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

Good afternoon, and welcome to the Bank of America 2020 Healthcare Conference. This is Ivy Ma, Diagnostic Analyst here at BofA. I'm pleased to be joined by Hologic's CFO, Karleen Oberton; as well as Head of Investor Relations, Mike Watts. Thank you so much for joining us today. We have a pretty ambitious agenda today, and we'll try to take some investor questions from the webcast. So I'll turn it over to Karleen. I think you have some quick intro remarks to kick it off. Thanks.

Thanks, Ivy. And thanks for hosting us on the call today. So let me just start about Hologic a little bit, it is a global medical device company and one of our hallmarks is market leading, clinically differentiated products, including our Panther fully automated high-through instrumentation for molecular diagnostics testing. And while there is a lot of uncertainty in the world right now, we know 2 things. First, our business is performing very well pre-COVID with 5.2% growth through February. That's the first 2 months of our fiscal second quarter. And that widespread diagnostic testing for COVID is essential to reopen economies. So we believe we are well positioned for any scenario going forward. So as COVID continues to constrain other health care utilization, we should have at worst a significant offset from our own tests. And if the health care utilization bounces back, so will our base business, but testing will continue for COVID, and we'll have a significant new market. Ivy, I mean, this is an area we're going to place many more Panthers and Panther Fusions, and our molecular Diagnostics business will be stronger.

Thanks, Karleen. That was a great overview. Since it's on top of everyone's mind and Hologic is an important COVID-19 test vendor, let's jump right into questions related to COVID-19 testing. I mean it's truly impressive progress here with the second high-throughput test on the Panther platform. I wanted to see how are you progressing with your production capacity for both the PMA and the PCR test? Could you talk about also how are your tests differentiated? And what are some of your advantages?

Yes, sure. So the PCR test is on our Panther Fusion platform and just to frame it up, we've talked about, there's about 1,800 Panthers placed globally with about 1,000 in the U.S., 800 OUS. And on those 1,800, there's about 200 Fusions for the PCR testing, and those are probably equally split between the U.S. and internationally. So from a production capacity perspective, right now, things are in line with our commitments. We're trying to deliver about 600,000 Panther Fusion tests per month and about 1 million Panther TMA tests per week. I think it's really important to note, as I said earlier, that both tests are high throughput, fully automated and highly accurate. And specifically, Fusion can test single sample for other -- Fusion can test a single sample for other respiratory viruses, and Panther has that large installed base, I just talked about and significant capacity, which helps us deliver test results when and where they're needed.

Thanks for the details, sort of moving to your question on the testing opportunity. So you mentioned there's about 150 million testing opportunity in fiscal third quarter. So granted, there are a lot of unknowns but curious to get your thoughts on what sort of capacity expectations or [ need ] expectations you're eventually planning for since there are plans to also make investments and increase the production capacity by the fall? And also, how long do you think the level of virus testing can sustain? I'll stop there.

Yes. Thanks, Ivy. That's a great question. I think there's a lot of uncertainty in regards to testing requirements over the coming quarters and years potentially. But I think today, we would all agree that we need more testing than we have. And so I think volumes will remain high for at least the next -- through the next flu season. Then at some point when we have a vaccine, hopefully, the testing could settle down but still be at a significant level, and there also will be meaningful markets internationally for us that -- moving forward from molecular diagnostics, which would be good opportunities for us.

Great. Can you talk about what's the current demand for your test kits? I thought you had touched upon that, that may be more testing than currently what's being implemented right now. So I wanted to -- also I wanted to see how the recent CDC testing guide change has been playing out so far in terms of your observation on the demand?

