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 an underlying subject [ph] just 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…

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 [Technical Difficulty], 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…

Thanks, Mark. With the sunrise in the second quarter, Quest Diagnostics step 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 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 health care, answering the call and fighting the COVID-19 pandemic Now, we'd be happy to take any of your questions. Operator?

Thank you. [Operator Instructions] 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 the ability for a period of time. It is clear that people are starting to weigh in that, in fact, 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 you 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 took 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 persons 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 at access to asymptomatic testing and very convenient locations. Then I mentioned that 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 [ph] 5 days -- maybe sequentially something like. I just want to know whether COVID testing or other collection and things with you guys might want to talk about with these things.

That's really formulaic approach. Cash collections are stronger as 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 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 continue 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 carry over 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 help 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 route or contracts 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 their 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 is 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 all the details. So my question is on the guidance. Mark, you obviously highlighted the assumptions on the low end of the range. Just trying to understand better what you assuming at the high end and especially when we think about molecular testing. I think you're expecting that at the low end that there is going to be a step down in the fourth quarter. So just trying to understand the rationale for that. What type of environment do you see where we're going to see a step down in molecular? What are you assuming at the high end? Then, when we think about just the future of COVID-19 addressable market in relation to vaccine administration as it relates to the molecular are you in any conversations with the vaccine manufacturers and in how do you think -- what do you think the role of testing will be in relation to 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, on your question about next year and specifically the vaccine. So, first of all, we believe there will be COVID-19 testing next year in 2021. Second is, if we assume we'll have a vaccine next year or sometime, and you go back to what I said earlier about the role of serology and evaluating and prioritizing who should get the vaccine, we do believe there will be a role of testing in 2021 for us. Then finally, in terms of working with those that are developing the vaccine, we are actively in conversations of using our data in a productive way to recruit patients. Some of this is around the vaccine development but also using our data to help with the donation of plasma for the country. So, good use of our data, which is part of our strategy again for growth -- the user data, the smart way as a diagnostic information services provider to help with the pandemic.

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

Hey, good morning. Sorry to harp on this, but I do want to go back to the guidance. Because when you first updated in early June, you expected breakeven is slightly positive for the quarter, you obviously ended up at $1.42. That essentially implies all of the two key earnings came in June. So if I just run rate that number for six months, I'm already at $8.40 [ph] in earnings before I even contemplate the over $2 you put up in the first half. So -- and again, my guess is COVID testing trajectory moves higher and assuming some continued core recovers, I'm still struggling a little bit to understand the offsets or the headwinds on what appears a pretty extremely conservative range, particularly at the lower end, but just want to make sure I'm not missing anything else.

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 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 a 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 [ph] 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, that I would have assumed a larger multiplier effect for geographic areas with a low posit 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 [ph] 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 we -- the emergency use -- obviously the Federal Emergency expires on July 25th. HHS has expressed a view that they're going to extend that 90 days, so we've built that $100 price which is not our AWR, you know, we don't fully get $100; but that $100 priced into our -- pretty much our full book. And so, the commercial as we shared previously, the commercial payers pretty much fell in line with the Medicare reimbursement rates as a couple of additional state Medicaid plans that didn't quite get there. But for the most part, we get that price from everybody, regardless of who they are. Therefore, we would expect that to continue. So, as long as the Medicare rate stays up, that doesn't mean there wouldn't be some pressure, but we would expect the commercial payers to stay in line with that, because obviously, if it stays, there's a federal emergency, and it'd be hard to argue. They should be cutting the rate for a test that's quite so important. And nonetheless, we will get some pressure. Once we get through that, where the commercial rates end up, obviously, we will take a position that says it shouldn't be less than Medicare. It will be very transparent with what our costs are and the continued importance of that test, even post-emergency and we'll do our best to keep it at the Medicare rate and not something less than that. But that's still -- it's obviously still in front of us.

