Welcome to the Quest Diagnostics third 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 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, Investor Relations for Quest Diagnostics. Go ahead, please.

Thank you and good morning. I’m here 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 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 testing volumes excluding COVID-19 molecular and serology testing volumes. Finally, growth rate 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 is Steve Rusckowski.

Thanks Shawn, and thanks everyone for joining us today. Quest had a very strong third quarter, benefiting from continued demand from COVID-19 testing as well as the rapid recovery from healthcare utilization. We have performed over 22 million COVID-19 molecular and serology tests to date, more than any other provider. We’ve also developed and introduced several new innovations that are contributing to enabling the country’s ability to return to work, the classroom, and on the athletic field. I’m extremely proud of all that Quest Diagnostics has accomplished through the COVID-19 pandemic and I want to thank our 47,000 employees for their hard work and dedication. 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 third quarter results and our updated financial outlook for the remainder of the year. Our financial performance in the third quarter was very strong. For the quarter, total revenue grew by more than 42% to $2.79 billion. Earnings per share increased by more than 164% on a reported basis to $4.14 and nearly 145% on an adjusted basis to $4.31. These results reflect continued demand for COVID-19 testing and continued recovery of our base testing volumes as healthcare systems resume non-urgent care and elective surgeries. Organic base testing volumes orders declined high single digits in July and improved in the quarter to mid to high single digit declines in September versus the prior year. Demand for COVID-19 testing came from several areas: clinical testing ordered by healthcare providers as the virus spread throughout much of the country, especially for non COVID-19 pre-surgical patients and people in high-risk populations like nursing homes and prisons; in retail testing in our standard network access points, such as our drive-through sites offered across the country by CVS and Wal-Mart; workplace testing as employers sought to return employees to the job and their offices; university testing to facilitate the return of students to campus life, including sports; and our consumer testing direct testing offered by Quest Direct. We’ve also demonstrated innovation and agility in bringing COVID-19 testing to our nation. In the quarter, we were granted an emergency use authorization, or EUA to offer unobserved self-collection. We were the first provider to receive an EUA due to the pandemic or emergency use authorization for at-home collection. Finally, we teamed up with Wal-Mart and DroneUp to pilot a program for contactless delivery of specialty kits using drones. Also in the quarter, we announced an initiative along with our Quest Diagnostics Foundation to address and reduce healthcare disparities in underserved communities, including those impacted by COVID-19. This value-based commitment builds on our existing work with Federally Qualified Health Centers and will focus on serving people of color, elderly and underserved populations in locations throughout the United States. Quest plans to donate testing services and fund a range of initiatives estimated to total more than $100 million. Our goal is to improve access to testing and drive awareness of the value of diagnostic innovations in managing health. Before updating you on our base business, what I’d like to do is comment on our recent CMS change to Medicare payment for COVID-19 testing and our decision to return the CARES Act funding to the government. In conjunction with our trade association, we’ve been currently reviewing the new reimbursement policy for high throughput COVID-19 molecular testing from CMS will impact laboratory and patients we serve. Last week’s announcement removes uncertainty that was an overhang on COVID-19 testing reimbursement. Finally, we’re grateful for the CARES Act funding from last spring which provided us at an important time of great uncertainty for our country. Now several months into the pandemic, we no longer require this funding, and as a result, we will be returning these funds to the government. That was the right thing to do. We’re making progress on our strategy to accelerate growth in the base business, so as a reminder, the five elements of our strategy to accelerate are to grow more than 2% per year through strategically aligned, accretive acquisitions; expand relationships with health plans and hospital health systems; offer the broadest access to diagnostic innovation; be recognized as the consumer-friendly provider of diagnostic information services; and finally, support population health with data analytics and extended care services. Now I’ll share a few highlights from our strategy to accelerate growth. Our M&A pipeline remains strong. Since the second quarter, we closed our acquisition of Mid America Clinical Laboratories, referred to as MACL, which is based in Indiana, and we completed a couple of small tuck-in acquisitions. Our recent acquisitions have been performing well during the pandemic; for example, our Memorial Hermann outreach acquisition announced earlier this year, as well as this recent MACL acquisition have driven growth in both COVID-19 testing and our base business. We’ve also seen growth in advanced diagnostics from our acquisition of Blueprint Genetics. The second growth driver, expanding relationships with health plans and hospital health systems is also delivering. Our hospital reference testing volumes excluding COVID-19 have returned to growth year over year. Given the challenges that hospitals are facing, we expect many more to be open to discussions about how Quest can help them achieve their lab strategy. So in professional lab services this year we have logged a record amount of bookings, representing larger and longer-term agreements than in the past. We also continue to make progress on our health plan strategy. Within the UnitedHealthcare preferred laboratory network, we’re helping United reduce out-of-network lab spending through the previously announced zero out-of-pocket benefit. In addition, United has added enhancements that reduce the administrative burden for physicians and patients related to those tests requiring preauthorization. Then in August, we entered into a new strategic relationship with Anthem in 12 states. We’re working with Anthem to improve quality and efficiency in the delivery of laboratory services. Then finally, additionally we’re working with major national payors to enable their members to access COVID-19 testing through Quest’s relationships with major retailers. We made progress on our third element of our strategy to accelerate growth by offering the broadest access to innovation. In the quarter, we launched three new combined COVID-19 and respiratory virus tests, reducing time for physicians to diagnose and treat patients by identifying nearly 20 viral and bacterial infections from a single swab. We also launched our automated next-generation sequencing solution that enables individuals to access genetic testing insights about hereditary diseases at consumer price points through Ancestry Health. Finally, we grew our direct-to-consumer services in the quarter. Quest Direct test offerings continue to resonate with consumers. In the quarter, we launched our COVID-19 active infection test, offering consumers a choice of using an at-home kit or getting the specimen collection done at a drive-through location. Also, we made remarkable progress in the surge of sign-ups to our My Quest patient portal. Today, roughly 13 million patients have a My Quest account to make appointments or receive their results through their smartphone or their computer. In the third quarter, on average more than 100,000 patients per week signed up for this service. This is more than double the rate we experienced before the pandemic. Now, the second part of our two-point strategy is to drive operational excellence by continuing to pursue our goals to reduce our cost base by 3% per year. We also see more opportunities ahead to drive further productivity gains while at the same time enhancing our customer experience and overall service levels. Here are a couple of examples. We have standardized on the Siemens immunoassay platform in 14 of our 18 regional laboratories. The solution drives workflow efficiencies and has enabled more than a 50% reduction in our equipment footprint. We are still in the early stages of these realized savings, but so far we’re pleased with this progress. Then also, our new flagship laboratory in Clifton, New Jersey is being prepared to go live in early 2021. When complete, this state of the art facility will be the most highly automated in our laboratory network and will represent the final regional lab to be converted to our standard operational system, which we call Platform 2. This will mark the culmination of a multi-year initiative to simplify, streamline and standardize our regional laboratory operations. Now I’d like to turn it over to Mark to take you through the results and update you on our outlook. Mark?

