Welcome to the Quest Diagnostics Second Quarter 2020 Conference Call. At the request of the company, this call is being recorded. The entire contents of the call, including the presentation and question-and-answer session that will follow, are the copyrighted property of Quest Diagnostics with all rights reserved. Any redistribution, retransmission, or rebroadcast of this call in any form without the written consent of Quest Diagnostics is strictly prohibited. Now, I'd like to introduce Shawn Bevec, Vice President of Investor Relations for Quest Diagnostics. Go ahead, please.

Thank you, and good morning. I'm on the line with Steve Rusckowski, our Chairman, Chief Executive Officer, and President; and Mark Guinan, our Chief Financial Officer. During this call, we may make forward-looking statements, and will discuss non-GAAP measures. We provide a reconciliation of non-GAAP measures to comparable GAAP measures in the tables to our earnings press release. Actual results may differ materially from those projected. Risks and uncertainties, including the impact of the COVID-19 pandemic that may affect Quest Diagnostics' future results, include but are not limited to, those described in our most recent Annual Report on Form 10-K, and subsequently filed quarterly reports on Form 10-Q, and current reports on Form 8-K. The company continues to believe that the impact of the COVID-19 pandemic on future operating results, cash flows, and, or its financial condition will be primarily driven by the pandemic's severity and duration, 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 governmental responses to the pandemic, which are drivers beyond the company's knowledge and control. For this call, references to reported EPS refer to reported diluted EPS from continuing operations, and references to adjusted EPS refer to adjusted diluted EPS from continuing operations. References to base testing volumes or base business refer to base testing volumes, excluding COVID-19 molecular and serology testing volumes. Finally, growth rates associated with our long-term outlook projections, including total revenue growth, revenue growth from acquisitions, organic revenue growth, and adjusted earnings growth, are compounded annual growth rates. Now, here's Steve Rusckowski.

Thanks, Shawn, and thanks, everyone, for joining us today. Well, in one of the most challenging periods of our history, Quest Diagnostics stepped up and expanded COVID-19 testing for the country, and delivered stronger than expected performance in the second quarter. Second quarter results were driven by COVID-19 testing and the rapid recovery of our base testing volume. I'm very proud of Quest employees who have been on the frontlines of healthcare, answering the call, and fighting the COVID-19 pandemic. So, this morning, I'll discuss our performance for the quarter, our role in the COVID-19 pandemic, and update you on our non-COVID base business. And then Mark will provide more detail on the second quarter results and our financial position. We have reinstated our financial outlook for the remainder of the year with a broad range, which reflects uncertainty caused by the pandemic. Mark will talk about our outlook in a few minutes. Our financial performance in the second quarter was stronger than anticipated, also lower than the same period of 2019. For the quarter, total revenues declined approximately 6% to $1.83 billion. Earnings per share decreased by approximately 10% on a reported basis, so $1.36; and approximately 18% on an adjusted basis, so $1.42. These results were driven by a strong bounce back in our base testing volumes for March and April, as the healthcare system began to resume non-urgent care and elective surgeries sooner than we had anticipated. Heavy demand for COVID-19 molecular testing helped partially offset the base volume decline as well. Demand came in from a number of areas with the continuing spread of the virus throughout most of the country, the pent-up need to test non-COVID-19 pre-surgical patients, people in high-risk populations like nursing homes and prisons, the proliferation of retail testing sites, and finally, employer interest in testing employees before they return to work. Quest Diagnostics has continued to play a pivotal role in bringing COVID-19 testing capacity to the nation. We performed roughly 8.5 million COVID-19 molecular diagnostic tests, and more than 2.5 million antibody or serology tests. We now have the capacity to perform up to 130,000 molecular diagnostic tests today, double the capacity since mid-May. Over the next couple of weeks, we expect to have the capacity to perform approximately 150,000 molecular diagnostic tests per day. Cumulatively, Quest has delivered nearly 20% of all the testing included in this country. Working together with large national retailers like Walmart and CVS, we've built a new model for consumers to access testing. We're also supporting HHS and state drive-through testing initiatives across the country. I'm very proud of the progress we have made in rapidly scaling up capacity since the pandemic began. However, demand for testing has soared in recent weeks. We are providing testing results in about two days for the highest priority patients, and the average turnaround time for non-priority patients is at least seven days. So, we're doing everything we can to bring more COVID-19 molecular testing to patients and speed the delivery of test results. We continue to add testing platforms and work with our suppliers to ensure access to testing equipment, reagents, and personal protective equipment. We're exploring a range of new technology options, like last week, the FDA granted Quest the nation's first emergency use authorization to use specimen pooling for COVID-19 molecular testing. This technique, which is commonly used with blood banking, will help expand capacity, especially among populations with low positivity rates. Through our lab referral program, we're partnering with other quality laboratories to expand our available capacity. In recognition of the magnitude of the current demand for testing, we have asked customers to help us prioritize patients we test for COVID-19 at this time. Quest colleagues have stepped up in so many ways over the last few months to fight the COVID-19 pandemic. Our company has been central to the crisis response, and I'm proud of our employees on the frontlines who are serving patients, customers, and communities every day. In June, we offered financial assistance to about 23,000 of our frontline colleagues and their supervisors to encourage increased expenses during the pandemic. In April, we took a series of temporary workforce actions to manage our costs. These included furloughs, reduced hours, and pay cuts for salaried employees. And then today, I am very pleased to report that a vast majority of these actions were reversed a month earlier to enable us to continue to respond to our customers' increased demand for testing. Since March, we've been fighting COVID-19, but we've also been focused on accelerating growth in the base business. As a reminder, the five elements of our strategy to accelerate growth are to grow more than 2% per year through accretive acquisitions, to expand relationships with health plans and hospital health systems, to offer the broadest access to diagnostics innovation, be recognized as a consumer-friendly provider of diagnostic information services, and then finally, support population health and data analytics in extended care services. Now, let me take you through a few highlights from our strategy to accelerate growth. Through the pandemic, the M&A environment understandably slowed. But despite that, we were able to complete the acquisition of a Memorial Hermann outreach business in April, and are pleased with the early progress. We also recently announced our plan to acquire all of Mid America Clinical Laboratories, or MACL. Once we complete this transaction expected this quarter, Quest will wholly own MACL's laboratory in Indianapolis, and about 50 patient service centers across Indiana. Also, we'll provide professional lab services under a long-term agreement for 30 hospital labs owned and operated by MACL founding hospitals, Ascension St. Vincent and Community Health Network. Our M&A pipeline remains strong. Given the many challenges that hospitals will face, we expect many more to be open to discussions about how Quest can help them achieve their lab strategies. At the same time, we know that all our regional laboratories have had their own challenges. This could also produce more opportunities for tuck-in acquisitions. If anything, the pandemic could be an additional catalyst to help drive industry consolidation. Some transactions in the pipeline that were paused because of the pandemic are being revisited, based on the new realities that the healthcare system is experiencing at this time. We also continue to make progress on our health plans strategy. We entered our second year of being a member of UnitedHealthcare's Preferred Lab Network, and we are pleased with the results to date. We have met or exceeded key quality metrics, such as electronic ordering and resulting, and patient service center appointment rates. We've also secured business for more than 180 out of network UHC labs, saving money for patients and lowering the overall cost of care. We look forward to making continued progress with the Preferred Lab Network in the second year. Over the last few months, we've seen a remarkable surge in the sign-ups of our MyQuest patient portal. Today, more than 11 million patients have a MyQuest account to make appointments and receive their results through their smartphone or computer. Since late April, we've seen a more than three-fold increase in weekly registrations, which accelerated at the end of the second quarter. We believe that our patients see and appreciate the ease and convenience of our consumer experience. Now, I'd like to turn it over to Mark, who will take you through the results.