As far as payment policy, reimbursement policy, it is evolving. What I'll share is that frequency policies, first of all, as we all know, you could test negative one week and the next week, it'd be positive. So therefore, it's quite important that people feel that they should get tested if they've been exposed, and if, in fact, they believe that they might have some early symptoms. So, we'll continue to take that as the position and I think by and large people support that notion, but you have seen positions taken on return-to-work programs that employers are moving with, and in many cases, these employees are self-insured. So it's sort of a moot issue, what pocket it comes from. But for those fully insured employers, there is positions by some of the insurers that that's not included in their healthcare reimbursement policies. So therefore, it should be paid for by the employers. And then equally with universities and colleges, whether the students -- free on campus testing is included in the reimbursement like a physical would be, if they're going back to school or playing sports or going -- there's some debate around that. So I would say, characterize it as people are debating some of this. We're seeing kind of a growing trend with some of this. And then, also as we evolve, we're trying to understand who should get tested and who should not get tested. There is even some question of whether, after you've been tested positive and out for 14 days right now, most people are operating on a protocol that you get retested again, but there's some views that maybe that second test to verify your negative is not of great value, and therefore, this might help reduce the demand that we have on the system right now. So that's being debated, as well. So it's evolving, a lot of discussion. And Mark, anything you'd like to add to reimbursement in general on COVID?

I would just add that we have not had a significant amount, it would be very few of 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 fall back 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 for the financial standpoint, we have not run into headwinds less far from the payers on frequency [indiscernible].

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 pair 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, payer mix did not change materially. The one thing we did see was an increase in uninsured. So beyond that, I don't think there was any -- and we rarely see -- given our size, we rarely see material changes of payer mix and this was no exception. So certainly, the drop in utilization did not impact people with certain payers more than others. The one that we did see was more uninsured.

Yes, Matt. On return to work programs and university role of let's say point of care devices, we are looking at all those devices and where they can help us, particularly around surveillance. And what we're finding for the initial testing, if you will, the gold standard is the PCR test for like a diagnostic workup and then secondly is for serology or blood based test is the gold standard. The sensitivity and specificity of both those are the best. Still to this day, and there are few devices -- there are a few devices that are coming to the marketplace that are -- that are offering we think an opportunity for us to include that in our services that we provide to both employers and to universities, specifically. Some of the antigen devices are coming to the marketplace we're looking at, you know those devices and some of the sensitivity around 85% which is lower than our sensitivity but for surveillance and in combination with possibly serology and just overall biometric screening of some form, it could be a helpful set of tools for us to manage a population over time. So, we are thinking about how we'll include those in our services to employers and also to universities as they have surveillance for their populations going forward.

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

Hi, Brian

Hi, Brian.

[Technical Difficulty].

Brian, you're breaking up.

I'm sorry. Yes, how's this? Better?

Much better, much better. Yes.

Okay. Yes. So how do you think about the strategy in terms of balancing, increasing capacity beyond that 150,000 tests per day versus the uncertainty of not knowing how big this opportunity really could be? And what are the limiting factors right now that prevent you from pushing that up to say 200 or 250 a day?