Thanks Steve. In the third quarter, consolidated revenues were $2.79 billion, up roughly 43% versus the prior year. Revenues for diagnostic information services grew approximately 44% compared to the prior year, which reflected significant demand for COVID-19 testing services offset by a modest decline in base testing volumes. Volume measured by the number of requisitions increased 19.7% versus the prior year with acquisitions contributing approximately 3%. We continued to experience improving performance in our base business in the third quarter. Orders for organic base testing compared to our pre-pandemic business declined high single digits in July and improved to a mid to high single-digit decline in September versus the prior year. For the entire third quarter, base testing volumes declined roughly 5% versus the prior year and benefited from recent M&A and the new PLS platform that Steve highlighted earlier. We also experienced a significant contribution from COVID-19 testing during the third quarter, performing approximately 9.9 million molecular tests and 1.5 million serology tests. We exited the third quarter averaging approximately 93,000 COVID-19 molecular and 11,000 serology tests per day. Revenue per requisition increased 20.9% versus the prior year, driven largely by COVID-19 testing. This was partially offset by unit price headwinds of approximately 1.7% in the third quarter, in line with our prior expectations. This included the ongoing impact of PAMA. Reported operating income was $718 million or 25.8% of revenues compared to $313 million or 16% of revenues last year. On an adjusted basis, operating income was $831 million or 29.8% of revenues compared to $349 million or 17.9% of revenues last year. The year-over-year increase in operating margin was driven by strong revenue growth in the third quarter, reflecting the relatively high drop-through on incremental volume in our business. Reported EPS was $4.14 in the quarter compared to $1.56 a year ago. Adjusted EPS was $4.31 compared to $1.76 last year. Cash provided by operations was approximately $1.46 billion year-to-date through September 30 versus $895 million in the same period last year. Cash from operations in the third quarter includes approximately $138 million of provider relief under the CARES Act. As a result of our strong financial position, we are planning to return the entire CARES Act funding we received, which Steve noted earlier. Additionally, we are accelerating the redemption of our senior notes maturing in April of 2021. We will use the proceeds of the bond offering that we completed in May 2020 to repay these notes. We expect to complete the early debt redemption in November. Turning to guidance, we raised our full year 2020 outlook as follows: revenues now expected to be between $8.8 billion and $9.1 billion, an increase of approximately 13.9% to 17.8% versus the prior year; reported EPS expected to be in a range of $8.22 to $9.22 and adjusted EPS to be in a range of $9 to $10; cash provided by operations is expected to be at least $1.75 billion, and capital expenditures are expected to be approximately $400 million. We continue to operate under the uncertainty caused by the COVID-19 pandemic. Continued recovery in the base business as well as demand for and duration of COVID-19 molecular testing are significant swing factors that remain challenging to forecast. With that high degree of uncertainty in mind, please consider the following: the midpoint of our full year outlook generally assumes base testing volumes to remain modestly below last year’s levels as we exit 2020; COVID-19 testing volumes averaging nearly 90,000 tests per day for the molecular test and 10,000 tests per day for the serology test in Q4; COVID-19 molecular reimbursement generally stable with recent trends. Our performance through mid-October is slightly above these assumptions, but again our guidance reflects the uncertainty of the current environment. Finally, as Steve mentioned, we are currently in the early stages of launching our recently announced initiatives with the Quest Foundation to reduce health disparities in underserved communities. As we move forward, we expect to exclude the costs associated with this multi-year initiative in determining our adjusted results. While we aren’t prepared to share a detailed outlook for 2021 today, I’d like to offer some considerations for next year. First, we are likely to have an easy compare in our base business for much of the year, especially in Q2. Second, demand for COVID-19 testing is likely to persist well into 2021. We believe that molecular PCR testing will continue to play a very important role in diagnosing, tracking and tracing active COVID-19 infections and that there will eventually be a growing need for serology testing as vaccines and additional therapies come to the market. Third, we are working to understand the details of the recent CMS announcement regarding COVID-19 molecular reimbursement for 2021, and finally as a reminder, there will be no Medicare reimbursement costs under PAMA in 2021 given the one-year delay included in the CARES Act. I will now turn it back to Steve.