Thanks, Steve. In the second quarter, consolidated revenues were $1.3 billion, down 6.4% versus the prior year. Revenues for diagnostic information services declined 5.7% compared to the prior year. Although revenue declined year-over-year, our second quarter results were stronger than we communicated back in June, reflecting the stronger than expected recovery in base testing volumes, as well as growing demand for COVID-19 testing services. Volumes, measured by the number of requisitions, decreased 17.7% versus the prior year, with acquisitions contributing approximately 50 basis points. Testing volumes in the company's base business declined approximately 34% versus the prior year. In April, base volumes declined in excess of 50% compared to last year, as stay-at-home measures were implemented across the U.S., hospitals began to limit elective procedures, and many physician offices were temporarily closed for business. Base volume trends began to improve in May, down more than 30%, as stay-at-home measures eased, many hospitals reintroduced elective procedures, and some physician offices reopened. The base volume recovery continued in June, down less than 15%, as the trends in May gained momentum. Throughout the quarter, the strongest recoveries were observed in the states that opened more quickly than others, such as Texas and Florida. As we exited June, base volume declines had moderated to approximately high single digits. However, due to the recent spike in COVID-19 cases across the country and the rollback of several state reopening plans, we have seen a slight softening of our base business in early July. While base testing volumes remain down year-over-year, COVID-19 testing was a meaningful offset in the second quarter. We exited the second quarter averaging approximately 110,000 and 26,000 COVID-19 molecular and serology tests respectively each day. Over the next couple of weeks, we expect to have the capacity to perform 150,000 molecular diagnostic tests per day. Revenue per requisition increased 15.3% versus the prior year, primarily driven by reimbursement for COVID-19 molecular testing. Unit price headwinds were slightly less than 2% in the second quarter, in line with our prior expectations. This includes the ongoing impact of PAMA. Reported operating income was $283 million or 15.5% of revenues, compared to $307 million or 15.7% of revenues last year. Reported operating income in the second quarter includes $65 million of proceeds from the CARES Act. On an adjusted basis, operating income was $294 million or 16.1% of revenues, compared to $352 million or 18% of revenues last year. The year-over-year decline in operating margin was due to the significant decline in revenue associated with our base testing volumes, partially offset by COVID-19 testing and our cost reduction actions. Adjusted operating income does not include proceeds from the CARES Act. Reported EPS was $1.36 in the quarter, compared to $1.51 a year ago. Adjusted EPS was $1.42, compared to $1.73 last year. Cash provided by operations was $602 million year-to-date through June 30, versus $596 million in the same period last year. Cash from operations in the second quarter included the $65 million of provider disbursements under the CARES Act I just mentioned. Our financial position remains very strong. During the second quarter, we amended our revolving credit facility, allowing us greater financial flexibility. We completed a $550 million debt offering in May, which may be used to redeem or repay our senior notes due in 2021. Given the better-than-expected second quarter results, our debt to EBITDA ratio was only slightly above where we ended Q1. We ended the quarter with nearly $1 billion in cash on the balance sheet. Finally, our Board of Directors remains committed to the company's quarterly dividend at this time. This morning, we reissued our full-year 2020 outlook as follows. Revenue is expected to be between $8 billion and $8.6 billion, an increase of approximately 3.5% to 11.3% versus the prior year. Reported EPS is expected to be in a range of $5.66 and $7.66, and adjusted EPS to be in the range of $6.60 and $8.60 per share. Cash provided by operations is expected to be at least $1.25 billion, and capital expenditures are expected to be between $375 million and $400 million. We continue to operate under extremely uncertain conditions due to the COVID-19 pandemic, which is evident in the wider than usual outlook ranges we shared in our quarterly press release today. As you consider our new 2020 outlook, I'd like to share the following considerations and assumptions. First, regarding base testing volumes, we expect base testing volumes to remain below prior year levels for the remainder of the year. While the magnitude of the year-over-year decline is likely to fluctuate geographically as states throttle reopening phases, our current outlook does not contemplate the magnitude of base volume declines observed in April and May, and the low end of the outlook assumes an average 20% decline in base testing volumes through the remainder of the year. Regarding molecular COVID-19 testing demand and capacity, we continue to drive towards molecular COVID-19 testing capacity of 150,000 tests per day over the next couple of weeks. Keep in mind this represents peak capacity, operating under optimal conditions. Due to various factors, such as routine maintenance and planned downtime, we generally operate at somewhat under peak capacity. We expect demand for molecular COVID-19 testing to remain high, at least through the third quarter. Please note, that the low end of our outlook assumes recent molecular COVID-19 testing volume trends continue at a similar level throughout the third quarter and then step down in the fourth quarter. Regarding Medicare reimbursement from the molecular COVID-19 testing the existing $100 Medicare reimbursement for molecular COVID-19 testing is tied to the public health emergency declared by HHS. HHS officials have recently indicated they plan to extend the public health emergency for an additional 90 days beyond the current expiration of July 25. Our outlook assumes this level of reimbursement continues through late October. To be clear, we believe HHS will continue the Public Health Emergency while the crisis continues and we are not aware of any plans for it to end. Regarding COVID-19 serology testing, COVID-19 serology testing also continues to help offset declines in base testing volumes. We continue to believe there is meaningful potential within serology testing but rising customer demand remains in front of us. Regarding the cost actions we've undertaken, as Steve mentioned, we have rolled back many of these cost actions we took in April with most remaining actions expected to end in July. Finally, as we develop this outlook we contemplated a range of potential outcomes in the second half of 2020. The low end assumes the variability and uncertainty I just described. We have greater degree of visibility in the third quarter and there are far more unknowns in the fourth quarter. Therefore, we currently expect third quarter results to be stronger than the fourth quarter. I will now turn it back to Steve.

