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

All right. Good morning, everyone. We're back. I'm Amit Hazan, the medical technology analyst at Goldman Sachs. From my team, Jamie and Phil are probably on in the background as well. And we're excited to have as our next presenter, Hologic, a company we actually don't cover, but I used to back in the day. And so we've got Steve MacMillan, the Chairman, President and Chief Executive Officer, with us this morning; and Mike Watts might chime in as well, Vice President, Investor Relations. And so first and foremost, these are busy times for you guys, Steve. So I must say thank you so much for joining us, and welcome.

Well, thank you, Amit. Good to see you again after all these years.

Yes. Likewise. My history with Hologic goes back a long way. It was a small-cap stock and Cytyc and Gen-Probe are all names I used to cover but don't anymore. So you'll have to excuse me when I ask you what MyoSure does or anything like that.

No problem.

But let's start with the 8-K you put out this morning. Do you want to just make a -- sorry, last night, do you want to just make a quick comment about that?

Sure. I think we put that out, so we can be a little more transparent today. But I'd say at the highest level, we're in a profoundly different place today than we were 60 to 75 days ago. If you think about it at that point in time. And I'd say both near term, but especially long-term as we think about where the business goes from here. Now at that point in time, we were hunkering down. Our surgical business, you saw the April results, was down 85% at that point in time, which really meant we had some weeks that were down 90%. And at that point in time, we're hunkering down. We're trying to cut salaries with furloughing some employees. We were focused on cash. People were just starting to work remotely, dramatically at the time. Now as many medtech companies, the base is recovering, which is very nice. But most importantly, we, as an organization, have been able to pivot to be on the leading edge of the COVID testing and the development first of our PCR assay, but really much more importantly, the development of our TMA assay, which just was cleared, got the EUA, really just a few weeks ago, is having a dramatic impact, both for the company and for the world. And then where that sets us up? We fundamentally believe diagnostics is increasing in importance. You fast forward to -- if we get through the immediate crisis, I think all hospital systems and some -- and governments, state level, Department of Health, they're all going to be thinking about diagnostics in ways that are very different and much more strategic, not just commoditization. And candidly, I think they're thinking about Hologic in a very different way. So with our Panther system and with our ability to respond, and they're getting such great feedback on, particularly, our COVID test, like everything else, it's going to position both, I think, the diagnostics industry as more important and us as more important within that industry. So that's the quick piece that obviously led to -- we're clearly selling more than we expected to and feel in a very different place about how this quarter and how probably the balance of the year will play out for us.

That's encouraging. And I want to get into certainly COVID testing in some detail. But I thought just the first question, just off of the 8-K. As it relates to diagnostics, is it a combination of faster recovery testing franchise, kind of like you saw in Surgical did a little bit better as well than you might have expected? Or is this basically just better COVID testing than you thought in the quarter?

It's mostly COVID, but in -- just in the last couple of weeks, we are starting to see a little bit more of the cytology and the core businesses taking back up. But they took it pretty hard on the chin in April and May. We are starting to see them picking back up as well. So it's a little bit of the base and certainly more COVID.

Okay. So let us talk about that. You've talked in the past about volumes, you can manufacture 1 million tests a week. Are you able to talk qualitatively about how much incremental demand the company was seeing relative to that figure?

Sure. Yes. At this point in time, Amit, we are able to sell everything we can make. And we're still, frankly, warding off. We're still getting calls from governors recently last week, multiple governors still calling asking for even more demand because their own people are telling them, look, the Hologic system is the one we want. We want to get as much as we can from Hologic. So we are still very much in a -- it's very counter for our salespeople through the years of trying to sell where we're actually just trying to be honest and still almost holding off and rationing customers. Now we're -- with our ramping, as you probably see, the 8-K would imply, we've actually been able to get a little more than 1 million a week out is what it looks like this quarter, just our teams being able to really kind of knock down barriers and get on the margin a little bit more than that 1 million a week out. It's been very good. But we still can't keep up with the true demand.

And as we think about that supply, do you have supply limitations? Is it still for things like swabs and your own raw materials? Or is your limitation more on your own manufacturing side? Just trying to think through the comment that you've had publicly that you'll have "a lot more tests by the fall." Just how quickly that can ramp? And how much you can quantify what a lot more actually means?

Sure. It's really the full supply chain, right from tubes to caps. In our particular case, a lot of it is the caps because we have a very unique cap, which is what allows us to -- the person who takes the swab can drop it right into our tube, never really needs to be handled again because of our unique capping system. So we are producing more cap machines and those should be -- we've been hearing all along to basically accelerate everything to be in a position that by September, we'll be able to more significantly ramp additional production, which we think is going to be another critical time for this. So it's really across the supply chain, but we feel pretty good on the swabs and most of the pieces that we've been able to kind of knock down. But it's such a dramatic increase in our volumes putting it all together.