Thanks Mark. To summarize, we had a very strong third quarter and have performed over 22 million COVID-19 molecular and serology tests to date. We’ve also developed and introduced a number of new innovations allowing the country to get back to work, into the classroom, and onto the athletic fields. We’ve seen further signs of recovery in healthcare utilization as our base testing volume continued to recover rapidly throughout the third quarter. Finally, again I’m extremely proud of all that Quest Diagnostics has accomplished throughout this very difficult time, and I thank all the 42,000 people at Quest Diagnostics for all their hard work and dedication. Now we’d be happy to take any of your questions. Operator?

The first question is from Ann Hynes with Mizuho Securities. Your line is now open.

Hi, good morning. How's everything? I wanted to follow up on your comments, Mark, regarding the reimbursement for next year. I understand there are still many uncertainties, but could you discuss your current turnaround time, your expected molecular capacity by January, and whether you anticipate needing to make further investments to secure that $100 reimbursement for molecular tests? My second question is about cash flow. It’s obviously quite elevated due to the testing. What are your plans for deploying that cash once you can, and what is the timing for that deployment considering the elevated levels? Thanks.

Let me start with the operational piece of that, Ann. First of all, we’re running about a capacity of 200,000 tests per day, even though our guidance indicates lower actual results. We’ve done this for two reasons. One is to prepare for the fall when we anticipate increased demand for COVID-19 testing, and secondly, having more capacity while achieving fewer results helps us improve turnaround time. I’m pleased to share that we’re currently averaging less than two days for COVID-19 testing. Additionally, as mentioned in my earlier remarks, we’re working to understand the exact guidelines, and further details will come from CMS regarding reimbursement changes. Our examination of turnaround times involves tracking from specimen collection to results, measured in calendar days. More specifics will be provided by CMS, and clarity will follow. We’re performing well regarding capacity versus demand, and we’re not stopping there; we’re increasing our capacity as we speak. We’re optimizing output from the new systems we’ve implemented and considering the application of pooling in some of our laboratory testing platforms. This should enable us to reach 250,000 tests per day by the end of this year, up from 200,000 today, allowing us to meet demand and maintain our indicated turnaround times. Mark?

Yes, so just to add to that, Ann, the devil’s in the details. We need to understand exactly when the clock starts on turnaround time. Based on where we think it should end up, we expect to be in very good shape around meeting the criteria. At this point, assume we have to get more than half of those tests turned around in two days or less, and obviously we need clarification and certainty around that, and that’s for obviously Medicare, and we still also need to work through some of the issues with the commercial payors as well to understand how it’s going to work with them. That’s why we’re cautious in terms of committing too much to what this pronouncement by CMS means. We have a lot of work to do, but certainly we’re optimistic as we look at it that we should be able to meet that requirement. On cash flow, as you see, we’re obviously feeling much better about our cash flow at this point. The fact that we’re repaying the debt early from April that we issued as a pre-issuance in May shows our confidence, returning $138 million which of course is deducted from our projection when I said at least $4.75 billion, so we’re expecting a very strong cash year. You know, Steve mentioned we have a very strong M&A pipeline, and I’ve said many times to investors I would prefer to do M&A because when we do it, we’re highly confident that that’s a better return for our shareholders, but we do have very strict criteria. We have to find deals that meet those criteria, so I’m optimistic that we will deploy a chunk of that for M&A and then at some point you can expect us to return to our normal capital strategy as we move forward throughout the calendar year, or early next year.

Great, thanks.

The next question is from Stephen Baxter with Wolfe Research. Your line is now open.

Hi, thanks for the question. I wanted to ask you about the progression of core volumes for the quarter. I believe you said August core volumes were down mid to high single digits, and then in today’s release I think it also has the September exit rate at about the same level, down mid singles to high singles. This would seem to suggest that the baseline volume return to normal has slowed a little bit. Is that consistent with what you guys have actually experienced, and if so, what do you think needs to happen to see it improve further? If it’s not, what’s the nuance that I’m missing? Then just to put a final point on it, does guidance assume you see a continuing improvement from the September exit rate or basically a continuation at that level? Thank you.

Thanks for the question, Stephen. As we mentioned, volume improved from July, so really September versus August is fairly flat, so yes, there was a little stagnation in improvement in the baseline, not completely surprising given the recent uptick in COVID again. So it hasn’t gotten worse for us, but it did not continue its improvement, and that’s why when I talked about what we expect in Q4, we don’t expect a full recovery any time this calendar year. Obviously we have a very broad range - $300 million, so within that range there are multiple variables, but in terms of the base business, we’re not counting on in the middle of that a complete recovery. We’re not expecting it to move materially away from where it’s been the last couple months, but that would kind of get you to that lower end and upper end of the range, depending on that along, of course, with COVID testing as well, where they go from that midpoint. So not counting on anything, but certainly improvement could lead us toward that upper end, and if it eroded a little bit, it could lead us towards the lower end of our guidance.

Yes, and we’re watching that carefully. If you go back and hear what I said, we started off July at high single digits, and then also as I indicated in September, it was mid to high, so slight improvement there but we’re watching it as we enter the fourth quarter and as we sit here in the fourth quarter in October.

The next question is from Ricky Goldwasser with Morgan Stanley. Your line is now open.

Hi, good morning. I have a question on the gross margins. You came in meaningfully higher than us - clearly we’re seeing the benefits of the return of core volumes. But can you maybe help us quantify, off the gross margin that we saw in the quarter, what is coming from the return of core versus realized price for COVID testing? We understand the reimbursement, but also we’re hearing you talk a lot more about direct-to-consumer testing, which I’m assuming comes with a higher price point, so if we can just get a little bit more clarity on that.