Yes. Well, first of all, as I mentioned, on my earlier remarks, we are going to push it beyond 150. And we do see capacity -- excuse me do we do see demand going forward, that's going to be beyond 150. And we do believe we'll get to a point where our capacity will meet that demand. And so we will get there. We'll go beyond the 150. And the limiting factors are, you know, combination of machines. So getting, you know, the IVD test systems and laboratory test equipment, and particularly for laboratory developed tests. It's not just the platforms, the PCR platforms, but in our setup, you know, there's actually two other pieces that you need to consider. It's the extraction and then second is the liquid handling. And it's been some machine constraints on us for getting those systems to be able to bring up -- bring up more and more capacity, but we're working with all our suppliers to get as much as we can get to bring our capacity and take it beyond the 150. The second is just manpower. Yes, we're running 24x7. And as I mentioned in my remarks, you know, doing 8.5 million tests over the last four months, our teams are working nonstop. Remember, this is in our microbiology department that has gone from the backwater of the laboratory to front and center. And we have capacity limits around the people and those that are trained adequately to deliver on this. And then third is just, you know, physically we need to get, you know these systems in place, we need to have the adequate controls and training in place. And that just takes some time. And then fourth is, you know, the reagents. We are rate limited by how much juice we get to run all our different platform. And we're working with our suppliers and getting more. We have had some shortages with some of the suppliers and that has not helped our ability to deliver results. And so we're working actively to, you know, get them to, first of all, give us more and then secondly to be reliable, what they commit to delivering again. So now, I will also say that everyone is working incredibly well together, the IVD manufacturers working with the task force, White House working at future ideas of where we can get more capacity, we're all pushing hard to get more and more capacity. But to answer your question, those are the rate limiting factors around what we need to do to get beyond 150. But we will get it beyond 150. That's where we want to be to be able to meet the demand we see, particularly as we get into the late August, early September time.

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. So let me characterize it this way; in primary care, I'll put OB/GYNs [ph] in that as well. We've seen a nice rebound as physicians have opened back up their offices and call back some of their patients. In some cases they have extended hours; so we've seen a nice bounce back on that piece of our demand. Secondly, as we are seeing some nice recovery in some of those -- some of those procedures that might have been pent-up and our pathology tissues have actually rebounded in a good way. We're not sure it's entirely sustainable because there might be some of this is reacted to the pent-up demand that is coming back to us that we lost in April and May and we started to see it in June that will come into the summer. And that's why when we talk about outlook, we are cautious to make sure that we're not taking the June run rate as our run rate forever in the summer. We actually might see some slowdown related to that being absorbed, if you will, through the system. And then we'll get to the run rate that we should expect for a reasonable period of time in Q3. And then, some of our other businesses; we have our life insurance business, frankly, that's down considerably, we haven't seen a big recovery there. Our pre-employment drug testing business is starting to come back as employers start to hire people but is down considerably versus 2019. Our employer population health business where we do wellness programs for employers is down considerably, many of those events have been cancelled. So, I would say it's really a wide variation with the best being primary care and the worst being those that are tied to the economy, and in general, constraints around normal programs like life insurance and wellness and hiring people. So Mark, anything you'd like to add that?

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. So, you know, think about, you know, the best is obviously the lowest and where we pool, and we could put four specimens in a well, you know, like quadruples, your throughput per batch, if you will, and if there is zero positives, then you get it all. Where you have positives within that run, you have to test those -- that whole well, and, you know, that obviously starts to eat into the productivity game. So, the best is lower than 2%. We actually have a number of states and geographies that are in that range. Actually, right now the Northeast is doing quite well. We hope that is sustained. And then, as you start to go up to high single digits, it starts to lose it's effectiveness because of all the retesting you need to do. So clearly, less than 5% is in the sweet spot, and greater than 5% starts to get marginally worth it. But we have plenty -- if we look at pooling; again, pooling is applied to our laboratory developed tests, it's a piece of our capacity, it's going to give us more capacity to get us to that 150, and also, we believe beyond. But we're not just doing pooling to get more capacity, we're adding new systems and processes and people everything we talked about earlier. So, it will give us some of the capacity but there's other things we're doing as well.

And just a reminder, that pooling is only currently possible on our LDT. And so therefore, you know, it's not as if it's going to be an expander across our whole network, and we can prioritize low prevalence areas or that LDT to a certain extent or to a large extent. And so to Steve's point, we're going to target the areas that we currently have low positivity rates. But the biggest benefit is while we do get costs -- some cost savings on reagents when you can do four samples at once instead of a single one, even despite some retesting; it's really the benefit of the capacity. So, being able to serve more people with the same equipments and more patients is really the benefit, much larger, although there is a certainly a cost of sales savings that comes 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.