So right now, the demand is very high for our tests, both on the Fusion and the TMA test on Panther. And I think as I've said before, clearly, there needs to be more testing done currently than there has been in the U.S. and certainly outside the U.S. But it's still hard to sit here today and say, how long will that demand last for? As I talked about things like just the course of the virus vaccines all play into the demand moving forward. But I think at this point in time, what we're doing is we're investing and increasing our overall molecular diagnostics production capacity. Because we do see this scenario where the base business starts to come back, and we still have demand for COVID testing as well as we engage with new customers who want our COVID test, we're talking about things for the longer-term, in our core women's health assays. So we think ultimately, we'll need more capacity for molecular diagnostics business, whether it's for the base or for COVID.

Got it. I'd like to remind investors that you can submit questions through the webcast next to the speakers list, and I can ask questions on your behalf if time allows. And then on to the last one I wanted to ask on the COVID testing side. How does these test offerings and the elevated profiles internationally, how does this change your positioning in the molecular diagnostic market? And specifically, how penetrated is Panther in the U.S. and internationally for now? And where do you think that could go as COVID might be driving some incremental placements over time. So I wanted to see where do you envision that to go longer term?

Yes, that's a great question, Ivy. I think, as I sit here today, I would say that overall, diagnostics testing, I think, is going to be a higher profile post-COVID in that need versus where it is today. And I think we will certainly accelerate in that higher profile need for diagnostics testing. Certainly, today, we have significant demand to place more Panthers with existing customers as well as new customers. And from a utilization today for Panther, think about it is that we've got 16 assays approved in the U.S. for Panther. Only about -- less than half of our customers run more than 2 assays on Panther today. So that is significant runway for our existing installed base to put more testing on their Panther as well as for new customers with both COVID testing and then testing for the rest of our products. But we feel really pretty good about what our tests are going to be able to do to just COVID. And then on the longer term, the more important need for diagnostic testing.

Got it. And related to that, what is the revenue pull-through per Panther today? Could you remind us of that? And where could it go, given you are mentioning, this might have some elevating effect on the number of tests being used by customers today.

Sure. So we said through the end of '19 -- of fiscal 2019, the average revenue pull through on a global basis, the average was about $240,000 per Panther. And the way to think about that is probably higher in the U.S. and a lower -- a little lower outside the U.S. And when we look at that on average, that capacity -- customers are using about 35% of the full capacity of Panther. So we will continue to see the average utilization or the average revenue pull through per Panther to increase. But at some point, you would -- probably wouldn't push the capacity above 75% of each Panther, and at that point, a customer would just get a new Panther. But we see -- definitely see runway in capacity.

Got it. I just got one question from Bloomberg here, which is about what's the right way to think about Hologic's market share in the COVID-testing market?

Yes. So it's early days, but we believe, if you think about installed base and infrastructure, you think about the 2 biggest players today, molecular diagnostics testing in the U.S. that's Roche and us. And I think in different product categories, we are the #1 or #2 player from a market share perspective. We believe -- we will -- let me say this, we'd be very disappointed if we didn't have that same position in regards to COVID.

Got it. And another question just came through is that I know you mentioned some of this on the earnings call, but people still are pretty interested in what's the sort of logical question -- opportunities here. And this question specifically is about, would you be able to test for antibodies on the Panther machine?

Yes, that's an interesting question. We -- that is not what we do today. That's not what our technology does. So we don't -- we're not considering pursuing that at this point in time. I think, again, what our test does and this is, I think, in general, serology doesn't do is our test has high sensitivity and high specificity. So that means very high results in identifying positive and very high results in not giving false negatives. So we believe that molecular diagnostics testing will continue to have a strong role to play kind of regardless of what serology does.

Great. So moving on from COVID-19 testing. Let's talk about the impact on the rest of the business from the pandemic. So could you talk about what's the volume impact by segment? How exposed it could be? What's the latest volume trends? And how do you think about the timing and pace of volumes returning?