Sure, so Ricky, first I’ll confirm that direct-to-consumer does come with a higher price point. Certainly there are other expenses that go with direct-to-consumer. We’ve actually invested incrementally in some marketing to drive awareness and so on, but from a gross margin perspective, the consumer testing is higher than our core business. Recall even though we feel good about that business, it’s still a very small part of our overall enterprise. Then between COVID and base, obviously we don’t get into gross margin on specific test offerings, but the one benefit I will point out on COVID is that there’s no patient responsibility, so when you think about it - and I don’t have the precise numbers, but just let’s say because our overall enterprise, about 20% of our revenues come from patients, if we collect, as we’ve shared, $0.70 on the dollar, you can imagine that there is about a 6% higher margin on that particular business because it’s 100% reimbursed by payors instead of having any patient responsibility, so there is some benefit to the gross margin. But in COVID, it really is unrelated to price and really has everything to do with the coverage policies and not having that inability to collect all the money that we’re due.

Great, and just one follow-up, if I may. You gave us some early puts and takes for 2021. We’re starting to hear some companies that are accelerating hiring in preparation for next year. When you think about increasing first serology associated with COVID vaccines, etc., should we assume a step-up in costs related to increased hiring in preparation for that?

Yes, so Ricky we managed our workforce carefully over the last six to nine months. As you’ll recall, the second quarter we had to trim down our workforce, so we furloughed over 6,000 people, we reduced work schedules, we cut salaries including myself and Mark and our board, and then we saw the steady recovery in our base business coupled with the COVID testing that we’ve done. So we’ve reinstated salaries, we have brought back full work weeks and we’ve brought back the vast majority of the furloughed employees, and actually we’ve hired people, so we’ve hired people where we need to hire people, particularly in areas like specimen processing. You can see with the volumes we’re seeing, you have to have a lot of people to receive all these specimens to sort it out before they go into the lab. But I’ll tell you, we’re still being very, very careful before we add another person. We’re being very careful in overhead, and Mark can go through exactly what’s in our expenses, but we’ve been very limited in hiring in our expense categories and will continue to be very cautious with our hiring for our overhead with our laboratory operations and our operations in general. The reason for that is we want to make sure we don’t get ahead of ourselves. We feel we got good leverage in the third quarter, as you see, and we believe we have a workforce in place to manage the demand we’re getting right now. We’re constantly looking at what we think the future demand will be, but we want to make sure we don’t get ahead of ourselves. We indicated what we think the fourth quarter’s going to be. We are building capacity to get more COVID-19 testing done. We have plenty of capacity available for serology without adding a lot of staff, with the exception of some of the volume-based jobs as I mentioned, and so as we get deeper into the fourth quarter and we get into the beginning of next year, we’ll then assess if we need to add some people. But so far, we’ve done some modest hiring, we’re back to full workforce, and we’re watching it, frankly, daily and we want to make sure we don’t add people before we need them.

Yes, so we don’t have any proactive plans to add resources, Ricky. We’re going to continue to monitor demand in our business, and we have the flexibility generally to ramp in a fairly short window as volumes move in one direction or the other. I can confirm no plan to add to the expense base in Q4 in anticipation of anything next year at this point.

And interestingly enough, this is a last point because we do have this natural hedge on this, is despite where we are with the economy, we still have attrition in some of our draws, so we’re in some places still trying to keep up. There are other options for people particularly with some of our non-exempt employment jobs, and therefore if things turn down, we could carefully turn off our spigot as well.

Operator, next question?

Next question is from Ralph Giacobbe from Citi. Your line is now open.

Great, thanks. Good morning. I want to go back to the reimbursement comments, and specifically in your prepared remarks on the CMS reimbursement tweak and it removing an overhang. I guess I just want to be clear on what the expectation is now, sort of post the PHE period, assuming you meet those turnaround times. Does it sustain the $100 level, am I interpreting that right or not? And then second piece is related just post that PHE period, my understanding is the commercial rate for COVID will be the default to your contracted rate, or there’s a rate negotiation that takes place. Is that correct, and then how should we think of that commercial rate off the $100 baseline? Thanks.

Yes, so let me start with where we saw some uncertainty and therefore the word we used, overhang. First of all, for this year we had some uncertainty, as you know, in the third quarter about the emergency order that’s in place, and that was extended to October. We are hopeful that the rate would continue at $100, and it’s our expectation given that the new rate changes with the incentive that we outlined previously on January, so therefore we’re assuming the $100 for reimbursement for the remainder of this year. But up until we heard this, there was some uncertainty about 2020. Then secondly, in 2021 remember the original rate was at $51 and it went up to $100, and so therefore the new reimbursement that’s being spoken of, again if you get the turnaround time of two days, you’re at $100, if you don’t, it’s $75, so that removes some of that uncertainty of it reverting back to where it was before we got the bump from $51 to $100. Mark, do you want to take it on the commercial side?

Yes, generally it’s a renegotiation, Ralph. We had provisions in our contracts for new tests, and certainly the high throughput COVID-19 molecular test is one of those, so there is no provision for it to default automatically to any sort of relationship to CMS or what have you. We had to negotiate that, and I was successful in getting it to match CMS’ rate, and certainly as we go forward we’re going to have to continue to talk to our commercial payors and negotiate. There’s no set answer at this point to where commercial reimbursement might go.

Operator, next question?

The next question is from Jack Meehan with Nephron Research. Your line is now open.