Thanks, Mark. With the results in the second quarter, Quest Diagnostics stepped up and rapidly expanded COVID-19 testing for the country and delivered stronger than expected performance. Looking forward to the rest of the year, we will continue to expand COVID-19 testing capacity while also serving the unmet needs of the healthcare community and drive our strategy to accelerate growth. We reinstated our financial outlook for the full year of 2020 with the broad range, which reflects the continued uncertainty caused by the pandemic. Finally, I'm very proud of our Quest employees who have been on the frontlines of healthcare, answering the call and fighting the COVID-19 pandemic. Now, we'd be happy to take any of your questions.

Thank you. Our first question is from Ann Hynes from Mizuho Securities. Your line is open.

Great, thank you. Again, I want to thank everyone across for what they're doing. I have two questions regarding testing. Could you clarify the comments you made on serology testing, the assumptions in guidance? I think you used the words, it's in front of us. Does that mean you do not have a meaningful contribution for serology testing in 2020 and if so do you think it's more of a 2021 contribution when the vaccine comes out? Then my second question would be around just molecular testing, the pooling that you announced Monday. Should we think about that as just the ability to turn around faster or do you ultimately think it's going to increase the capacity over the 100 to 2000 per day? Thanks.

So it sounds good. Well, on serology, we are doing serology as we speak. We brought that up in April. We have in our outlook for the year some serology volume. What I will say is there is growing evidence of the value of serology. There has been some debate of the evidence that would suggest if you have the antibodies that, in fact, it provides immunity for a period of time. It is clear that people are starting to weigh in that those antibodies do provide confidence that there will not be a re-infection. As that confidence builds and as we get into the fall and into next year, I do believe there will be a pickup in serology, particularly as we start to think about who should get the vaccine and who should not get the vaccine. So I think some of that is in front of us, but we do have some of that in our outlook. As far as molecular testing and pooling in the numbers that I provided particularly getting to 150,000 per day in a couple of weeks, some portion of that will be driven by the opportunities we see with pooling. Some portion of that is also driven by adding new systems and new resources to increase our capacity. What I'll say is we're not stopping there. There's opportunities in front of us beyond that 150,000.

