Hologic, Inc. (HOLX) Earnings Call Transcript & Summary

Good afternoon and welcome to the Barclays Virtual Health Care Conference. Pleased to be joined now with Hologic's CFO, Karleen Oberton; as well as Head of Investor Relations, Mike Watts. Thanks for joining us this afternoon. Wish we were in Miami, but glad you could join us in the new virtual format.

Thanks for having us.

Thanks for having us.

Yes. So maybe just turn it over to you. Do you have any introductory remarks to kick it off?

Yes, sure. It's Karleen Oberton, CFO, and I'll just say a little remarks on Hologic for folks who aren't familiar with our story. But medical technology company, uniquely focused in women's health. We operate within 3 divisions, our Breast & Skeletal Health, our Diagnostics and Surgical, each with clinically-differentiated, market-leading products, certainly here in the U.S. We do have varying business models with only about less than 25% of our revenue comes from capital, and the balance comes from our service revenue stream as well as the consumable revenue stream. And only about 22% of our revenue today comes from outside the U.S., and we've actually invested considerably, over the last couple of years, to improve our commercial capabilities internationally, and believe that will be a platform for growth moving forward. And with that, Jack, if you want to jump into questions.

Sure. Yes, let's maybe pick it off there with -- kick it off with the international exposure, the topic du jour has certainly been the coronavirus. So I was wondering if you could just give us an update. As you think about the 3 business segments, how you expect the coronavirus to impact demand, whether it's capital purchasing or health care services across Diagnostics and GYN Surgical?

Sure. So as you know, this is obviously an evolving and escalating situation, potentially escalating. Maybe, let me cover what I do know and give you some other thoughts. So what I do know is we are seeing an impact from China as well as Japan, and now Italy, where we see the highest concentrations of the virus. For us, as I talked about being under-indexed internationally, China is only about 3% of our total revenue. So to the extent we have exposure there, we think it's quite manageable as well as a pretty small presence in Japan and Italy. And so don't think meaningful impact here in the quarter. The other thing that -- from a supply chain perspective, we have limited direct exposure to China. As we analyze the situation, we're getting down into second and third tier of potential delays we're seeing. But nothing that is going to impact the current quarter. And really some of the impact is on our smaller Skeletal business, so limited risk there. Today, we have not seen, kind of, any impact in the bigger markets we play in, in Europe or the U.S. But as I said earlier, this is certainly an evolving and potentially escalating situation. And to the extent, I think as we think about it in the near-term to the extent women stop having well visits, which we haven't seen yet, that's where we might start to see some impact.

Yes. I think that's all pretty fair. One area, I think Hologic is probably one of the few companies that does have a potential offset if you're able to develop coronavirus assay on the Panther. I know you had an 8-K out last night. I was wondering if you could just give us an update in terms of the development there. And what you need to do to potentially bring an assay to market here in the U.S.?

Yes, sure. I do think we are uniquely positioned here to help, if you will, with bringing diagnostic testing for COVID-19. And as you mentioned, we did released an 8-K that we're working with BARDA who's funding some of our research to run a COVID-19 assay on our Panther fusion system. Likely, this will be an emergency use approval. So certainly an accelerated pathway compared to traditional approval processes. This would be similar to what we did with Zika, and think we could have, again, an EUA approval within the coming weeks. I think this is also an opportunity for our labs that do have Fusion already. That brings open channel, if you will, to the Panther instrumentation. So beyond our approved assay, labs can, today, run their lab-developed tests on our Panther Fusion system. So like I said, we're uniquely positioned to help here in the testing. And to that end, just a quick shout out and thank you to our Molecular research and development teams in San Diego who are working day and night to make this happen.

Great. Maybe just continuing on there with the Diagnostic segment. The Panther, obviously, has been a real growth engine for the Molecular franchise. As you kind of look out, and setting aside everything that's going on with the coronavirus, what do you view as kind of the next leg of growth in terms of placements? And where should we be focused from a menu perspective to drive that adoption?