Hey, good morning. Wanted to dig in a little bit on the commentary around core volumes. Just a clarification first - I think you said the core was down mid single digits. Does that include M&A, just to bridge versus the monthly commentary? Then as you look out to 2021, do you think routine demand can return to the pre-COVID baseline or is there some reason why you think it might struggle to get back to 100%?

The core volumes, I want to be clear, for the quarter were mid to high single digits with an improvement from July into August, and then fairly flat in September, and that was an apples to apples comparison, so M&A puts those core volumes in a better place and then also some of the new point-of-service deals. But we didn’t want to confound utilization by just reporting the base business. We wanted you to understand the apples to apples, almost same store analysis, and that’s the one where we’re down mid to slightly higher single digits for the full quarter. In terms of next year, like everybody else, we’re trying to figure out how quickly things might recover and to what extent. We’re looking at all the same reports you are. Given the continued monitoring utilization given the potential for the economy to have an impact on utilization and other uncertainties, at this point we’re not expecting any time soon to get the base volume back to the pre-pandemic levels, but with that said, it doesn’t mean it couldn’t happen. We’re just not at this point assuming it, and while we haven’t given guidance for 2021, we wanted to just give some of our initial thinking. But obviously when we come out with guidance, we’re going to give you specifics around what those assumptions are, and at that point we’ll have a lot more information.

There is variation in our performance across different regions and clinical areas. For example, New York City has not yet fully recovered, and despite having a considerable business there, its impact on our overall percentage is significant. In contrast, other parts of the country have returned to normal. We are monitoring these changes closely on a city-by-city basis to gauge their implications. Additionally, while some of our clinical franchises have returned to pre-pandemic performance, others still lag behind. For instance, our prescription drug monitoring business remains below pre-pandemic levels. By analyzing these different factors, we can see why our overall performance is still below where we were before the pandemic. To return to our pre-2020 levels and potentially exceed them, we need some areas to normalize to the levels we experienced in the winter months prior to the pandemic in March.

To Steve’s point, there is a lot of complexity. We do have some regions that are experiencing year-over-year growth, while others are struggling. For instance, areas like Long Island, Westchester County, and New Jersey, which are close to Manhattan, are performing much better than Manhattan itself. We are uncertain if this trend is related to the availability of physician offices. It might be due to fewer commuters traveling into the city, as they are getting their tasks accomplished in other locations rather than during their work hours. However, we currently lack specific information on this matter.

The next question is from Erin Wright with Credit Suisse. Your line is open.

Great, thanks for the question. Overall, how are you thinking about the competitive dynamics between the point-of-care rapid testing capabilities in your COVID offerings, or should we be thinking about it as testing to get testing in this sort of environment? Then I guess a broader question here too, how are you thinking about consumer behavior when it comes to diagnostic testing in a post-COVID world? Will this inherently expedite some of your direct-to-consumer initiatives here, or does it change or affect any of those efforts, such as Quest Direct and other consumer initiatives, and will this be dramatically more meaningful from a financial perspective for you in the coming years? Thanks.

Yes, thanks. I’ll take the first part around point-of-care solutions. As you know, there are two point-of-care solutions. One of the point-of-care diagnostic solutions that were out there for some time provided by IBD manufacturers, and for all intents and purposes they were there for a number of months and they provided a role. Then most recently, I believe you are referring to what’s happening with the antigen testing. We do believe there will be a role for antigen testing, particularly for monitoring and surveillance of a population. But we do understand for a lot of reasons why PCR and the return to the lab model is going to continue to be the gold standard. One of the reasons for that, depending upon the quality of the antigen testing that might be applied, there are requirements around reflex testing to PCR for both positives and negatives, and also we believe that physicians do prefer PCR testing. When offered together, it means flu respiratory panel and COVID tests that will be PCR, and we think with the flu season coming up that we are going to see some demand for it as well. So we believe that antigen testing will be a necessary part of our portfolio and we do expect to be bringing out a solution for antigen testing as part of our services we offer, but it will be complementary to the PCR testing that we’re currently doing. Hopefully that provides some clarity of what we think the role will be. Then finally on the consumer piece, we do believe that there is increased interest in our direct-to-consumer offerings for basic testing. As you all know, a number of patients have not gone to their doctors as they should. We do believe there is an opportunity for them to have their lipid panel checked for their cholesterol, make sure the statins are working properly - you know, monitoring glucose A1c, sexually transmitted diseases. As we’ve mentioned, we’ve brought up serology testing direct to consumer and most recently COVID-19 testing. We believe there is interest in a very convenient approach to getting testing, and we couple this with a telehealth physician consult as part of our service and we do believe going forward, there is going to be increased demand for both telehealth in terms of its role in our business overall, and then secondly, testing and getting that either indirectly through Quest Direct or getting that through a telehealth provider as well. We’re very well positioned in that regard with our relationships with telehealth companies but also with Quest Direct. Before the pandemic, we kicked this program off, and so we have a nice platform that’s been building up volume and we feel that there’s going to be more opportunities in front of us as the demand, given the circumstances, continues to have a lot of interest from consumers.

Operator, next question?

The next question is from Donald Hooker from Keybanc. Your line is now open.

Great, good morning. There’s a lot being talked about here, a lot of topics, but one thing that jumped out for me in your prepared remarks was the record bookings in POS. I was wondering if it’s possible to maybe size or scope that. I suspect I know why that might be the case, but I’d also love to hear your perspective on what you think is going on there, if it speaks to maybe the health of the hospital environment as well.

