Quest Diagnostics Inc (DGX) Q1 2021 Earnings Call Transcript

Quest Diagnostics Inc (NYSE: DGX) Q1 2021 earnings call ended Apr. 22, 2021

Corporate Participants:

Shawn Bevec — Vice President of Investor Relations

Stephen H. Rusckowski — Chairman, Chief Executive Officer and President

Mark J. Guinan — Executive Vice President and Chief Financial Officer

Analysts:

Kevin Caliendo — UBS — Analyst

Erin Wright — Credit Suisse — Analyst

Pito Chickering — Deutsche Bank — Analyst

Ralph Giacobbe — Citigroup — Analyst

Brian Tanquilut — Jefferies — Analyst

Matt Larew — William Blair — Analyst

Casey Woodring — JP Morgan — Analyst

Ricky Goldwasser — Morgan Stanley — Analyst

Derik de Bruin — Bank of America — Analyst

Eugene Kim — Wolfe Research — Analyst

Presentation:

Operator

Good morning. Welcome to the Quest Diagnostics Fourth Quarter — First Quarter 2021 Conference Call. [Operator Instructions]. 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 of Investor Relations for Quest Diagnostics. Go ahead, please.

Shawn Bevec — Vice President of Investor Relations

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 we’ll 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; healthcare insurer, government and client payer reimbursement rates for COVID-19 molecular tests, the pandemics impact on the US healthcare system and the US 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 and references to adjusted EPS refered to adjusted diluted EPS.

References to base testing volumes or base business refer to testing volumes, excluding COVID-19 testing. Growth rates associated with our long-term outlook projections including total revenue growth, revenue growth from acquisitions, organic revenue growth and adjusted earnings growth, our compound annual growth rates. Finally, revenue growth rates from acquisitions will be measured against our base business.

Now, here is Steve Rusckowski.

Stephen H. Rusckowski — Chairman, Chief Executive Officer and President

Thanks, Shawn, and thanks everyone for joining us today. While Quest had a strong first quarter with our base business continuing to recover to near pre-pandemic levels. Contributions from acquisitions and PLS relationships accelerated growth in the base business that helped offset the reduction in demand for COVID-19 testing which was in line with industry trends.

In March, for the first time since the pandemic began, monthly organic revenue in the base business grew versus our 2019 baseline. As we noted at our recent Investor Day, Quest is well-positioned to grow as the US exits the pandemic and people return to normal activities and address the routine care issues that have been requested over the past year.

Also, as you saw in our press release this morning, our Board of Directors increased the company’s share repurchase authorization by $1 billion for the second time this year and we expect to launch an accelerated share repurchase or ASR in the amount of $1.5 billion in the coming days.

This morning, I’ll discuss our performance for the first quarter of 2021, provide perspective on industry dynamics and update you on our base business, and then Mark will provide more detail on our financial results. But before we get into the details of the quarter, we wanted to share our perspective on the ongoing role of COVID-19 testing, more than a year into the pandemic, as well as provide our thoughts on recent news regarding PAMA. COVID-19 testing remains critical as supply of the vaccine continue to be available to all Americans.

Testing will help control the spread of the virus in addition to reducing hospitalization and saving lives, continued testing will be key to helping segments of the economy reopen as more Americans become vaccinated. Vaccination is front and center in the minds of most people now and testing remains a critical element of safely returning to life. I’d also like to share our perspective on some of the most recent developments regarding PAMA. So when it occurs that this count recently reported that this is exploring alternative collection efforts under PAMA that are less burdensome for laboratories.

One of the alternatives mentioned is surveying a representative sample of Independent Hospital and Physician Office Laboratories instead of reporting all laboratories to submit data. We can say for years that CMS stopped the data collection process long and didn’t follow the extensive progress. [Indecipherable] from the hospital outreach and physician office labs reported higher fatal rates in the test labs and the independent labs were over-represented in the first round of PAMA data reported. We agree on both counts. The independent analysis by [Indecipherable] also provides evidence that the Medicare clinical lab fee schedule would have been 10% to 15% higher if CMS have used more representative sample that included more data from hospitals and physician office labs. Departments [Indecipherable] CMS collecting more hospital outpatient and physician office labs here would have impacted the rates tested by CMS.

We believe that accurate and reliable testing remains critical, not just as part of our nation’s ongoing response to the pandemic, but also for the millions of seniors that required routine screening and care over the past year. We need to fix PAMA to avoid the next round of [Indecipherable] in 2022 and to help ensure seniors have continued access to critical lab services they need and rely on. Additionally, we were disappointed by the recent dismissal by a US report of [Indecipherable] challenge to PAMA. We are working with [Indecipherable] to determine the next steps with respect to this litigation. We can continue to work with policymakers to establish critical lab scheduled that is truly representative of the whole market and supports continued innovation and access to vital laboratory services that the Congress originally intended.

Now turning to our results for the first quarter. Total revenues grew by more than 49% to $2.7 billion. Earnings per share increased by more than 375% on reported basis to $3.46 and nearly 300% on an adjusted basis to $3.76. Cash provided by operations nearly tripled to $731 million.

As I mentioned earlier, in the first quarter our base business performed at its highest level since the start of the pandemic and continued to recover throughout the quarter. Demand for COVID-19 testing slowed in the quarter reflecting an industry-wide trend. We performed an average of 101,000 COVID-19 molecular tests per day in the first quarter, which is well below our current capacity of approximately 300,000 tests per day.