Sure. So I think as this -- in early March, I would tell you that we started to discuss as a leadership team of what the impact would be. And as soon as we started to get the inclination that elective procedures were going to be stopped or deferred, we went into a pretty quick scenario planning, and I think we've taken really great actions to set us up for success post the pandemic or as things recover. But certainly, the base business has been significantly impacted, but it's been impacted to the levels that we had actually planned for. We talked about April -- our fiscal April was down 45% to 50% as a whole. And to break that down, the Diagnostics business, down about 45%; Surgical, down 85%. That was the most significantly impacted and our breast health down about 30%. And we believe that's going to be the profile for most of the quarter. Now as we see elective surgeries coming back and some economies starting to open up, we might see some improvement within June. But at this point, we do believe that there's significant impact here in the third quarter, in the base business. But great news as we've got a really meaningful offset with the COVID testing.

Great. I know you spoke about getting back to normal in the first half fiscal 2020 plan, hopefully, for the majority of the business. And then from earlier today, at the hearing, Dr. Fauci was talking about, COVID could be worse in fall or winter. So I wonder if there's a significant second wave later in the year than relative to what we've seen with the initial outbreak and shutdowns, how do you think about the impact to your business? And how much of that second wave is embedded in assumptions? And if you could do a hypothetical situation that would be great.

Yes. I think we had talked about, Ivy, that returning to normal levels in the second half of fiscal 2021 is really tied to the normalized flu season. So I think our assumptions do have some level of uncertainty moving through the next 3.5 quarters, if you will. Certainly, we believe the biggest impact was here in this current quarter, which is our fiscal third quarter. We expect some improvements in Q4. But I think we're not estimating, we'll get back to the normal levels until we get through those first -- those next 2 quarters of 2021, which is the calendar fourth quarter and the calendar first quarter, again, with the potential for resurgence in the normal flu season. But I think there's also some reality to the recovery, right, of what we do in screening for cancer. Certainly, there's patients at risk, patients that have a higher risk profile. I think we'll start to see those folks -- certainly, there's some pent-up demand that they'll get back here in the fourth quarter to their screening activities. But I also think women are very engaged in their own health and just because you're not getting a mammogram doesn't mean there's a potential that there isn't a cancer in the breast, right? So I think that, at some point, we'll see women more actively engaged in kind of their own testing as well as physicians figuring out how do they get back to work and how do we work in a different manner. I think that's part of the uncertainty in the recovery is even if there's pent-up demand, what does the workflow look like? Think about social distancing, not everyone can be in the waiting room that normally was. The clean between procedures between different patients, which maybe historically was minutes, maybe up to an hour. So -- and there's the need for PPE. So for example, our rep would typically, if they are in an OR setting, would be given PPE by the hospital, and now we're seeing the hospitals require our reps to show up with their own. So I think the workflow is the other thing that's going to be uncertain in this recovery. But again, to the extent there is resurgence of the virus, we believe that we'll have that offset with our COVID testing that, that demand will flex up. And again, those are the things we're investing in to make sure that we're able to supply.

Great. That actually is a great segue into a question related to recovery. So I've been hearing some OB/GYN offices are reopening and some of our lab companies were actually saying women's health might be among the first to bounce back compared to other routine volumes. So I'm curious to get your thoughts on the rebound in terms of different segments, especially given Hologic's unique focus on women's health?

Yes. So I think that ties back to some of my earlier comments that I made that clearly, physicians see a pent-up demand for women, women's health needs. I think there's women that are engaging more actively or women tend to engage actively in their own health care. And so we're seeing them start to plan in a different way. So we're seeing things like we're going to have sites open 6 days a week versus 5. We're going to operate 12-hour shift versus the normal 8-hour shifts, but I think that balance of trying to address that pent-up demand is going to be the workflow and how that really shakes out of what you can process from a patient procedure perspective in this new normal, if you will.

Great. And then a broader question is what actions have you taken to mitigate the near-term impact of COVID-19? And also, how do you think about Hologic's ability to grow through a recession here?