I just would like to add in certainly, serology testing is meaningful and we shared in Steve's prepared remarks we've done 2.5 million. That's certainly meaningful. It's just different than molecular where the demand is exceeding our capacity. We had shared earlier that we had capacity of 200,000 serology tests a day with an expectation that demand could possibly be at that level. For various reasons, it's nowhere near that. But certainly, the amount of serology testing we're doing is very meaningful to Quest and is one of the offsets to the base business decline right now.

All right, thanks.

Next, we have Stephen Baxter from Wolfe Research. Your line is open.

Thanks for the question. I also wanted to ask about the molecular testing. Can you talk a little bit about how your referral patterns have looked throughout the quarter and what percentage of that testing volume is now coming from return-to-work? My thought process was that if you are currently utilizing close to full capacity in the molecular side and the return-to-work opportunity is still largely in front of you, you potentially have pretty high visibility even going out into Q4, one way or another, as there sort of a natural hedge built in there. Then just as my follow-up, it looks like DSOs increased very meaningfully during the quarter. I was hoping you could discuss that a little bit and whether you're seeing any collection challenges or delays with the COVID testing. Thanks.

Sure. First, as far as demand, where is it coming from. In our prepared remarks, we talked about the different elements of demand and what I'll share with you is that we have demand right now that is exceeding our capacity and we're doing what we can to obviously bring up the capacity. Also, we said in prepared remarks is working with our customers and clients on prioritizing those specimens that we're getting in to make sure we're testing the most urgent need in the country and we're making progress. As we bring up the capacity and we manage our demand over the next several weeks and get into August, we believe as we get through August and into September, we'll have a higher level of capacity, but also a higher level of demand and we'll be able to get to turnaround times that are in the acceptable levels that we've had in the past. So it's in front of us. We're working hard getting there and I think all elements that you described will allow us to be successful through the next several weeks. As far as demand, Steve, you talked about return to work programs. It's starting to come into our demand. We're managing it with employers. We also see in front of us the demand for return to universities and colleges. There'll be a lot of testing required in the month of August around that. We also see physicians bringing up their offices and more physicians are actually sending us specimens that they've collected. So we see that adding to the demand. Then there has been broader access and broader availability of testing where people have now access to asymptomatic testing and very convenient locations. Then I mentioned in our remarks the access we provided with CVS stores and also with Walmart has increased the demand. So, I would say across the board, it's growing in all areas. We do believe though as we get into the September months when we hope there is still a number of employers that are bringing employees back to the office or to work that we are going to be in a place where our capacity will meet the demand that we see in our funnels.

Stephen, did you ask about pacing concessions? I didn't quite pick up your last question.

Yes. It just looks to me that the DSOs were up a bit, maybe sequentially something like. I just want to know whether COVID testing or other collection and things as you guys might want to talk about with these things.

That's really formulaic approach. Cash collections are stronger than expected. We did have some delayed billing around COVID testing because the payers needed to update their systems and many of them needed 30 days or more to do that so we were holding on some billing, but I can assure you that at this point in terms of our reserves and our cash collections and everything we're very, very comfortable with where we're in our balance sheet. As you can see the operating cash flow was benefited from the CARES Act. $65 million was pretty strong year-over-year despite the depressed volumes revenues and earnings in the second quarter.

Okay, thank you.

Thank you. Our next question is from Jack Meehan from Nephron Research. Your line is open.

Hey, good morning. So first of all, congrats on the trajectory. Wanted to get your thoughts on one of the top questions I've been getting to the labs, which is how can you convert the short-term opportunity from testing and make your long-term growth rate more durably higher? I was curious to get your take on that. And then, Mark, what does the guidance assume for incremental margins on testing in the second half versus reinvestment and are there any things that you can accelerate to try and improve the longer-term trajectory of the business?

Let me start with we're going into the second half and clearly, our base business is going to continue to be down versus 2019. We are hopeful that we'll start to continue to see some recovery in the back half of the year, but we're not necessarily contemplating any of that in our outlook for 2020. As we get into 2021 it goes back to us continuing to work our strategy for accelerated growth and we do believe we have the right strategies and we wanted to share with you in our prepared remarks that we're working those hard. I actually believe that the strategies are actually more appropriate given the pandemic than they were before. So if you think through those, one is, we do believe there could be more acquisitions in front of us for growth through acquisitions. We announced the two deals recently that will prepare us nicely in the back half of the year for growth through acquisitions and sets us up for 2021 too with that carryover on that and the funnel that we're seeing and we're going to push on that front. It will give us some nice growth through acquisitions as we keep on working those in the back half helping us in 2021. Second is as far as organic growth in our base business, we continue to work our relationships with the health plans. I would say that our work in the preferred lab network with United is going well. We're going to continue to gain share with them and we're pushing that same type of approach in concept with many peers throughout our networks and we believe there is an opportunity for us to pick up share as we've said in our strategy. We also continue to work with hospitals. We talked about the Mako systems, professional lab services deal. We have a number that are being finalized as we speak that we feel good about and those will give us continued organic growth next year. Then also as we think about our advanced diagnostics and the capabilities we're bringing to the marketplace with gene sequencing and consumer genetic offerings, we believe those strategies will give us some nice opportunities for continued growth next year. So we're continuing to push on the base business growth platform. At the same time, we'll have some natural recovery in our base business as the economy and as healthcare recovers and also through acquisitions. We think we'll be in a good place as we get into 2021 to deliver on that objective that we have of 2% growth through acquisitions. Mark, anything you'd like to add to that?