We are engaged on several fronts to bring immediate testing to schools, businesses and industries like travel and entertainment which rely on bringing people back together safely and in large numbers. With the current focus on schools, Quest is well-positioned to help with our extensive logistics network as well as our ability to offer high quality, cost-effective classroom PCR testing using pooling. We want to help get the kids back to school and we’re working with the range of partners to get this done quickly and efficiently.

We continue to make progress on our two-point strategy to accelerate growth and drive operational excellence. We discussed our strategy in detail a few weeks ago at our Investor Day. So we talk today [Indecipherable] few highlights of the quarter. We are excited about our agreement to acquire the Outreach Laboratory Services business to Mercy, one of the nation’s most highly integrated, multi-state healthcare systems. And as we indicated in Investor Day, we are having board discussion with leaders of modern health systems like Mercy. The Mercy’s outreach laboratory services business currently operates from 31 hospitals and clinical laboratory service providers and patients in Arkansas, Kansas, Missouri and Oklahoma. And we’re on track to complete this acquisition by mid-year.

Our professional laboratory services relationship with Hackensack Meridian Health began in January. And it’s off to a good start contributing revenue for the quarter. We recently announced the sale of our 40% minority share in Q2 Solutions to IQVIA for $760 million. IQVIA have the strategic vision and ability to lead Q2 Solutions on the next phase of the journey as a global leader in special lab services. And Quest will support it as a strategic lab partner.

We made good progress taking advantage of co-planned access in the first quarter. United Healthcare implemented initiative removing other network benefits for insured groups in selective states. We also broadened leakage and redirection efforts with the [Indecipherable] eight more states in the quarter and we’re seeing benefits from these initiatives. And then finally, we renewed our long-standing strategic relationship with Anthem Health, provide comprehensive clinical laboratory services for more than 3 million members of Anthem Health and its affiliates United Care.

Turning to our strategy to drive operational excellence. We are on track to once again deliver 3% savings across the business. In the process, we’re also improving the customer experience and quality. And in the quarter we achieved year-over-year improvement in 14 of 19 top tier quality metrics, which we track to gauge our operational performance.

Now, I’ll turn it over to Mark to provide more details on the financial performance. Mark?

Mark J. Guinan — Executive Vice President and Chief Financial Officer

Thanks, Steve. In the first quarter, consolidated revenues were $2.72 billion, up 49% versus the prior year. Revenues for Diagnostic Information Services grew approximately 52% compared to the prior year, which reflected ongoing demand for COVID-19 testing services and to a lesser extent continued recovery in our base testing revenue which increased versus the prior year. Volume measured by the number of requisitions increased 25.6% versus the prior year with acquisitions contributing 4%.

The impact of severe winter weather during the quarter, negatively impacted volumes by approximately 2.5%. Compared to our first quarter 2019 baseline, total base testing volumes increased 1.5% and benefited from M&A and new PLS partnerships that began in 2020. Excluding the net impact of weather in the first quarter as well as M&A and new PLS wins over the last year, base testing volumes declined approximately 7% in the first quarter versus the 2019 baseline, and down 5% in March. This represents more of a same-store view of the recovery in our base business since the pandemic began.

While COVID-19 testing volumes declined faster than expected throughout Q1 the decline coincided with reduced demand across the industry. Importantly, these volumes have stabilized over the last several weeks. We resulted approximately 9.1 million molecular tests and nearly 900,000 serology tests contributing nearly 21% to volume growth in Q1 versus the prior year. We exited the first quarter averaging approximately 73,000 COVID-19 molecular tests and 8,000 serology tests per day.

Revenue per requisition increased 20.5% versus the prior year, driven largely by COVID-19 testing. Modest unit price headwinds were in line with our expectations. Reported operating income in the first quarter was $660 million or 24.3% of revenues, compared to $175 million or 9.6% of revenues last year. On an adjusted basis, operating income in Q1 was $708 million or 26% of revenues compared to $225 million or 12.3% of revenues last year. The year-over-year increase in operating margin was driven by the strong revenue growth in the first quarter due to continued demand for COVID-19 testing and the ongoing recovery in our base business. Reported EPS was $3.46 in the quarter compared to $0.73 a year ago. Adjusted EPS was $3.76 compared to $0.94 last year.

Cash provided by operations was $731 million in the first quarter versus $247 million in 2020. We completed $410 million in share repurchases in Q1, and we ended the quarter with approximately $1.2 billion in cash on the balance sheet. Including the net proceeds from the Q2 divestiture in April, we currently have more than $1.8 billion in cash available for deployment. Following the $1 billion increase in our share repurchase authority that we announced today, we now have the ability to execute approximately $2.5 billion in additional buybacks this year. We expect to launch an accelerated share repurchase transaction of approximately $1.5 billion in the coming days.

Turning to guidance. We’ve updated our outlook for the first half of 2021 as follows: Revenue is expected to be between $5 billion and $5.2 billion, an increase of approximately 37% to 43% versus the prior year. Reported EPS expected to be in a range of $7.51 and $8.01, and adjusted EPS to be in the range of $6.30 and $6.80. Cash provided by operations is expected to be at least $1 billion and capital expenditures are expected to be approximately $200 million.