Yes, well we’re encouraged. As I mentioned in my prepared remarks, the hospital business is actually growing again versus last year, and that’s encouraging, and that’s without COVID-19, so that’s an encouraging trend. We see hospitals back in business and we’re seeing the testing that you would expect from those hospitals, and we’re doing well in that marketplace. This is where we traditionally called our reference testing business. Then in addition to this, over the years we have built up a professional lab services business. This isn’t just a new program - we’ve been working on this for over five or six years, and we’ve built up a nice portfolio of referenceable accounts and that’s serving us well. We are penning a number of long-term, multi-year contracts this year that will provide growth for us in ’21 for certain, and we see continued growing interest from integrated delivery systems on how we can help them with their lab strategy. As you know, many of these hospital systems are having a difficult time through the pandemic, and now speaking with many of the CEOs, and I actually had a conversation Tuesday with one, they’re looking at various options to get more efficient, get more effective. One of the areas that we’ve talked about for years, and I think it’s going to keep building momentum, is walking in and having a conversation around their lab strategy, which includes the reference testing, the sophisticated testing they send out, how it can help save their money through the acute care laboratory. Then it does beg the question of what they do with their outreach business, and in some cases they sell that to us, and that’s what we did with Memorial Hermann this year, with MACL, and we’re seeing more and more prospects. So it continues to receive strong interest, and this year was really a banner year for bookings, and we’ll see that in the growth in ’21. Mark, anything you’d like to add to that?

Yes Don, as you know, we don’t generally prospectively announce the size of a contract, but what we will see as we report our quarterly results and we talk about our growth and where it’s coming from, the point-of-service contribution, so certainly moving forward you’re going to see the evidence of what Steve just talked about in some of these very large bookings and deals that we’re just starting to implement and that will accelerate our growth into 2021.

Operator, next question?

The next question is from Kevin Caliendo with UBS. Your line is now open.

Hey guys. I have a two-part question here. I guess I don’t understand why you expect COVID volumes to be down from your current levels given COVID is likely to increase - we’re already seeing the outbreaks for the fourth quarter. But even if they are, like just say it’s 90 versus the 100 pace that we’re at now, the margin assumption for the fourth quarter is still meaningfully lower. Maybe Ricky was asking about this earlier, but is there any additional costs - bonuses or anything that maybe you’re going to do in the fourth quarter that you didn’t do a year ago, that would suggest the margin sequentially falling, given your guidance?

Yes, so I did not intend to imply that PCR volumes will be reduced in Q4. Actually the midpoint of the guidance assumes it stays where it is, where we are right now, and as I shared, through the first couple of weeks of October we’re actually slightly ahead of the midpoint of guidance. I wanted to clarify that. In terms of margin, really nothing of significance. We did have in Q3 a significant catch-up expense on our bonus. As I’m sure you could imagine, early in the year we were projecting to significantly miss our targets, and then Q3 really reversed that and got us to a point where we’re expected to exceed our targets, so in Q4 we would just have, assuming we deliver, the Q4 proportion of that. So actually, there was in Q3 a significant incremental expense to catch up our bonuses that will not be repeated in Q4, so there’s nothing of huge significance other than there are some of the cost actions that Steve referenced that we have reinstated to normalcy, so we did have some reductions in July on salaries and in Q4, those will be fully to where they were pre-pandemic, and then we did reinstate the 401K match late in Q3 and that will be fully reinstated in Q4. So there are a couple of what I’d call headwinds, but those are really just returning us to pre-pandemic levels, and then normally in Q4 we just have some other margin pressures, given the holidays and some other things that we manage through, but nothing of note. Finally, there is a small amount of incremental investment. I referenced the things that we’re doing around supporting our consumer business. We want to continue to build that business. We think it’s going to be increasingly important, and so we do have the opportunity given our business performance to invest, and so there’s a little bit of commercial investment into our consumer business that’s a step up from where it’s been in Q3.

The next question is from Pito Chickering from Deutsche Bank. Your line is now open.

Good morning guys. Thank you for taking my questions. Two quick ones for you. Now that you’ve more experience with the preferred lab networks, what leverage do you think plays a bigger impact with changing consumer behavior? Is it the zero co-pays for the consumer or is it the lower admin burden from the referral sources? Also a quick follow-up on the core organic volumes - you mentioned seeing geographic pressure in New York City. Is geographic weakness a primary driver that you’re seeing across your book of business, or is it more broad-based specialties like Pantox that haven’t recovered yet? Thanks so much.

We continue to work on our relationship with UnitedHealthcare. As we said, in ’19 we made some really good progress picking up share related to the PLN. We had a lot of things to do in the fall of 2019 related to employers, zero out of pocket and preauthorization work. We really felt good about January and February. We actually did see a nice progression of our volumes and then we hit the pandemic in March. We continue to work those programs and matter of fact, this week I was spending time with United on this and we continue to work on everything we can do to move more of their lab purchases to the PLN, and obviously specifically to us, and there will be other programs that we’re working with them by geography, by state to be able to make sure that employers and patients and integrated delivery systems understand the value of what we deliver. Remember if you go back to where we started, we believe that by the improvement in access with United and Verizon and Anthem in Georgia as of the time of our last investor day, it afforded us about a $4 billion opportunity in market and we believe that we should be able to get about 25% of that. We received some of that in 2019 and we believe there’s more opportunity in front of us. So what I can share with you is we continue that work in 2020 and we do expect it will continue to help us pick up some share in ’21 to accelerate our growth.