Sure. So Jack, as we've talked, we've steadily placed well over 200 Panthers a year for the past 5 years. And while this trend has shifted to OUS, it kind of runs with my comments earlier as we look for OUS to be placed for growth in the future, but we still have runway. But early days on the expanded menu. So we have -- back in 2015, we only had about 4 assays approved in the U.S., and now we have 16. A large majority of those approved within the last 2 years. So as you know, that -- this business is typically under contract of 3 to 5 years. And so we believe those -- the continued placements, along with the expanded assay menu, will be drivers of growth moving ahead.

Fair. One theme we've seen has been the consolidation of labs and diagnostic suppliers, some of the big labs talking about that. Can you just talk about some of the enhancements you've had recently with the Panther in terms of automation? And do you think it would make sense to have stronger ties with the core lab provider just to drive some better alignment there?

Yes. So as we just talked about, the Panther Fusion is a great example of bringing automation to the lab. Allowing the labs to put their own lab-developed tests on our fully automated Panther instrumentation, coupled with the expanding menu, really allows labs to consolidate testing, increased walkaway time in this and enhanced flexibility. Even beyond Fusion, we have what we call Panther Scalable Solutions, which drive efficiency and platform consolidation for the lab. So we have the Panther Plus, which increases the capacity and walkaway time. The Panther Link, which allows a virtual connection of multiple Panthers in a lab with a centralized operating dashboard, both of those are available in the U.S. today. And then what we expect to be approved in the coming months is Panthers Trax, which physically connects Panthers in a lab to address the needs of our larger labs. So I think we're really well positioned, from a value perspective, to bring value to the lab supply chain, certainly with the expanding menu and the efficiency that the Panther platform brings.

Are the -- some of those more recent updates, are those are things that you plan to -- what's -- I guess what's the sale there? Is it a service contract? Or is this more about just building stronger relationships with the customers that you have already?

Yes. It's more of what we call lock the socket. So typically, from a business perspective, we place the Panthers at the labs, so those assets still sit on our books. And it's really again the throughput of the consumables, again razor-razorblade model, if you will, that drives revenue. And again, the value we bring with the ability to -- with the expanded menu and the efficiency that Panther brings, allows us to, as I said, kind of lock the socket with our customers, coupled with our physician sales force who -- they partner with a lab to drive underlying testing demand in compliance with testing guidelines. So real value that the labs see to that partnership as well.

Great. And then last one I wanted to ask on the diagnostic side is -- and I think it builds off that is, just looking at the competitive environment, there are a number of companies looking to bring new molecular workflows to the market. I guess, just as you think about locking in customers, what are some of the things that you think build a moat for Hologic around the molecular franchise you've built?

Yes. So I think it's those things that I just talked about, is that the automation and the workflow flexibility that the Panther brings, coupled with the expanding menu. So to the extent labs can consolidate testing on our instrumentation. Our instrumentation, which actually typically has a smaller footprint as well inside the lab allows just a greater value proposition for the labs as well as some of the hospitals as well as they come under pricing pressure to the extent they can run the test themselves that brings value to them -- to the customers.

Okay. Maybe next, just turning to the Breast Health segment. It would be great to get an update on adoption of 3D mammography. Just frankly, I think, versus our expectations, the cycle has persisted a lot longer than I think we would have expected, and many people thought. So just as you sit here today, how much conviction do you have in the durability of placements as you get further into the cycle?

Yes, you're right. We have steadily placed over 1,000 3D units per year for the last 5 years. As we think about the market conversions, we think we've converted a little over 70% in our own installed base with the market at 60%. So still a few years of conversion ahead. So I think, Jack, more importantly, is what we've -- what we're talking about, this U.S. capital was only about 21% of the Breast Health revenue in 2019. We have purposely diversified the portfolio of products in that division away from capital to limit our exposure to conversion cycle. And we've done that through both R&D, bringing new products as well as M&A that -- some of the M&A that we've executed on.

And maybe building off that, next, just wanted to talk about some of those tuck-in deals that you've done, most recently, SuperSonic Imagine. I think one of the big opportunities there was just scaling that business in the U.S. So maybe just talk about what you're doing from a commercial perspective to do that? And then just how do you see the offering stacking up versus competitive platforms?