Before concluding, I’ll briefly review some assumptions embedded in our updated first half outlook and considerations to think about for the remainder of 2021. We expect continued steady improvement in our base business throughout 2021. On a same-store view, excluding M&A and new PLS wins, we see the base business remaining slightly below our 2019 baseline in the second quarter. We continue to anticipate a full recovery in our base business compared to our 2019 baseline in the second half of 2021. We are assuming COVID-19 molecular testing volumes will average roughly 50,000 tests per day in Q2 and no meaningful change in COVID-19 serology testing volumes compared to Q1.

Given the significant progress of vaccination in the US, we continue to expect the decline in clinical demand for COVID-19 molecular testing in the second half of 2021 versus our expectations for the first half. Return to life testing, such as the K-12 school testing program should partially offset declining clinical demand later in the year. While we continue to believe strongly in the value of COVID-19 serology testing, we are not assuming a material increase in demand for serology testing going forward.

Finally, COVID-19 molecular reimbursement held relatively steady in the first quarter and we currently expect this trend to continue through Q2 with the Public Health Emergency being extended through mid-July. This is likely to trend lower in the second half of the year, as our mix of COVID-19 molecular volume shift from clinical diagnostic testing to return to life surveillance testing.

I will now turn it back to Steve.

Stephen H. Rusckowski — Chairman, Chief Executive Officer and President

Thanks, Mark. And to summarize, we are off to a very strong start in 2021. Our base business continues to recover back to near pre-pandemic levels as people address the routine care issues that they have neglected over the past year. And then finally, I’d just like to thank all Quest employees who continue to serve the needs of people, who rely on Quest every day. And so with that, we are happy to take your questions. Operator?

Questions and Answers:

Operator

Thank you. We will now open it up to questions. [Operator Instructions] Our first question comes from Kevin Caliendo with UBS. Your line is open.

Kevin Caliendo — UBS — Analyst

Hi. Thank you. Thanks for taking my call.

Stephen H. Rusckowski — Chairman, Chief Executive Officer and President

Hey, Kevin.

Kevin Caliendo — UBS — Analyst

Hey, good morning. So I guess with some of the commentary around 2Q, I sort of want to understand the expectation. It looked like March, the base business is sort of up year-over-year and your guidance is suggesting that 2Q would be down year-over-year. You don’t expect it to recover fully. What — is there anything that sort of changed or was March an anomaly, so to take it through what you’re seeing in the base business in terms of the volumes?

Stephen H. Rusckowski — Chairman, Chief Executive Officer and President

Mark?

Mark J. Guinan — Executive Vice President and Chief Financial Officer

Sure. So, Kevin, when we talk about the base business — and sorry for any confusion, it being up in March. That included our new PLS wins which were significant and also M&A. So it’s a total base business, so it was not an organic number. What we tried to do was delineate where the — what we call, same store, so kind of the apples and apples versus 2019 to give you a sense of where we think utilization is. So suffered from new sectors and PLS wins and M&A were that base business performances. So when we talk about expecting to be slightly down in Q2 that organic non-PLS kind of utilization, same-store number not our total base business performance.

Stephen H. Rusckowski — Chairman, Chief Executive Officer and President

So, Mark, it would be good to share kind of our employee view on what’s going to happen with COVID testing in Q2.

Mark J. Guinan — Executive Vice President and Chief Financial Officer

Yeah. So we talked about 100,000 a day in Q1, we talked about expectation about 50,000. We also shared that we exited Q1 with over 70,000. So that would imply a significant ramp down throughout the second quarter and that’s based on our expectation that vaccines will continue to rollout. We’ll get more and more people who will be protected and less and less clinical demands, of course, we’ll see how that plays out. But that is certainly within the guidance that we’re providing today, how we see the next several months.

Stephen H. Rusckowski — Chairman, Chief Executive Officer and President

So, you assume Kevin that our base business it would include acquisitions and PLS and organic growth. But just focus on organic growth. Those steady improvement that we’ve seen in Q1 continues in Q2 and then it somewhat offset by what we’re anticipating with COVID and that gives us the acquisition around a ranges of guidance in the second quarter. So hopefully that’s helpful.

Mark J. Guinan — Executive Vice President and Chief Financial Officer

Yeah. And just to close it out, Kevin, I would point to the numbers that we quoted for Q1 of minus 7%. That’s the same-store performance number. And we are — obviously, March was stronger than that. February was impacted by weather as we said. But that — we expect that minus 7% to improve, as Steve said, throughout Q2 but not yet to get positive.

Operator

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

Erin Wright — Credit Suisse — Analyst

Great. Thanks. Capital deployment itself is one of the biggest question we’re getting from investors. Are there any meaningful changes now in your view from an M&A pipeline perspective? And what’s assumed in guidance in terms of inorganic growth? And longer-term here over the next few years do you anticipate the piece of consolidation across the lab industry to accelerate or do we anticipated a similar piece what we’ve seen historically? And just somewhat tied to that as well, I mean, how should we be thinking about the broader excess capacity across the competitively landscape post-COVID and how does that impact your positioning?

Mark J. Guinan — Executive Vice President and Chief Financial Officer

Let me take the guidance question first and then I’ll turn it over to you. So, Erin, our current guidance, obviously is only through the second quarter and we’re not counting on any M&A that hasn’t already been transacted, and even the deal that we announced Mercy is not going to close and generate any significant volume of revenue in the second quarter. So the current guidance does not anticipate future M&A. Steve?