Sure. To answer your EBIT question about margin dropdown, Jack. As we've shared in the past in a short window, we are a highly fixed cost business on our base business, so generally any plus or minus will be 80% or so drop-through. It's really supplies and reagents that are the variable costs. The most of it, everything from logistics infrastructure to phlebotomy to even largely the labour in the laboratory in a window is fixed so variation, good or bad, around the base business has a very high drop-through. Although we certainly have good margins on our COVID testing there is more variable cost in the COVID testing so it's not quite as high a variable margin on any sort of plus or minus as from our base case, but still very attractive.

Thank you.

Next, we have Ricky Goldwasser from Morgan Stanley. Your line is open.

Hi, good morning and thank you for the details. My question is about the guidance. Mark, you've clearly outlined the assumptions for the low end of the range. I'm trying to get a clearer picture of what you're anticipating on the high end, particularly regarding molecular testing. I understand that at the low end, you're predicting a decrease in the fourth quarter. I would like to know the reasoning behind that. What kind of environment do you envision that would lead to a decline in molecular testing? What are your expectations for the high end? Furthermore, considering the future of the COVID-19 market in relation to vaccine administration, are you in discussions with vaccine manufacturers, and how do you see testing fitting in with the vaccine?

I'll let you handle the vaccine question, then I'll just talk about the assumptions. Ricky, I appreciate the question. If there is one thing that has been demonstrated over the last several months is we don't have the ability to predict some of these things so I don't think any of us here envisioned a 50% decline in our business in April even when the pandemic first started. Then on the other side, we didn't expect the fast recovery that we saw throughout May and June, given what had happened in April. So we want to recognize that some of these things are out of our control and we want to talk about some ranges of potential outcomes and how they might impact our financial results to take away a little bit and hopefully a large degree of that uncertainty we've been living with over the last couple of months where people were wondering what might be happening at Quest. But when we talk about PCR molecular volumes falling off in Q4, it's not because we have a vision of that happening, but we had to make some assumptions in the guidance. Since that's several months away and we've shown that even a month or two in the future it's hard to predict that, we didn't expect the surge in June that happened. Therefore we're just being, I think, appropriately cautious and explaining what those assumptions are, so we don't have any sense that it will follow up. I think all of us for society are hoping it will follow up as the infection rate dampens but also note that some of the non-clinical work, the work we're doing for return-to-work for employers and students should be heavy in Q3 and some of that we might expect to step down in Q4. So that is one driver that might lead you to believe that demand would dampen a little bit in Q4, but it's not as if we know how the virus is going to proceed and the infection rate and certainly some people would say that when we get the flu season, we might even have another spike. So we don't know but we wanted to be very clear around those assumptions.

Ricky, in response to your question about next year and specifically the vaccine, we expect there to be COVID-19 testing in 2021. If we assume a vaccine will be available next year or at some point, and considering the role of serology in assessing who should receive the vaccine, we believe testing will still be important in 2021. Additionally, we are engaged in discussions with those developing the vaccine about using our data effectively to recruit patients. This involves aspects of vaccine development as well as utilizing our data to assist with plasma donations for the country. Overall, this represents a strategic use of our data for growth, using it wisely as a diagnostic information services provider to aid in addressing the pandemic.

Thank you. Our next question is from Ralph Giacobbe from Citi. Your line is open.

Good morning. I apologize for repeating myself, but I want to revisit the guidance. When you first updated it in early June, you anticipated slight profitability for the quarter, yet you ended up at $1.42. This suggests that all of the significant earnings occurred in June. If I project that number over six months, I'm already at $8.40 in earnings, not even accounting for the over $2 you reported in the first half. My assumption is that COVID testing will continue to increase, and with some ongoing recovery in the core business, I'm still finding it challenging to grasp the offsets or challenges that justify what seems to be a very conservative range, especially at the lower end. I just want to ensure I’m not overlooking anything.

Well, we laid out for you in pretty detailed fashion in the low end. So you can take a look at those assumptions. And, you can have your own point of view, and that's why we wanted to be very, very clear about that assumption. So your notion that Q2 earnings were all pretty much in June is spot on. And the issue with multiplying that times six for the back half would be a couple of things. One is our base business was down exiting the month high single digits of average 15 in June. And the question is, is that sustainable? We'll take a step back, we'll look at worse. We don't know. So certainly, if it were to improve, or were to hold for the whole six months, would say down 10% versus that 20% assumption on our floor, that would make a material difference for the business. And as I just described, at an 80% drop down, you can do some of the math, but our core business was about $2 billion on quarter before COVID. So you know, 1000 basis points is a pretty significant difference on revenue and OM. On the PCR, we shared that we're assuming the volumes dropped down in Q4, not because we have any foreknowledge, but because as I said, return to work and back to school will largely be behind us, and because we don't know. So we want to be cautious about putting on guidance that counts on the level of PCR testing that at this point is unpredictable. Obviously, we go through Q3 and we get better knowledge towards Q4 and see a need to update that, we would do so. But, given how things have moved around, we want to be really careful. The other thing is, as I said, we fully expect, if we continue to have high levels of COVID and ease-of-testing that the Federal Emergency will continue, but because that's unpredictable, it could actually be revoked at any time. We want to be very careful about assumptions on reimbursement for our molecular tests. And so, at this point, we're only building in that reimbursement through a 90-day extension since that's been voiced by HHS. And while we would hope and expect if COVID continues that that reimbursement will continue into Q4, that would make a very significant difference as well. But that is not in either the bottom or the high-end of our current guidance.