Yes. So as I mentioned earlier, back in the beginning of March as we start to strategize about the impact of a possible pandemic, it was great partnering with the other leaders in the business and really they stepped forward with these meaningful impacts to the revenue line and so we were able to take plan and take measured actions early and really with a guiding principle of where is the work no longer there. So there wasn't a one-size-fits-all for everybody. It was -- where does the work no longer exists. So those -- that's where we have employee actions as in furloughs or reduce workloads, moving to 4 days a week or 3 days a week as whatever was determined was appropriate. But then we also took kind of what we called deeper-for-shorter pay cuts across the board from the Board and Steve at 50% and the leadership team at 25% and then most employee base at 10%. So able to take action quickly, but then also looked at demand capacity from supply chain, both making sure we're securing supply chain for a recovery, as you talked about, but also leaning into the reality of where we could cut back at site productions for a period of time, but still be -- an ability to rebound. So we believe there's a balance that we've taken that secures our liquidity and our good financial position in the short term, but also not taking cuts so deep that we're unable to rebound and recover as we transition out of this pandemic.

I have a follow-up for that. But since you mentioned leverage, and I actually got a question on webcast on this. So the question is, what is the company's leverage target and priority for cash flow generation?

Yes, that's a great question. So we entered into this pandemic in a very strong financial position with a leverage ratio of roughly 2.5x, very strong cash flow profile, credit agreement with best-in-class terms, essentially investment-grade terms and $1.5 billion revolver at our disposal. So I talked about the actions we took for expense control, but we also started monitoring cash on actually a daily, weekly and monthly basis to make sure we had good line of sight to the inflows and outflows and with the goal of trying to maintain a positive cash flow position, liquidity during this -- the worst quarter. And it looks like at this point, we're on trend to do that. We also tapped our revolver for about $750 million. We used $250 million of that to pay down our AR securitization line, which we believe, given the -- some customer constraints may come under pressure, so we paid that off, and happy to say that we have -- the rest of the $500 million is still in the bank today. We haven't had to use that, but we have that liquidity just in case we needed it. And from a future perspective, I think we've talked about pre-COVID that a profile of leverage of 2.5x to 3x is where we'd likely maintain. I think we will see the leverage ratio come into pressure here in Q3 and Q4, but we believe that to be temporary. I'd say not under pressure, but it should -- it will increase. The leverage ratio will increase temporarily.

Okay. That's part of the COVID response. And then a follow-up to the question. We're just talking about what actions you're taking to mitigate the COVID impact. So I wanted to see how are you going to implement a full return to work? How would you utilize your own testing maybe to guide your decisions? And maybe Mike, you can share what you've been seeing on the West Coast as well?

Yes. I think to that point, Ivy, I think, again, one of our guiding principles is not one size fits all. And I think, again, Mike and I have very different workdays right now. So I'm based in the East Coast where our corporate headquarters are and the headquarter is essentially a shutdown. I think I was in the office 1 day last week, and there was 3 other people there. And I think Mike can talk to his experience where there is lower utilization in San Diego, but there's much more activity there as they ramp up the COVID testing on the San Diego basis -- in the San Diego campus, I'm sorry. But as you prepare to return to work, first, we're looking for what are government guidelines, the government restrictions, and we're going to follow the appropriate state guidelines. And we'll likely break up our workforce into rotating groups to promote social distancing and help us do whatever cleaning we need to do with change of shifts. But at the end of the day, we're welcoming our people back to work. We believe we've got some of the best teams out there, and we believe that we want to get those teams together as soon as possible in a safe way.

[Technical Difficulty]

I'm sorry, Ivy you broke up there a little bit.

Are you having any... [Technical Difficulty]

So Ivy I'm sorry, I didn't hear that. You're cutting in and out. I didn't hear -- I heard about every tenth word, I think, I wouldn't want to guess. Can you try out the question one more time?

I'm sorry that was a technical difficulty. So I was just saying, wanted to just get your West Coast observations on how are you going to implement a full return to work? And how would you utilize your own testing and guide your decisions that way?