Stephen H. Rusckowski — Chairman, Chief Executive Officer and President

Yeah. So we feel good about the discussions and the follow-up prospects we have for what we have characterized as a possible strategy. There continues to be a lot of pressure on this grid delivery systems where they are considering their lab strategy as one of the options to help them and we have another example over the past six months [Indecipherable] delivering on the strategy that we’ve talked about for years. And so the answer to your question, we do see continuation of interest in the building funnel with more prospects to come.

What we shared at Investor Day is we re-affirmed our outlook that we would grow through acquisitions around 2% per year. And what we shared is that, we historically have delivered on that the three years prior to ’21 and we believe that’s still the good guidance number for us for this year and going forward, even it’s implied in our outlook for growth. So finally, as we do see the trends, in general, just like all healthcare around consolidation we do see systems interest and thinking about what’s most important to them and what’s your strategy and Quest help them with their lab strategy.

And likewise, we see, if you will, fewer and fewer in-network providers with health plans and if you want to think about, that is a consolidation play as well. And when those two forces happening there will be more share in the hands of fewer and our plan is to gain share. So all those mega trends and changes that are happening in our industry we believe have actually improved to support what we said for some time and that we are doing is go forward what’s happening with ARPUs and also what’s happening with health plans.

Operator

Our next question comes from Pito Chickering with Deutsche Bank. Your line is open.

Pito Chickering — Deutsche Bank — Analyst

Good morning, guys. Thanks for taking my question. Would this be a routine market. Can you give us some more color on strengths and weaknesses of different parts of the country? Looking at your customers, can you give us some color on doc offices versus hospitals versus the baseline and the routine tests any details you can give us on what types of the customer normalizing and sort of what are laggard areas?

Stephen H. Rusckowski — Chairman, Chief Executive Officer and President

Sure, sure. So let me take a run around all of the different cuts, the way we look at the market. So geographically, we are seeing good recovery in Texas and the Southwest. We’re actually seeing really in the last several weeks, starting with much better recovery in California in the West Coast, which is good news. We see that the software used certainly to recover and get us back to 2019 levels that we spoke to earlier. So I would say those are moving in the right direction.

Now, the offset to that is, one is, you’ve seen the spikes in the hot spots in the Midwest and when that happens and there’s lockdowns and people are concerned about going after delivery that’s going to affect our business. So we feel so bad, let’s say, in the Midwest. And then finally, the Northeast, in the Northeast, including in New York and Pennsylvania and going into New England. It still be high and it’s recovering slowly, but we are the most off, if you will, the Northeast. So that’s the geographic swing.

Now let’s start physician business versus hospital business, the hospital business is actually very close to where we work. We are encouraged by that. We see physicians getting back to ’19 levels, we see outpatient procedures getting back to ’19 levels. So that business is tracking nicely compared to where we were.

And then the physician side, that all depends on what sectors physicians, primary care starting to turn on, oncology, for safety [Indecipherable] they have postponed diagnosis and treatment for oncology is starting to turn on. And at the same time, we still see our prescription drug monitoring business where mental health and behavioral health and [Indecipherable] still down versus where we were at ’19 and that’s an issue that varies by state, we’re working on that. So that gives us a feel for what’s going geographically, what’s going on with physicians but also by what we describe as a clinical franchises.

Mark anything if you’d like to add to that?

Pito Chickering — Deutsche Bank — Analyst

No, I think that’s a good summary, Steve. Thanks

Operator

Our next question comes from Ralph Giacobbe with Citi. Your line is open.

Stephen H. Rusckowski — Chairman, Chief Executive Officer and President

Good morning.

Ralph Giacobbe — Citigroup — Analyst

Thanks. Good morning. The higher revenue guidance. Just want to understand is that upside from 1Q, because it sounded like COVID was may be lower than you had expected. So just trying to understand if it reflects assumption of better core or the deals just maybe color there reconciling the higher revenue. And then second, is the ASR included in the guidance because just based on the revenue increase and running through recent margin performance, it doesn’t look like that’s factored in or otherwise there will be an assumption of much lower margin. So just trying to reconcile that as well. Thanks.

Mark J. Guinan — Executive Vice President and Chief Financial Officer

Yeah. So, let me take a shot of that, Ralph. Thanks. The higher revenue was absolutely driven by stronger than expected recovery in the base business. So, as you point out, we’ve acknowledge and we report every couple of weeks. COVID testing has ramped down faster than we had anticipated throughout the first quarter. We’re continuing to expect to have that ramped down, but the base business has recovered stronger as it certainly more than an offset on the revenue side.

In terms of the ASR, it is in the guidance. I just want to remind everyone that we had committed to $900 million in share repurchases that was already in the guidance for the first half, we did $410 million in Q1.

And then a part of the ASR is related to the proceeds from the sale of 40% ownership in our JV with IQVIA. And that is slightly accretive when you consider the loss of the equity earnings. So you need to look at over $600 million of the ASR as really offsetting the — foregoing those equity earnings. We had already committed to $900 million in the previous guidance in the first half, so almost $500 million there. So when you combine that, the share repurchases are really just like several hundred million. So I want to make sure everyone’s clear on the math there. So it is reflected in the guidance.

Operator

Our next question comes from Brian Tanquilut with Jefferies. Your line is open.