Is that mostly going to the U.S. market?

Mostly at this point though we also as the summer and fall ramp out or ramp up, we -- and as our own production capacity ramps up, we are going to be in a position to be able to make a reasonably meaningful impact on a global scale.

So you and I are going to get to talk a little bit about the testing market later on the panel today. But I thought just for now, just to ask you, we have this we kind of know where testing is in the U.S. and we get daily rates on that. It looks like in the last month or so, the U.S. has done about 10 million tests. And as you talk about being able to supply a lot more than what you're doing now, obviously, as a percent of that 10 million, let's say, or if that grows, I'd be curious about what you think about that market aspect. What you're seeing from a demand perspective in the U.S. and if we did 10 million in the last month, as we get into the fall, reopening of schools, reopening of offices, how you're thinking about where that number can go?

Yes. I think the honest answer, Amit, is we don't yet know. And that played out as you well know, there was 1 million tests done in March. There were 5 million done in April just in the U.S., a little over 10 million in May and 3.3 million last week. So first off, on a high level, I think it's been a remarkable private sector response to drive this. Come the fall, we've seen all kinds of predictions. I probably would be somewhat surprised if it's not in the 20-ish million. But say, it could be between 10 million and 20 million as you really start to ramp up in the fall. We're obviously going flat out to see how much we can provide of that. But I think there'll be, as you mentioned, schools go back, as sports days go back as colleges and universities, I know they're all planning that are on testing systems. So I think where we'll probably at least end up is some rational thinking, which would be we need to be testing in areas, not necessarily testing every individual and starting to really track. We'll be able to find out where there are pockets and outbreaks and then probably accelerate the testing in that area. But you go to the extremes, one of the Harvard studies was talking about 20 million tests a day. I think that's overkill; I don't think we would need that. It might be good for us, but I don't think society is going to need that. So I would think we end in the 3 million to 5 million a week in the United States, probably somewhere in that range. But again, it's such a -- as you know, in COVID time, a day seems like a week, a week seems like a month and things can change so quickly.

Absolutely. Let me try to put some context around competition and market share here. So when we look at publicly traded companies -- public companies and what they've said and added up just like what you said, we get anywhere from 20 million to 30 million theoretical tests available in the U.S. per month. And I know that number is going to go up, just like you said, a lot of other companies are building up capacity in the fall, it would be more than that. So it looks like from a company perspective, the capacity will be there. How do we think about -- and everybody kind of sells their own tests and market share is a hard thing to understand, I think, for investors because of that. What's the best way to think about how Hologic fits into the pie of market share given all these companies that have tests for COVID and different systems that in the past had been in different markets in terms of menus?

Yes. It's a great question, and I will tell you, deep down, we've been far less focused on our typical market share competitiveness right now versus just being able to address the overall margin. Having said that, I think the same things that have made us the definitive world leader in sexually transmitted infections, in HPV tests, our TMA assay combined with the incredible depth, breadth and reach of our Panther system put us in what we think is a very, very strong position to, if things eventually go as they typically do and everybody jumps in and eventually, the best technologies and the best product prevail. We know from the number of outreaches and the customers from the hospital system that are calling us where we stack up in terms of their experts wanting the Panther system on our assay. So I think we feel very good that at the end of the day, nucleic acid testing with both PCR, or in our case, a TMA testing is definitively the most specific, most sensitive assays. Those are the ones that are going to give you the real answer. And for all the discussions around serology and there'll be needs for that, at the end of the day, to give confidence to get people back to work in their environment, we need to be able to test, do you have COVID? And so I think we feel like just as we've benefited over time in every market we've gone into because of our both throughput and accuracy, we will be a major player as we -- as this continues to evolve.

Okay. I want to ask a margin question here, and I apologize if this is something you have or haven't discussed, I'm not sure. But just are you able to give us a sense of the COVID test and its fee, I mean, we're kind of thinking $25. And I think we've heard from some other companies. Just curious if that's the right number. It seems like that would be somewhere like a 20%-plus premium to other Panther tests that you have. So intuitively, I'm just thinking that this opportunity for you is margin accretive. Is that a fair way to look at it?

Yes. On that pricing, ultimately, I'd probably model just a touch below that $25-ish number when you look at weighted average customers. We're obviously trying not to be ridiculously absorbent and do anything in our pricing strategy. The pricing is similar to our flu assays and other things like that. But having said that, I think it is certainly -- it is a positive accretion to our gross margin overall for Diagnostic business and for the company.

Okay. Let's move over to the Instrument side. And here, trying to think through the demand there and the ability to manufacture new systems, you've said pre-COVID, you're running, I think, 250 a year. How much further can that realistically ramp here in the short term where the demand is so high? How long does it take you? We talked to Roche, an example 1 month or 2 ago and their customers are talking about a 10-month backlog, like just give us a sense maybe of how you're able to ramp that, how fast, what your backlog looks like to the extent that you can?