Sure, sure. Sorry. I didn't hear that question fully. I would just reiterate what Karleen said. I mean each site, each division will have a different approach out of necessity. That's certainly true here in San Diego, which is one of our largest facilities. So R&D, working in some cases, around the clock, manufacturing also working close to around the clock as we ramp up our capacity. But on the other hand, some of the corporate support areas, whether that's finance or HR or IS, those folks are largely working from home. So just doing what makes sense for the business based on current conditions as well as the geography that we're working in. Obviously, in terms of we're using our own testing, we do make the test, we sell those to labs. But we're not authorized as a CLIA lab ourself. So that would be -- we wouldn't be able to do the testing ourselves, unfortunately. But certainly, I think the best thing that we can do for the pandemic as a whole is contribute in our unique way by making as many tests as we can and selling those to our lab customers, but can't do that ourselves.

Yes, absolutely. I was just curious if you're taking some tests to go back to work or any sort of guidelines like that. But I understand each job function might be different. With just 5 minutes left here, I want to sneak into a couple of questions on margins here. So what's the margin trajectory look like from here? And how do we think about margin profile or expansion drivers given few puts and takes here with the COVID impact and the Cynosure being divested? Anything would be appreciated.

Sure. So obviously, we expect margins, both gross margin and operating margin to come under pressure meaningfully here in the third quarter. I mean we can't have the base business down 45% to 50% without seeing that. And again, when we made -- took our actions, we were intentful that and not to cut R&D, for example, to the bone and we're preserving some of our sales force, their commission structure so that we don't lose some of our best talent. But I think as we continue to have pressure on the base business and as we see the recovery turnout, we should see gross margins continue to improve as well as operating margins. But I would also say that -- I would say 2 things, so where we're seeing our revenue drop off is on -- in the base business, is that some of our most profitable businesses than perhaps in surgical, for example. But we believe the COVID offset will have an accretive gross margin profile as well. So again, biggest impact here in the third quarter, and we should see improvements as we move forward.

Great. With just a couple of minutes to go, I wanted to ask a couple of bigger picture questions. So any thoughts on M&A criteria post COVID?

I'm sorry, Ivy, you broke up there again a little. Can you say that again?

Sorry, I just want to see if there's any updated thoughts on M&A criteria post COVID?

Yes. I don't think we have certainly updated criteria, but more of, we believe it's going to be a great opportunity for us that -- as we think about post-COVID or as things start to recover, I think there'll be more assets that are more actionable. And certainly, with a focus on our tech and M&A strategy led by our divisions, I think we'll be able to be a little more optimistic, and I think -- or opportunistic, I should say. And I think the actions we've taken, the focus on our liquidity, we should be in a position financially to do that.

Great. And as a closing question, would love to get your thoughts on what do you think the long-term implication of COVID-19 would be? Is there anything that you are changing in the way you do business or the way that your customers that you think would persist in the post-COVID world?

Yes. I think this goes back to my -- some of my opening remarks in that we believe post-COVID, diagnostics testing is going to be even more important than it was before. And I think what we'll be able to do is showcase to existing customers and even new customers and even potentially even more new customers outside the U.S. as to what Panther can do. What it can do from a workflow perspective, the accuracy, both sensitivity and specificity of our tests and the menu that we have. The menu that we have is, by far, the biggest with 16 assays approved in the U.S. and that value, both from a workflow, automation and expansion of menu can bring to a customer. So that's the biggest thing that I would say we're thinking about post-COVID is the role of diagnostics testing.

Great. And with that, we're out of time. Thank you for everyone to be on the line. Stay safe and healthy. Thank you again, Karleen and Mike for joining us. Enjoy the rest...

Thank you.

And we'll talk soon.

Thanks, Ivy.

Thanks, Ivy. Bye-bye.

Thank you. Bye.