Brian Tanquilut — Jefferies — Analyst

Hey, good morning guys. Congrats on the quarter. I guess my question for you guys, Steve, as we think about what you saw in Q1, specifically in March with the resumption of volumes in the core. What are you seeing in terms of acuity levels kind of like, number of cuts per rack or even revenue for rack that you saw in March. And is that carrying over already into April? Just any color you can share with us on that. Thank you.

Stephen H. Rusckowski — Chairman, Chief Executive Officer and President

Yeah, so thanks, I appreciate the question. Mark was encouraging and we’re watching April carefully. And we do look at the number of testing for requisition received. We’re getting more again to be, if you will, of testing per requisition. And we talked about explanation for increase in the calculation of revenue per rack at the COVID mix say calculation. But we have historically seen, let’s say, modest expansion of the number of test for variety of reasons. We offer more secondaries at higher level of acuity in the chronic disease, ageing of the population. So we have generally seen the general increase on that, but nothing that was really notable that standing out within March.

Operator

Our next question comes from Jack Meehan with Nephron Research. Your line is open.

Stephen H. Rusckowski — Chairman, Chief Executive Officer and President

Hi, Jack.

Brian Tanquilut — Jefferies — Analyst

Good morning. I was wondering if you could give us an update around your thinking around COVID testing for the second half of the year. What do you expect kind of in terms of — the base in terms of testing levels? And then also if you give us an update as to how you think the school testing opportunity could shake out? You referenced that at the beginning. How do you feel your positioning is for the upcoming awards there?

Stephen H. Rusckowski — Chairman, Chief Executive Officer and President

Yeah. So you go after where we started off the year. What we’ve said is, we do expect COVID PCR testing to decline throughout the year. We mentioned in our remarks, we did see that in Q1 and we see it happening in the country. So as Mark said earlier, we do expect that continually trends in Q2 and that will continue into the second half. Now with that all said, we do see this transition from what we said is more clinical uses of PCR testing rule in rule out COVID in hospitals, rule in rule out patients seeking their physicians and moving it to return to life activities. And there’s a lot of activity around that, Jack, a lot of activity.

We mentioned in the remarks, was going on around schools, there’s few funding mechanisms for that from the US government. We’ve actually engaged with a number of those which is called systems integrators that will be coordinating the efforts beyond the laboratory testing. We’re well-positioned there. Secondly is corporations are now thinking about probably get people absolutely into their places of work may be albeit now there is full time as they want more. But despite the vaccination progress there still going to be testing requirements with the return to work activities.

And then let me just say the entertainment piece of this is being to — we see the sports teams wanting to staying back in the stands. We see New York City interesting to getting people back, and tourism as we get into the fall and turning back on the city. We mentioned in our prior remarks and other calls and meetings that we participated in this pilot study in New York to provide a check if you apply access for an individual the course of the day. So that type of activity will be a larger portion of what we do for COVID testing in the back half.

Now with all that said, we’re not providing guidance for the back half, but we do see continued PCR testing in the back half. But it’s going to change this nature. And also we do believe COVID-19 testing and PCR testing will continue into ’22. This is not going away like that.

Operator

Our next question comes from Matt Larew with William Blair. Your line is open.

Stephen H. Rusckowski — Chairman, Chief Executive Officer and President

Hey, good morning, Matt.

Matt Larew — William Blair — Analyst

Yeah, good morning. Thanks for taking my question. I guess maybe a two-part. The first would just be a thought to Jack’s question, Steve in terms of how much of that return to life testing opportunity really is going to be in a sort of a reference lab setting with the [Indecipherable] turn around time versus point of care setting. But my question that was about the consumer markets. I just wanted to get your take on sort of the PW and accurately well combination and if that changes, I think your approach or the competitive dynamics in that space?

Stephen H. Rusckowski — Chairman, Chief Executive Officer and President

Yeah, so first of all, as you know, not all tests are created equal and PCR stores the gold standard. And we do provide a solution with antigen testing. Okay. As part of utilization of that testing, particularly for surveillance but, as we know the antigen testing sensitivity and specificity is still for, let’s say, day two through day five of a potentially infected person. But the PCR test is really the gold standard who rollout of someone has been exposed in the early days or rollout of the figure exposed in the late days. And so the sensitivity and specificity we have with our PCR testing is quite good.

And so physicians know that and therefore that’s why we are so confident that it will continue to be an important part of while we fight this pandemic. As far as the consumer, the consumer is trying to figure out to get easy access to testing. And they will get assets in a variety of forms. And by the way our turnaround times now for PCR testing are much better on average than the 2-ish days we often talk about several months ago. And we’re now delivering results in less than a day for many customers come in. And the reason for that is that remember the remarks they are testing about 101,000 tests per day. And we have approximately 300,000 per day of capacity.

So that allows us to have much better turnaround times, which we believe as that becomes more and more visible and people want to get to the access to the gold standard, they’re going to rely on those places to get access. So we continue our relationships with retailers more expanding our relationship with CBS that’s gone quite well. CBS is active and promoting good access to PCR testing when we drive in and Walmart as well. And then also with our direct to Quest capability that we talked about in our Investor Day, we have put on that platform for PCR testing, as well as serology testing and we are seeing high levels of interest from a consumer perspective of what they can do simply by getting collection kits in the mail, get a sample of shift to that and good turnaround times in the start at Quest.