Yes. So if we think about -- SuperSonic Imagine was a French-based company with their -- 2 of their biggest markets were France and China. And they only had 5 reps in the U.S. So really, for us, just dropping that product into our commercial capabilities, our infrastructure, whether it's our relationships with national accounts and just the breadth of our presence in the U.S., we believe, we and that -- that product is going to perform much better as part of Hologic than on a stand-alone basis. And I think we believe in the technology that, certainly, from a breast imaging, is a superior technology. We believe it's a platform that we can build off of from an R&D perspective. And believe that is a space where there is some fragmentation in the space and some small competitors that we're going to be having a real great opportunity there once it's in our sales force.

Great. And maybe just finally, let's move to the final segment, GYN Surgical. Just as I look at the growth rates, it really accelerated into the end of the calendar year. And at least in the most recent quarter, was most of the upside versus our model with MyoSure. How are you feeling about the runway in terms of just keeping the elevated level of growth going and driving penetration?

Yes. MyoSure has certainly been a product which continues to exceed a lot of expectations. And so really pleased with what it's done. And we do believe there's still room to grow for that product. One of the things that we've done from an R&D perspective is thought about the workflow and how more pathology can be accessible with the MyoSure. So for instance, our Fluid Management has better management of fluid during the procedure, which is actually allowing more pathology, like I said, to be accessed by MyoSure. So I still believe that there's some growth there.

Okay. And then just turning to NovaSure. This -- starting to see a little bit of stabilization. Are there any changes to watch on the competitive landscape? And just in terms of the litigation, where do you -- where do we go from here?

Yes. Not much new on the competitive front. I think, from a litigation perspective, we have a ruling in our favor, and the clock is ticking in that regard from an infringement perspective. But I think what we're really seeing there is the commercial teams and their -- what they're doing to lessen the declines in NovaSure and stabilize that product. So we've talked about new leadership for Surgical, significant change in that sales force over the past 2 years, coupled with moving from a highly fixed to highly variable compensation plan. And what we've -- kind of some of the learnings have been that -- is that the NovaSure a little bit of a harder sell than MyoSure. So tweaking the cost plans to address that, but also going back on some of the newer reps to make sure that they're feeling confident in that sale process.

Great. Maybe just turning to the income statement next. As I stack up Hologic versus some of the peers in my coverage, I feel like you have some of the best EBITDA margins. And things have changed a little bit now with the divestiture of Cynosure. Do you feel like there's still room to drive efficiencies as you look either at the segments or in terms of the operations? Where are you going to get -- what are the puts and takes on margins we should be thinking about?

Yes. Certainly, with the divestiture of Cynosure, we will see an improvement in both gross margins and probably even more meaningful improvement in operating margins as a result of that divestiture. Yes, I think, as I think about moving forward in the P&L, obviously, we talked about mid-single-digit growth on the top line and double-digit growth on the bottom line. So from an EPS perspective, and share count and tax rate can contribute a little bit to that, but will require some operating income expansion to drive that. But feel like we still have room. I mean, we've made a lot of improvements over the last few years, but I do believe there's still infrastructure-type things that we could go after to improve the efficiency.

Great. And then maybe just to conclude, we'd love to get your thoughts on capital deployment. You have, I think, some aspirations on the buyback. And just be curious given some of the market dislocation, does it change your view on how aggressively you want to be buying back stock versus are you seeing more potential activity on the deal front? How are you thinking about playing the end here?

Yes. I think it's early days certainly from the dislocation in the market that really haven't changed our capital allocation strategy at this point, which is really both the tuck-in M&A and share repurchase. But what I would say, Jack, is that we have a great balance sheet. We're in really good shape. We have strong liquidity. We have access to capital markets. We got $1.5 billion revolver at our disposal. So to the extent assets become more compelling, if you will, or other things change, we feel we're in good shape to be opportunistic.

Great. Well, thank you for all the time this afternoon. I appreciate you doing it in the new virtual format. And hopefully, we'll be back in Miami next year.

Well, thanks, Jack, for having us and thank you.

Yes. Talk soon. Bye.

Bye.