Thank you. Our next question is from Pito Chickering from Deutsche Bank. Your line is open.

Good morning, guys. Thanks for taking my questions. Two questions for you, back to the pooling option, I would have assumed a larger multiplier effect for geographic areas with low positive testing rates. As you progress into the third quarter, is there a reason why that can't scale to provide a much larger multiplier effect? And what would hold it back from being that large of an impact? And the second question is, as we look into 2021, and if there's a decline in COVID testing, both molecular and serology in the US, is there any discussions about providing testing capabilities for other countries that don't have the testing infrastructure?

Yes, so let me start with pooling. So what you mentioned is true, that is, it's more beneficial in areas that have low prevalence. We've started to ramp up our capacity that will be driven for getting some nice boost in our capacity, which we're planning for, as I mentioned, to get to that 150 in a couple of weeks. So we're going to apply those concepts in our laboratory developed test locations and try to steer it towards the low prevalence areas to be able to get the best bang for the buck. So we'll push that and the multiplier is considerable when you have low prevalence, so that would be very helpful to bringing up our capacity. We'll keep on pushing on it. As far as testing for non-US geographies, frankly, we are focused entirely for all-intensive purposes on the US. We could consider it in 2021, but it's not in our plans right now and we haven't spent a lot of time thinking about it, as we sit here dealing with the pandemic in the US.

Thank you. Next we have Kevin Caliendo from UBS. Your line is open.

Hi, thanks, and thanks for taking my call. I want to get to the assumption around the vaccine and how to think about this. So if we were to assume a vaccine becomes available January 1, there's a billion doses or whatever the number might be, how do you anticipate the vaccine being distributed and administered along with testing? Are you suggesting that first people would get serology testing to figure out who would need the vaccine or? We can imagine that this vaccine is going to be administered quickly to the entire population. So take me through how you would expect to model out the administration of the vaccine along with testing.

Yes, well, obviously, this is beyond Quest Diagnostics and rationing or prioritizing who should get it first, and what's the progression and how you distribute it throughout the United States. But like with other vaccines, you'd like to get it to the higher-risk groups. And the higher risk groups are those groups that we actually tested initially, higher on the priority list for COVID testing. And so, those were with pre-existing conditions, over the age of 65, and obviously, people that have been compromised with other respiratory illnesses in the past. So independent of serology and antibody testing, my assumption would be those at-risk groups would be high on the priority list. And then, the second priority list would be everyone else. And if, in fact, you were to test positive for the antibodies, then my sense is there will be evidence at that point that will suggest that, in fact, you'll have immunity for a period of time. And the question will be, how much of this would be public policy versus independent choice of whether you want to have the vaccine or not. That's all speculative on my part, a lot to be determined. First of all, where the vaccine will come from, when it's going to be available, how much will the US get. And also, this is going to be I'm sure debated throughout the United States as we get into it.

Thank you. Next, we have Lisa Gill from JPMorgan. Your line is open.

Thanks very much, and good morning. Steve, I just wanted to follow back up on reimbursement. So, you talked about Medicare. Can you talk about the commercial market? So, it's the anticipation that the commercial market will just follow Medicare through the emergency pricing and what's your anticipation post-emergency pricing, should it be rolled back, number one. And number two, we've heard in the market that some of the health plans are pushing back on multiple tests done on individuals. What's been your experience so far?

Sure, sure. So first of all, we do have an assumption that commercial rates are aligned with Medicare rates and, Mark, why don't you just remind everyone what we have in the outlook going forward as far as our assumptions for reimbursement?

So the federal emergency declaration is set to expire on July 25th. The Department of Health and Human Services has indicated they plan to extend it for an additional 90 days, so we've incorporated a $100 price into our overall projections. This price isn't our average sale price, as we don’t receive the full $100, but it's reflected in our financial outlook. As we've mentioned before, commercial payers are generally aligning their rates with Medicare reimbursement rates, although a few state Medicaid plans have not fully matched that. For the most part, we are able to secure that price from all payers. We anticipate this trend to continue as long as the Medicare rate remains stable. There may still be some pressure on pricing, but we expect commercial payers to maintain their alignment with Medicare rates. Given the importance of this test, especially during the federal emergency, it would be difficult to justify reducing the rate. That said, we do expect to face some pricing pressure. Once we navigate through this period, our position will be that commercial rates should not fall below Medicare rates. We will be transparent about our costs and the ongoing necessity of this test after the emergency period, and we will strive to keep the rates aligned with Medicare instead of allowing them to decrease. We have yet to address these issues fully.