So that will continue to build as the consumers start to return to apply for the safe way, want to be assured that even if they are vaccinated or they have the natural immunity, they are now walking into a situation as they might have been exposed in some ways except to the cracks and we’ll have a caveats we have with the effectiveness of the vaccines, questions about natural immunity. And then also with the new variance as well. So because of that we keep our working out better and more efficient and easier ways for Americans to get access to PCR testing and we’ve got now I think a lot of new channels to do that and that will continue to be an opportunity for us in the back half.

Mark J. Guinan — Executive Vice President and Chief Financial Officer

Okay. And Steve, I’d like to add, I want to make sure that others understand how the surveillance works. And in this case, when you pull, you get the economics to where it’s affordable to do more broadly and more regularly because we’re going to be putting upto 10 individual samples in a single well. And so hence the cost will be 10% or less per individual. And what you sacrifice is it’s not a diagnostic because we’re not going to have the individuals identified in that well. The school or the entity that provides us the sample will pull that they will know and test to vaccine the 10 people are and if we come back to them with a positive result, they will apply real diagnostic to those 10 individuals.

So with that, we also don’t have the obligation or the ability to re-tap, whereas today when we do pooling for clinical purposes, if we get a positive, we have to go back and retest the individual samples. So actually has an inefficiency in our process in order to get this to work we don’t do retesting of the sample. We don’t have the capability of doing that. We notify the submitting entity that we had a positive. And one of the collection specimen tubes and then they go forward and test those individuals.

Operator

Our next question comes from Tycho Peterson with JP Morgan. Your line is open.

Stephen H. Rusckowski — Chairman, Chief Executive Officer and President

Good morning. Hey, Tycho joining in.

Casey Woodring — JP Morgan — Analyst

Hi, sorry about that. This is Casey on for Tycho. Can you give us some color as to what the implied operating margin is for the EPS guide and sort of what’s the upside is from the ASR? And then just on serology, can you talk a little bit about, you’re not modeling a decrease in 2Q from 1Q but PCR is going down. Can we assume the same level of serology testing throughout the back half of the year and explain maybe what the resilience is there. Thanks.

Stephen H. Rusckowski — Chairman, Chief Executive Officer and President

Hi, sorry about that. This is Casey on for Tycho. Can you give us some color as to what the implied operating margin is for the EPS guide and sort of what’s the upside is from the ASR? And then just on serology, can you talk a little bit about, you’re not modeling a decrease in 2Q from 1Q but PCR is going down. Can we assume the same level of serology testing throughout the back half of the year and explain maybe what the resilience is there. Thanks. Mark, do you want to start the ASR? No, the ASR is in our updated guide, so there is not upside per se relative to before we announced the ASR as I tried to walk through the math. About little less than $400 million of the repurchases are truly incremental in terms of a EPS lift because we had already committed to the full $900 million and we had about $500 million remaining in Q2 that was already in the guidance. So that $1.5 billion goes down to $1 billion incremental. A little over $600 million of that is the proceeds from our divestiture of our stake in Q2. That’s slightly accretive but not materially relative to the full mature of the equity earnings there. So it’s really let them $400 million of share repurchases that are incremental to what we guided to previously. And that is built into the updated guidance. In terms of implied operating margin, obviously, we have a range. So we can answer that with precision, but if you take the midpoint, you can all do the math. As we get a lower mix of COVID testing at our assumption of the $100 reimbursement, obviously your realization and AWR that’s less than that about $100 price point. And that mix is toward the base business that will erode the margin slightly. But kind of the offset to that is the base business recovers, we’re very leveraged. So the variable drop-through on that base business recovery is certainly much higher than our enterprise and historical fully loaded operating margin, but it’s not quite as high as the COVID PCR.

Casey Woodring — JP Morgan — Analyst

And for serology?

Stephen H. Rusckowski — Chairman, Chief Executive Officer and President

Yeah, serology, we supply that, it will continue at the same level. We are pushing on the various roles as we go forward. We believe that semi quant capability that we offer has nice insight of view and what response happening in patients in general with the virus. And therefore that has value. We also believe that between PCR and serology going up, you’ve had the virus that’s important for Americans to know. So we keep on pushing on the value and we will continue to look at tests beyond that with minimal response long term with these T-cells. We don’t have that, we continue to look at that has been the prospect. So you should assume for now it’s stable with what we’ve seen so far. We continue to believe this more and more valuable and important. We continue to work on developing the test to support that.

Operator

Our next question comes from Ricky Goldwasser with Morgan Stanley. Your line is open.

Ricky Goldwasser — Morgan Stanley — Analyst

Yeah, hi, good morning. Two questions and then wanted to follow-up. So when we think about this first half guidance, it does imply meaningful operating income sequential decline, full realization, you’re not giving second half guidance. But just could you maybe everybody on the call sort of some sort of framework as we think about a more normalized pace of the core business. How should we think about that margin headwind? I think it’s just going to help us all as we think about the second half modeling. That’s first.

And then second, more of kind of like long term strategically, we’re hearing the payers talk a lot about digital-first strategies and being sort of contracted at the front door to health care. I think you guys talked about expanding relationship with payers like Anthem. So, are you having any conversations with payers on how you can be part of that digital-first strategy in those kind of like a digital network?

And if so, do you see that kind of like is an opportunity to accelerate sort of more narrowed networks that will to drive volumes towards you and actually — would that require any additional investments, or you think you have the infrastructure for that already?