I just want to remind everyone, Pito, that the zero out of pocket still has a ways to go, so they started with their fully insured small plans and then expanded it, and then it’s going to go out to the sponsored plans. Obviously that’s marketed to the employers who are paying those bills, and the good news is we’re collaborating with them on that and trying to demonstrate how that will save the employers a whole lot of money. To this point, most of the movement has been through other activity, things that United has done to encourage physicians to stop using out-of-network providers, having us go in and show them the benefits of moving that lab ordering to us and the PLN member, but still a lot of runway in front of us in terms of how that might benefit. The lower burden is really just a new thing. We’re putting in some pretty significant requirements around some of the higher cost testing, and they realize that two things - one is that the PLN members can really have more responsible panels or an approach to clinical testing. The second thing is obviously we have good prices as compared to some of the other providers, and we’ve mentioned in the past that some of the managed Medicaid payors, so outside of United, have used this approach in specifically toxicology to drive better value. You know, with toxicology exploding over the last couple years, they put in some very tight restrictions on utilization, and seeing that the national labs tend to do this responsibly and have better prices, they exempted us from a preauthorization. So not only does it make it easier on physicians and patients, but it tends to steer more work to us because the administrative burden is lower. United sees that in the same areas where they’re trying to control some of the growth in high cost testing, but that benefit to us is to come yet.

Next question is from Matt Larew with William Blair. Your line is now open.

Good morning. We’re in the early weeks of the traditional flu season, so I had a couple questions. First, what are your expectations going in with respect to potentially higher vaccine rates or social distancing? What are you hearing from physicians about approaches to flu versus potentially flu with COVID, or flu-RSV-COVID combos in symptomatic versus asymptomatic, and then what are you hearing about with respect to reimbursement on those combo offerings versus the individual analytes? Thanks.

Matt, we are monitoring the situation closely. We think that when individuals show symptoms, they will want to rule out COVID, making PCR testing the preferred choice. We have introduced a new solution that we are confident about – it allows for testing influenza, along with other viral and bacterial conditions, using a single swab. This will be very convenient for physicians as it enables quick diagnosis and effective treatment for patients. Regarding your point, we are keeping a close eye on this situation because with everyone practicing social distancing and improved hygiene, along with schools not fully reopened, it could potentially lower the infection rates this year, though we cannot say that for certain and will continue to monitor it. Mark, do you want to discuss reimbursement for some of the offerings?

Yes, you know, it’s still to be determined. Basically for reference, CPT code 87631, which is the respiratory multiplex panel with three to five targets is $142 today; 87632, with six to 11 targets, is $218, and then 87631 reflux with 12 to 25 targets is $416, so still to be determined exactly where we come out on this. Still have negotiations with the commercial payors, but at least we could reference in the past for some of these multiplex panels, you know, the reimbursement is reasonable.

Operator, next question?

The next question is from Brian Tanquilut. Your line is now open.

Hey, good morning guys, and congrats on a good quarter. I guess my question to you guys, you talked about serology and how that plays into the 2021 outlook. How are you thinking about the ramp of that, and what are the conversations right now with payors on potential coverage or likely coverage for serology once the vaccine is out?

Yes, we’re doing our share of serology, running around 10,000 per day. We’ve got plenty of capacity in front of us. We believe it’s going to play an increasingly important role as we get into 2021, as the vaccine becomes available. We’re actively engaged with those pharmaceutical companies that are doing the trials for the vaccine and trying to understand where we might play a role in either with the vaccine or post-vaccine, and serology has a role there. We’re also doing some serology population health testing. We’ve done some work for states and we’re doing work for the CDC, and we believe that that work will continue to give us a good handle on what is happening with the progression of disease and have an early warning signal if we’re moving in the wrong direction, so more to come. We’re working through that. We do believe it’s going to be a growing and bigger opportunity in 2021 and more visibility of that as we understand where the vaccine is, understand the progression of where we are with the pandemic. Then also, we will be bringing new solutions out to the marketplace that will provide more and more utility around serology, and more to come on that. But we’re working on the science and we believe there’s more we can do to contribute towards the pandemic as we go, particularly as we see how the pandemic progresses.

In terms of discussions with the payors, it’s still early, Brian. There is not clarity around the exact role that serology is going to play, and while we believe there is going to be an important role, it’s not at a point where we’re in detailed discussions with the payors yet.

The next question is from Derik de Bruin with Bank of America. Your line is now open.

Hey, great. Thanks for fitting me in. Just a question, a quick question on the impact on the business from pooling. How much of the samples are being pooled right now, and what are the economics on that and the reimbursement for that? How much is your cost savings, and I guess how much of the volumes do you think can ultimately be pooled, realizing the fact is you’ve got to have low pandemic areas to do it. Just your thoughts on that for the business.

Yes, sure. Remember we talked about 200,000 tests per day for capacity, and we resulted in the third quarter about 100,000 per day. Roughly 20% to 25% of that volume is done on what we call our LDTs, and that’s where we’ve been leveraging the pooling capability. It’s particularly useful. It has good improvements in productivity and efficiency where you have low prevalence populations because when you do the pooling, when one well lights up, you have to test for that well, and you get a few 14, 15% positivity rates in locations, the mask doesn’t mark it out anymore, so we’re applying it in the right way. It’s primarily around our LDT portion of our capacity. What I mentioned in earlier comments was we’re looking at applying that to our laboratory testing platforms as well, and that will be helpful in moving our capacity from 200 up to 250.

Yes, and just to remind everyone, as Steve said, the efficiency is really highly dependent on the positivity rate, and while we do save on reagents, it’s not an order of magnitude less expensive. The real economic benefit of pooling comes from capacity increase, so our ability to do more testing and the margins we get on that testing, not a huge difference. There is a benefit but not a huge difference in the cost per individual test that we pool.

The next question is from Lisa Gill from JP Morgan. Your line is now open.