Regarding payment and reimbursement policies, they are currently evolving. It's important for individuals to understand that testing can yield different results week to week. People should be encouraged to get tested if they have been exposed or believe they have early symptoms. This approach seems widely supported, yet there are differing views on employer return-to-work programs, especially among self-insured employees where the issue of cost may be less critical. However, fully insured employers face challenges, as some insurers do not include testing in their reimbursement policies, placing the financial responsibility on employers. Additionally, discussions are ongoing regarding universities and colleges about whether free on-campus testing should be treated as reimbursable like a physical exam for students returning to school or participating in sports. This indicates a general debate in the community. There is also a need to assess who should be tested, especially concerning the protocol around retesting after a positive result. Some opinions suggest that the second test may not be necessary to confirm negativity, which could help alleviate current system demand. Overall, the situation is changing and under active discussion. Mark, do you have anything to add regarding the general reimbursement for COVID-related matters?

I would just add that we have not had a significant amount, it would be very few, if any denials or frequency limitations. So, while things might evolve, Lisa, to this point, we've not run into issues with the payers around frequency for the molecular tests, and for the return-to-work and back-to-school programs, we are not taking the risk on those. So we are either arranging client bill where we get paid directly contractually by the customer, or in some cases where they think they have coverage from the payer, we have a fallback to where, if we do get a denial, then we have a right to bill the client directly. So, we think we're protecting ourselves from the financial standpoint, and we have not run into headwinds thus far from the payers on frequency.

Thank you. Our next question is from Matt Larew from William Blair. Your line is open.

Hi, good morning. I wanted to ask about how payer mix is trending in the base business, obviously, with the rising unemployment, but also, I suspect that patients in the commercial population may have been quicker to seek services as restrictions were relaxed, and I wanted to follow up on the opportunity for back-to-work and back-to-school. Just curious what discussions you've had and what role lab-based testing might play versus rapid testing? And then, perhaps there is an opportunity for Quest to play a role model not only in testing but managing the testing strategies for employers, cities or companies, or schools?

Mark, you want to take the first part of this around payments? I think that was the question.

Yes, I'm sorry, Matt, what is your specific question? Can you repeat it?

Sure. Just payer mix; how that trended through the quarter in the base business?

Yes, the payer mix remained largely unchanged. However, we did observe an increase in the uninsured population. Other than that, given our size, we typically do not experience significant changes in payer mix, and this case was no different. The decline in utilization did not disproportionately affect individuals with specific payers; the main change was the rise in uninsured individuals.

Yes, Matt. We are examining return to work programs and the role of point of care devices in those settings, particularly regarding surveillance. Our initial testing shows that the gold standard for diagnostics is the PCR test, and for blood-based testing, serology remains the gold standard as well. The sensitivity and specificity of both tests are the highest available today. There are a few new devices entering the market that we believe could enhance our services for both employers and universities. Some antigen devices, while they have a sensitivity around 85%, which is lower than our current standards, could still be useful in combination with serology and overall biometric screening. These tools could help us manage populations over time. We are considering how to incorporate these options into our services for employers and universities as they conduct surveillance for their populations moving forward.

Thank you. Our last question comes from Brian Tanquilut. Your line is open.

Hi, good morning.

Brian, you're breaking up.

Hi, Brian.

Thank you. Our last question comes from Brian Tanquilut. Your line is open. Hi, good morning. Brian, you're breaking up. Hi, Brian.

Yes, first of all, as I mentioned earlier, we plan to exceed 150. We anticipate that demand going forward will surpass 150, and we believe we will eventually match our capacity to that demand. So we will exceed 150. The limiting factors include a mix of machinery, specifically the IVD test systems and laboratory test equipment, especially for laboratory developed tests. It's not only the PCR platforms we need to consider; in our setup, there are two additional components: extraction and liquid handling. We are facing some machine constraints in acquiring these systems to enhance our capacity, but we are collaborating closely with our suppliers to maximize what we can obtain to raise our capacity beyond 150. Additionally, manpower is a factor. We're operating 24/7, and as I stated in my earlier remarks, we've conducted 8.5 million tests in the last four months, with our teams working continuously. Our microbiology department has significantly shifted from being underutilized to being central to our operations, but we are limited by the availability of trained staff to carry out these tasks. Moreover, we need to establish these systems physically, which requires adequate controls and training. This process naturally takes time. Lastly, reagents are a constraint as we are limited by how much we can source for our various platforms. We are actively working with suppliers to increase our supply. We have faced shortages from some suppliers that have impacted our ability to deliver results. Therefore, we are pushing them to provide us with more reliable commitments for supply. I will add that all parties are collaborating effectively, including IVD manufacturers, the task force, and the White House, to explore ideas for increasing capacity. We are all striving to enhance our output. To summarize, those are the limiting factors we need to address to surpass 150, but we are committed to achieving that goal to meet the anticipated demand, especially as we approach late August and early September.

And Brian, you know, to be clear, you didn't ask this directly, but we are not being conservative. We are doing everything we can. The challenges are not financial, you know, willingness to spend more capital or for that matter, operational expense to get things up and running. They're all operational in our ability to get more equipment and, as Steve said, multiple pieces of equipment, and to get them operating and to get the people who are trained to do it. And we are, you know, moving as quickly as possible. As you said, we doubled our capacity from mid-May, you know, we're expecting another 20,000 per day increase from where we are today over the next several weeks. And then as Steve said, we're going to go beyond that. So there's no, you know, hesitancy to add capacity because of uncertainty and demand. We're doing everything we can to increase our capacity and certainly to reduce turnaround times.