Stephen H. Rusckowski — Chairman, Chief Executive Officer and President

Mark why don’t you take the first one, I’ll take the second one.

Mark J. Guinan — Executive Vice President and Chief Financial Officer

Sure, Steve. Thanks for the question, Ricky. So, again just to reiterate the first half, we delivered over 100,000 PCR COVID tests per day, we’re assuming half that in Q2.

So, that’s certainly contributing to the margin decline as we talked about implied in the guidance for the first half implicitly in Q2. When you think about the base business, we are still uncertain how all those moving parts will play out in the second half, which is why we’ve not provided especially our guidance, everyone wait till we can confidently give guidance that we are highly confident will be delivered. So, what I would point to is that the transition period, really look at our Investor Day and how we talked about 2022 and talking about getting our base business fully recovered by the end of this year back to growth, through the growth pillars and back to a margin level pre-pandemic.

And then obviously improving beyond that, as we talked about, the CAGR, where our bottom-line grow significantly faster than our top-line [Indecipherable] 100 basis points. So, we feel very confident in the earnings power of the base business. Certainly, we’re going to have a step down from the pandemic bubble where we did several billion dollars of COVID testing last year and significant COVID testing this year.

But the base business should be very healthy coming out of the pandemic once COVID testing drops to a minimal level, we’ll be right back to the operating rhythm, our expectation is that you saw earlier in 2019, when we’re growing our business January, February more than 5% on a volume basis, and you saw strong improvement in our operating margin. Steve?

Stephen H. Rusckowski — Chairman, Chief Executive Officer and President

Yes. Just transition. So, as you recall in our Investor Day, we went through a lock if you will to reviewed from the pandemic years of 2020 and 2021 into 2022 more [Indecipherable] with the math, would give you sort of in — our indication here for 2022.

And also, as I said earlier is, we do believe there will be some COVID testing, both the base business. So will be the property and mortgage growth going forward in 2022 based on our outlook. So, last question here, we have to do with the digital front-end and digital-first. We’re excited about this because we’re very well positioned. This isn’t something that we have just started working on, we’ve been working out it for a while. The first one go back to large provider like Quest, we are very much embedded in the ecosystem of connectivity already. We have over 500 interfaces, so all the different electronic, none of the records obviously this is the big players like after consumer got theirs hundreds of others.

And so therefore we have a real strong interoperability capability, and that’s helpful, we just — when you’re doing the workforce, [Indecipherable] perspective, it will allows you to more streamlined the different service offerings like laboratory to fewer players. And then secondly, see on this past year, we’ve seen the acceptance, if you will — which will help, it has been growing nicely without explicitly and we did see an explosive growth in 2020. And we believe that overall that acceptance, if you will, of that programs, we’ve accept the way to first engage with the healthcare business system will continue, and the payers are working on that and providers are working on that. And they’re working with other partners, and we’re very well positioned with those other partners, know who of those partners. Those partners are some of the telehealth companies that you know and telehealth companies as to become much more embedded in healthcare delivery, let’s call the digital broadband, will rely on a fewer number of all of laboratory service providers. And therefore we’re very well-positioned as one of small handful, but what’s the subscribers preferred lab network that we are already with united, but with this new world that we see.

Again, with all that we do believe that your direct-to-consumer initiative will have enough opportunities as well, because consumers equally are wanted to engaged with healthcare delivery, they not always need to engage with the physician. And therefore with the prospects, we see — of growing that business and the opportunities for consumers and served themselves [Indecipherable] to be a big opportunity for us. As far as investor, we are investing. We were fortunate enough to have the capabilities in 2020 and 2021. If you again go back to what we shared at Investor Day, we said we were investing about $75 million over a period of — over the last three years 2021. Some portion of that is related to what we’re discussing here.

And so we’re not rate limited by investments, we’re rate limited by just takes time to get some traction and we’re very well positioned with the telecom companies. Very well positioned with the plans and yes, we do see a change. And yes, this will allow us again to gain share as we go forward because they can’t do this with tens of laboratories, they could all deal with a select group like us.

So, we have no other questions? Operator?

Operator

Our next question comes from Derik de Bruin with Bank of America. Your line is open.

Derik de Bruin — Bank of America — Analyst

Hi, good morning. Thank you for taking my question. Hey. So two questions, one is, I was on the Danaher call just before this and they actually pretty sharply raise their COVID testing guidance for the year and also surprisingly gave a very bullish outlook for 2022 and sort of backing that number. So, I think the first question goes to — is some of, this is a question on the point-of-care shifting from decentralized testing, shifting to point-of-care. Is some of the volumes, you’re seeing coming down just because they are more of these point-of-care platforms out there and as they ramp capacity you’re seeing volume shifting out of the central lab? That’s the first question.

And I think the second question is, when you look at your — you’re at 100,000ish tests, you’ve got 300,000 capacity. How are you using — you how — utilizing that capacity? Is it more, are you ramping down your IVD platforms versus your LDT platforms? Just to be assume that it’s more the IBD because the LDTs are more profitable, but just would love some ideas on like — how are you utilizing your installed base? Thank you.

Stephen H. Rusckowski — Chairman, Chief Executive Officer and President

Yeah. So the first part. Yes, we did see an increase in the availability and use of the antigen testing, and point of care testing throughout the last 12 months, we clearly has picked up in the back half of 2020, we’ll see that continue in 2021. So, if you look the PCR transfers of how much testing, we are doing in this country. Clearly, that’s dropped out, and therefore volumes have dropped out as well.