Good morning. I just want to go back to the guidance that Mark gave, or kind of preliminary thoughts for 2021, and just understand a couple of things a little bit better. When we think about the base business, what’s your expectation around unemployment trends, and as we think about the near term, what we’ve seen in the last few months, do think that unemployment is having any impact on your core volume? Then secondly, when we think about COVID and we think about PCR testing persisting into 2021, do we think about that just in the first part of the year, and when we think about a potential vaccine, what are your thoughts around PCR testing? I understand your comments around serology, but how do we think about PCR testing playing into a vaccine?

Yes, so Lisa, it’s hard to know specifically what’s driving the dampened utilization. Certainly things have opened up a lot more than they were in the spring, so whereas physician offices were closed, I think there was a huge fear in a large part of the population around engaging with the healthcare system at all because of the risk potentially of catching COVID when you went into a physician office. While I wouldn’t suggest that’s eliminated, certainly that has improved dramatically, so there is some overhang left there certainly but the unemployment rate is probably a contributor right now - we don’t know for certain, and we wouldn’t expect that to change dramatically certainly in the next six months, or who knows how long before it might turn around. So we’re being cautious around our thinking for next year, and we wanted to share that. Obviously people will form their own opinions, but we would expect unemployment to have some dampening on utilization going into next year. In terms of the COVID volumes, we haven’t modeled and we haven’t given guidance for ’21, but maybe three, six months ago some of us had hoped that COVID might be behind us this calendar year. Clearly, that does not look like it’s going to happen, but all this depends on how quickly the vaccines get rolled out, how effective they are, and even once they get rolled out, we see a role, so whether it’s a level of testing we’re seeing today or something a little less, we expect there to be a meaningful amount of COVID testing, including the PCR testing throughout a reasonable part of next year.

Yes, and just to add to that, remember with the economy, and we saw this back in the Great Recession, whatever happens to the economy will affect access, and so access is important to us. Second is consumer confidence, and we know a large portion of the population is paying for healthcare out of their own pocket, and therefore they’re going to think twice about utilizing it, so we are thinking about that as we think about models in ’21. Now with that said, if you look at where we are with our base business versus where it was and you think about the math for the full year, it should be an easy comparison, as Mark said in his comments about ’21. Even if it’s down versus ’19, just to look at the comparison of what the full year will be for ’20 versus ’21, given where we are right now, that makes for an easy comparison. As far as PCR, remember we brought out our first PCR test on March 9 and we’ve been ramping rapidly, so we have not had a full year from PCR. We’re hitting our stride, we’re building capacity because we do anticipate more demand, winter is coming and we’re all anticipating more demand as we enter the winter, clearly in the first quarter, and then we’ll start to see hopefully some of the vaccines. As we all know, those won’t be broadly deployed immediately and the pandemic and the virus will be with us for a large portion of ’21, so if you think about the full year of ’21 for COVID-19 versus what we did in 2020, there’s still going to be a lot of volume for testing and you have the full 12 months versus essentially a half year for PCR in 2020. It’s something to think about as you do your models.

Yes, and to Steve’s point, for this year based on our guidance expectations, we see our base volume down organically in the high teens, so even if it’s down a couple hundred basis points in 2021, it will still be an easy compare for the full year.

The last question is from Mike Newshel with Evercore ISI. Your line is now open.

Thank you. Going back to the geographic differences on the core volume rebound you mentioned, just wondering if you’re seeing fluctuations tied specifically to where there are new COVID outbreaks. Is there patient behavior changing and affecting the core business when cases spike, or is that variation just more correlated to how far along local economies are into reopening? Is there volatility at a local level or is it just some states are bouncing back faster than others?

Well you know, it’s by states, really the big four states. California shut down first, we saw a steady rebound, they’re still not back to pre-pandemic levels, particularly in some of the large cities like LA. If you go into Texas, we actually saw a good rebound in Texas. We have a great presence in Texas, both in Houston and Dallas, and despite some of the flare-ups we saw in the summer, they still continue to be in the range of where we were pre-pandemic. Look at Florida - it went down in the spring into the summer, there’s still issues in Florida. We’re still not where they were pre-pandemic. Then if you go to the northeast, New York and Boston and Connecticut, actually we’ve seen some nice steady recovery with the exception of, as we’ve indicated earlier, New York City, but specific to the Borough of Manhattan. We still have a ways to go to recover there, so we’re watching those, particularly related to infection rates. But where we have had some of these flare-ups, interesting enough, like in the States of Texas and Florida in the summer months, it did not have a negative consequence for our base business as we saw back in the spring, so we’re watching it carefully. But so far, we’re getting there. Then again, you can’t ignore that clinical franchise element of this because some of the portion of the buy-in effects are related to these specific businesses, like prescription drug monitoring, and there are other issues related to what it takes to get those back to pre-pandemic levels that are not related to the geography at all.

I can’t say they’re precisely negatively correlated, but actually that would be my representation. Areas with the lowest positivity rates, like New York, actually are down the most, so we haven’t seen a huge parallel movement between spikes in COVID over the last several months and a downturn in utilization. It actually has kind of gone in the opposite direction.

Okay, so thank you all for your questions. We appreciate your support on this call today and in general, and we wish you all a great day.

Thank you for participating in the Quest Diagnostics third quarter 2020 conference call. A transcript of prepared remarks on this call will be posted later today on 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 1-800-337-6568 for domestic callers, or 402-220-9660 for international callers. Telephone replays will be available from approximately 10:30 am Eastern time on October 22, 2020 until midnight Eastern time, November 5, 2020. Thank you and goodbye.