Thank you. Our next question is from Eric Coldwell from Baird. Your line is open.

Hey, thank you very much. Maybe just a couple of quick housekeeping first. I know you said that your guidance assumes PCR volumes declined in 4Q versus 3Q, I'm just curious can you give us a sense on how much what you're expecting for average daily volume in PCR in 4Q that's implicit in your guidance assumption?

Yes, so, you know, Eric, I'm sure you can appreciate that, you know, it's not as if we have a point estimate, forecasts, you know, for every number within that range or even the high-end range, because we've got, you know, multiple factors that can move things material, you know, certainly as we mentioned, the base volume, decline or improvement relative to our assumptions is very material to the outcome. And then that PCR, you know, volume is very, very material, as well. And then finally, the reimbursement rate, you know, beyond the 90-day extension is very, very important. So, you know, there's multi-variable so, you know, I really can't answer directly, but, you know, specific number because, you know, we're running scenario planning, but I would tell you that at this point, we have a significant reduction in Q4 demand to get to these guidance numbers. So it's not small, it's fairly significant. And again, not because we know that's what's going to happen, but just given the uncertainty of the volumes and the knowledge that the return to work and back to school volumes will largely be gone by Q4.

Thank you. Next we have Derik de Bruin from Bank of America, your line is open.

Hi, good morning. Two questions. The first one being, can you give a little bit of color on some of the rebounds in the different categories? And then you've noted some softening in July. So can you talk about what you've sort of seen oncology versus clinchem versus pathology, just to give us a flavor on how you're seeing sort of hiccups?

Yes. Let me describe it this way; in primary care, including OB/GYNs, we have observed a positive rebound as physicians have reopened their offices and resumed seeing patients. In some instances, they have increased their hours, leading to a noticeable rise in demand. Additionally, we are witnessing a recovery in certain procedures that may have been delayed, and our pathology tissue demand has also improved significantly. However, we are uncertain about the sustainability of this trend as it may be influenced by the pent-up demand that we lost in April and May, which began to return in June and may carry into the summer. Therefore, when we discuss our outlook, we remain cautious not to assume that the June performance will serve as our ongoing benchmark throughout the summer. We may experience a slowdown as this demand stabilizes, ultimately reaching a more realistic run rate for Q3. Regarding our other business areas, our life insurance sector has experienced a notable decline with little recovery in sight. Our pre-employment drug testing business is beginning to rebound as employers resume hiring, yet it remains significantly lower than 2019 levels. Our employer population health business, which provides wellness programs, is also down significantly as many events have been canceled. The performance variation is wide, with primary care performing best and those linked to the economy, such as life insurance and wellness programs, performing poorly. Mark, do you have anything to add?

Yes. I would just add that most of our base business has come back proportionally. As Steve said, oncology has really picked up recently over the last couple of weeks; we'll see how much of that was deferred pent-up demand. But the one category, it's not just in pre-employment but prescription drug monitoring; so the whole drug testing area, that's lagged a little bit some of the other franchises within the base business, not just in our employer business.

Thank you. And our last question comes from Mike Newshel from Evercore ISI. Your line is open.

Thanks. Maybe just a follow-up on pooling. Is there a specific positivity rate threshold you have in mind where pooling makes sense in a particular state and region? And I know you get full reimbursement for each specimen, but how much does pooling change your cost structure? Is there a big incremental margin difference versus testing single specimens?

Yes. The ideal scenario is when we have the lowest positivity rate, allowing us to pool multiple specimens in a single well, which can significantly increase our throughput per batch. If there are no positive results, we benefit fully. However, when we have positive results in that run, we must test the entire well, which reduces productivity. The best rate is below 2%, and several states are currently performing well in that range, particularly in the Northeast, which we hope will continue. As the positivity rate approaches the high single digits, efficiency starts to decline due to the need for retesting. Generally, a positivity rate below 5% is optimal, while rates above that become less beneficial. We are looking at pooling as part of our laboratory developed tests to enhance our capacity, aiming for our target and potentially beyond. However, we are also improving our operations by adding new systems, processes, and personnel, which will contribute to our overall capacity in addition to pooling.

Pooling is currently possible only with our laboratory developed tests. It won't be a broad expansion across our entire network, but we can focus on low prevalence areas to some degree. To Steve's point, we will target locations where we have low positivity rates. The main advantage is not just the cost savings on reagents from processing four samples at a time instead of one, even with some retesting, but the increased capacity to serve more people with the same equipment. This capacity advantage is much more significant, although there are also savings in the cost of sales associated with pooling.

And we have no other questions. Thank you.

Okay. Well, we appreciate the time on the phone. We appreciate the extent of your interest in our business. And we hope you, like us, are appreciative of everyone at Quest and what we're doing, and we appreciate your support as well. So have a great day everybody.

Thank you for participating in the Quest Diagnostics second quarter 2020 conference call. A transcript of prepared remarks on this call will be posted later today on the Quest Diagnostics website at www.questdiagnostics.com. A replay of the call may be accessed online at www.questdiagnostics.com/investor or by phone at 888-566-0435 for domestic callers or 402-998-0605 for international callers. Telephone replays will be available from approximately 10:30 AM Eastern Time on July 23, 2020 until midnight Eastern Time on August 6, 2020. Goodbye.