We believe in those tracking mechanisms, it’s predominantly PCR. However, we think there could be some point-of-care antigen testing in there, but we believe it does not include all the testing with that. So it would be as well, traffic for PCR testing throughout the United States. And if you look at the estimates that are coming from is point-of-care antigen providers, you see that the actual level of testing is almost at the same level that we were in the summer, but in different form.

So the answer to your question, yes, there is a transition from PCR is exclusively what we have to more of capabilities around point-of-care, we [Indecipherable]. Testing, however, going back to what I said all tests are not pretty equal. And so we’re also working with clients to make sure they realize, were antigen testing could be helpful for a period of time. And also, would you need to refresh at the PCR, and where you can use point-of-care and costs are not all through equal. So, it has come down, because of what we described. But there continues to be a strong role for PCR through the remainder of 2021 and also into 2022.

Operator

Our next question comes from Pito Chickering with Deutsche Bank. Your line is open.

Pito Chickering — Deutsche Bank — Analyst

Hey guys, thanks for follow-up question here. Could you give us a little more details on the changes of what the United Healthcare did for — I don’t know where providers in the quarter? What markets did they make this change in? So what impacts did you see in your volumes from the changes. Thanks so much.

Stephen H. Rusckowski — Chairman, Chief Executive Officer and President

Yeah, yeah. So really yes, — looking on into journey to pick up share, if you will to the United. What we shared in March at our Investor Day is we really kicked-off the network program in 2019. And we saw good progress here. We are actually very encouraged the loans of 2020, which is early days, and then we have the pandemic, but it didn’t suffer activity. So what we shared is we actually picked up some of the share over the period time what we have more share to gain and there is a list of activities we’re working, with United to support picking up share and getting into, at least 0.5% [Phonetic] level. One of which is what we’re tried to limiting the other network policy and benefit design for their fully insured book and where that has happened is, we have other examples of how do to get does — book share to us.

We don’t provide specifics on stations, specifics on how much did this contribute to share but it did have a nice impact for the wells to pick our share. And so we continued that to March, but I’ll also share that — wouldn’t share everything we’re doing. We have many other programs and some of this is working with the plan sponsors, their employers. Some of this is working with the regions, specific opportunities with providers. When we do an outreach, purchase and the relationship with the geography whose, work over expensive venue to a less expensive venue which is Quest, and all of those are active relationships that we have to continue to build share with United Healthcare. We equally will continue to work programs for the Anthem than others.

Operator

Our last question comes from Eugene Kim with Wolfe Research. Your line is open.

Eugene Kim — Wolfe Research — Analyst

So. Hi, good morning. So quickly, on 2022 at The Investor Day, the company provided based on EPS. I mean this $748 [Phonetic] and I believe pointed to the higher end of that range and that will put us assumption that base business recovery return to pre-pandemic levels towards the end of the year. With the potentially I mean, the recovery coming faster than expectation, how should we think about that range that provided at the Investor Day. Thank you.

Stephen H. Rusckowski — Chairman, Chief Executive Officer and President

Mark. Hi, Mark, you there.

Mark J. Guinan — Executive Vice President and Chief Financial Officer

Yeah, yeah. So the, what I would say is, I’m not in a position to update that what we provided at Investor Day because, when you could get in a rhythm of constant we’re getting asked to update that. So next time, we’ll comment will be when we provide guidance for 2022. But of course, as we have that broader range, there’s a lot of different considerations, what the remaining level of COVID testing, what’s the reimbursement level, whereas the base business that when we gave the $748 as we said, we’re expecting the base business to be fully recovered this year to be back to 2019 baseline and starting to grow, but depending on the pace of some of these initiatives that are being rolled-out by several payers not just United, by Anthem and some of the other major payers, depending on the economy, depending on obviously potential expansion of covered lives.

There’s a lot of variables that we’ll know a lot more about before by the end of the year, before we give guidance for 2022. And so stronger recovery, the base business, get back, I wouldn’t say at this point that the faster decline in COVID testing yet, necessarily implies anything for 2022 around our comments because we assumed it would still be around in yours, from others as well. Nobody think it’s going away and we were not expecting it to be anywhere near the significance than it was in 2020 and 2021. So, and then you’ve got the ASR, we just announced. So there’s a lot of different moving pieces. So I will give you an update on 2022 when we provide our guidance for 2020.

We just wanted to ground the people at Investor Day, because the pandemic clearly confounded everyone’s ability to understand our long-term earnings power. And that’s why we thought it was important to make a specific comment in 2022.

Stephen H. Rusckowski — Chairman, Chief Executive Officer and President

Okay. So I think we’ve covered all the questions. We appreciate you joining the call. We appreciate your continued support and have a great day everybody. Thank you.

Operator

Thank you for participating in the Quest Diagnostics’ first quarter 2021 conference call. A transcript and prepared remarks on this call will be posted later today on Quest Diagnostics website at www.questdiagnostics.com, a replay of the call maybe as such online at www.questdiagnostics.com/investors or by phone at 888-566-0490 for domestic callers or 203-369-3053 for international callers. Telephone replays will be available from approximately 10:30 a.m. Eastern Time on April 22, 2021 until midnight Eastern Time May 6, 2021. Good bye.