you want to take it.

Great. Thank you, Steve. And just a reminder for everybody who's listening to the webcast. If you have any questions for Steve, Jim or Shawn, please just text it into the browser and we will relay the question to the team. So Steve, let me start with COVID testing. I mean, obviously, point-of-care testing have been gaining traction with some of the recent approvals and we've been getting a lot of questions from investors on this topic. Can you talk a little bit about how you're seeing the introduction of new point-of-care testing impacting demand for PCR testing now? And then maybe we can expand it to how do you think about the role of point of -- in the future role of point-of-care testing versus PCR?

Right. Right. So it has been an evolution over the last 5 months or so since we brought up the first test in March. If you recall, early days of March, actually, we met as an industry on March 4 at the White House as part of the task force around testing, when the entire country only did about 25,000 tests at that point. And we just announced this week that we have already done over 13 million tests. And this is the molecular test alone, not counting the serology test. So that is greatly built. So we are continuing to build our capacity because we continue to see the demand for molecular test. We've announced over the last couple of weeks that we have the capacity to deliver around 200,000 tests per day, and we're not stopping there. We actually see the demand will build, and I'll touch on why we think that's the case. So let's call it 1.5 million per week or about 6 million per month. This is Quest Diagnostics. And we feel that's important in the event that we do have a resurge, in the event with some of the dynamics we see, but also to make sure we keep our turnaround times where we brought them now since we have the surge in the summer. So it's playing forward that we have more capacity than we have demand to be able to deal with those demand issues that we see across our network of laboratories. And with that, we, to your question, have seen the launch and rollout of a number of point-of-care tests. And specifically, those that are related to the diagnostic portion of COVID, not the serology test. But we do see a role for antigen test. And there's nothing that -- in this market that we don't take a look at. And we do believe serology will have -- excuse me, we do believe that antigen testing will have a role, particularly around surveillance testing. And we do believe that when you have a set of circumstances where it's helpful, and you have the capability to do multiple antigen tests, that has value for certain clients in certain environments that we think we'll provide to the marketplace. But in many of those cases, whether it's a symptomatic patient or an asymptomatic patient, it will reflex to a PCR. So in an event that someone is tested with an antigen test and that person is symptomatic and it comes back negative, then it will be reflexed to a PCR. And equally, if something's asymptomatic and it comes back positive, then that will also reflex to a PCR. So it will be complementary as we go forward to what we already have for testing throughout this country. And actually, it will stimulate some additional demand for the gold standard, which is the molecular PCR testing. So let me see what other questions you have about that, Ricky.

That's very helpful, Steve, and great clarification of how we think of overall demand. So should we think about that point-of-care testing, antigen testing as kind of like frontline and then being reflexed to PCR? Or should we think about point-of-care as the right test in certain settings, but also a frontline demand for PCR testing?

Yes. Well, you shouldn't think about antigen testing as the diagnostic test, okay? The gold standard diagnostic test will continue to be PCR. As you know, health care or medicine moves at a very slow rate of change. And I'd be willing to say that most physicians will stick with the gold standard, but probably will take care of their patients, and that will be PCR. But it will be complementary, and there is a place for antigen testing going forward. If you look at some of the return-to-work programs, in many of those cases, we tested a large portion of the workforce with PCR. And then people go back to the workplace. And while in your workplace, then we do believe there could be a role for antigen testing. And what I often say, Ricky, is you see one, you see one. It all vary -- it's very dependent upon where that employee, where that person is in school. What's the prevalence within the city or the town or the state that they're in? Secondly, is what kind of environment are they in? And also what kind of culture are they in? Is it a safe culture? Is it a compliant culture? Or is it not? So what we look at when we look at all of this is you see one, you see one. And therefore, we have to customize it for the means of what we see within an individual set of circumstances, and antigen does have a role in that. But the gold standard for diagnostic testing will continue to be PCR.

And how should we think about reimbursement? I mean, obviously, the reimbursement for the PCR testing has been tied to the Emergency Act. How do you see that evolve?

Yes. So what we have shared within our guidance is the emergency period expires at the end of October. So we have contemplated in the event that if the rate does go down from $100 to where it was prior to $100, increase of 51%, we are comfortable with that in our guidance. We don't know whether that will happen or not. But we have indicated that it is a possibility. And as far as commercial rates, they're not directly tied to that reimbursement change in the event that, that were to happen. But there might be some pressure on the commercial rates as well in the event that, that changes at some point. And we're not sure if that changes at the end of this year or if it changes at all, to be honest with you.

The COVID vaccine, obviously, front and center, and it has implication to testing as well. Obviously, a lot of unknown, yet. But I'd love to hear kind of like your perspectives and thoughts? And how you think testing is going to be done in conjunction with the vaccine?

Yes. So it reaches the topic of serology, and we believe that serology testing, which is the test for the antibodies will continue to show its value as time goes on. And if you think about the evidence that is building around the antibodies and then presenting themselves after being infected and the evidence being built of the immunity it provides in -- for that period of time, all of this is very important to the eventuality of having a vaccine or vaccines, maybe by the end of this year for certain -- some time in '21. And so as those vaccines roll out, then the question would be what type of immunity do I have or do I have immunity, and serology will play a role in that. So we don't talk much about serology. And frankly, I think it will be something that will have a bigger -- broader role as time goes on. And Jim, would you like to add a little more to what I just said about what we see potentially happening with our ability to indicate whether there is immune response and protection once there is a vaccine, Jim?

Sure. Yes. So Ricky, as you know, many of the vaccines that are being discussed, all come with a certain effectiveness. And even the FDA has said if there's a vaccine that is more than 50% effective, they're likely to approve it in and out. So once vaccinated, the question is going to become, are you in the good side of the 50% or the nonimmune side of the 50%? And that's where we strongly believe serology has a role. Just like when you have the virus, the antibodies develop. And so we do believe that there'll be broad test in serological testing to: one, check do you have the IgG antibodies? And then two, what level do you have? And we are working with several of our industry suppliers on quantitative assays. One has been submitted for an EUA. So we expect to have that very soon. So I think we're going to be well prepared. Now there's also the discussion of, hey, it's more than just antibodies that you have to look for. There's T-cell response, B-cell response. And specifically, with respect to T-cell response, there are tests that do look at T-cell response. And it's still early, but we're contemplating that as well.

So a couple of follow-ups there, to your point about the T-cell response and B-cell response. There's been recent press that talks about post-approval surveillance. Can you talk a little bit about how you think your role can evolve in working together with the pharma companies, with the drug developers on this post-market surveillance and testing?

Yes. So go ahead, Jim.

So in clearly, just our core serological test today that we offer and one that we will offer that is quantitative with a neutralizing cutoff point, I do think that most people that get the vaccine are going to want to know 2 weeks, 3 weeks post, whatever that time period is, is it effective or not. And they get the response. So I think that will become a core part of any vaccination program.

Great. And should we envision it as -- I remember when I was kind of like growing up, and I guess I'm predating myself here, we had kind of like TV programs, right? So before getting the vaccine, we used to be kind of like take the test to see whether there was exposure. Is that how we should think about the role?

So that's a great question because what we've been talking about is post vaccination. But yes, we've discussed, is there a pre-vaccination? If the vaccine is in limited supply, we know x percent of the U.S. population has been exposed, some with symptoms, some without symptoms. So if this -- if the vaccine is in limited supply when it first comes out, certainly, you want to give it to people who have not been exposed and who don't have the antibodies. So it's hard to tell what clinicians will do, but could there be a role for antibody testing pre-vaccine that determine who should get it and who shouldn't, absolutely. We think it's a great way to tell.