Sure. I think clearly, demand for Panther as it has with our assays has skyrocketed. We've been placing on average 20-ish globally per month really for the last 5-ish years and that I'd say 250 number. We have -- luckily, we have some very good partners. Obviously, ramping up manufacturing capital for hardware and software is a very complex machine that ultimately creates the simplicity for the workflow. I will tell you, our partners have been able to respond very well. And we would expect probably to be able to double the amount of Panthers that we're able to manufacture and place over the course of this 12 months. With even a fair amount, a fairly quickly ramp happening now when the customers really need it. We had some inventory. Luckily, even our partner had to be able to pull in some other local suppliers to help them. We have been able to ramp some Panther production. We'll give an update probably on our earnings call, but clearly ramping those placements as much as we can to help our customers to kind of grow.

Yes. That's great to hear. And then kind of thinking about the world in a recovery, is there generally enough capacity on installed Panthers to do both COVID and other pre-COVID tests that these labs were doing?

Yes. Within -- you're talking about capacity within the lab space?

Yes. Yes. As folks comes backs to offices and surgeries and lab tests, STD testing comes back.

Yes. Certainly, some are being stretched, even the main reference labs and others who stretch some of the hospitals wanting to add capacity. And I think just back to my opening comments, particularly within the hospital systems, I think of thinking this is something they want a little more strategic control and not rely completely on outsourcing. So I think there's a fair amount of capacity. And having said that, we're seeing a number of hospital systems for labs also wanting to almost develop some dedicated COVID tests. That's been machines and sites. So I think, ultimately, come the fall and even right now, the capacity is ramping, that it will be there in the system to be able to handle both COVID as well as the -- what we're seeing is picking up path in the base business. But it's requiring additional installations to be able to do that all of which, by the way, for us, part of the way we look at this entire thing is, we're placing more Panthers that's been part of our strategy all along. As the Panthers get in, there's such demand for them. It also sets us up for the future that even at some point as COVID volume trails off, we've got more Panthers installed that the lab techs love using. And we've had obviously a far increasing menu over the last few years that will now -- we've just accelerated our Panther placements critical to our strategy long-term will pay off for us.

Yes. So maybe just a follow-up on that. We think about kind of this post-COVID world, where you've got all these new installations, you've got 16-or-so assays approved, but really 2 major ones that make up the bulk of your revenues. And I'm just wondering if that's a function of the market opportunities themselves that you just won't be able to ramp that much because the testing volume is there? Or is that just -- do you have room to gain share in certain test categories once all these Panthers are out there and conceivably COVID testing subsides at some point?

Yes. We think that's been the massive strategic opportunity for our Diagnostic business that this is opening up, which is if you want to be critical of, say, the way we've been perceived in the market, we've really been viewed as a women's health, the sexually transmitted infection category. Everybody knows we're incredibly strong in that space. They haven't necessarily realized as much how much we've moved out into the viral world into expanding the assays well into some of the GI and ultimately respiratory stuff. This put us on now that radar screen of, "Oh, wow! I can run all these other things on Panther. I didn't realize the depth of the menu that we've really launched over the last few years." And so being suddenly on the forefront of shipping millions and millions of COVID tests coming into the labs, everybody realizes the way Hologic is far more than a women's health company. And because there's been so much love, when you talk to the lab techs about our Panther system and how easy it is, now watching even our COVID test, and how simple it is and how little manual work is required in the labs, we really feel, because we're already having discussions with a lot of the key customers of, "Wow! when this is done, there's other things we want to start to partner or buy from the Hologic." It's a -- by the way, both in the U.S. perhaps even more so in the international, which is really, really where our profile has jumped up a lot and this is well kind of totally under the radar.

Yes, that's great. So one of the things back to more of the STD and the Pap testing side that we're looking at is just this kind of obvious move to telehealth that's been happening. It's been a big shift so far. I don't know if it's going to be sustainable, but it seems likely to stay elevated for a while, I guess, probably and above pre-COVID levels. And so I'm wondering if that from you is actually a concern as it relates to trying to get Pap+HPV CT/NG volumes to normalize as we think about the next year or 2?

Yes. I think we put it in 2 buckets. Telehealth really going to have a different and more important role going forward. And could it have some mitigating effect on doctor visits for these things? Probably a bit -- we're always going to plan conservatively and operate aggressively. So I think for our planning, we would want to assume, "Hey, there may be some diminished amount of people going back in." But back to the opening point, diagnostics becoming more and more critical. And so getting women back in there for particularly any of the STI infections, they can have a long-term implication for their reproductive health. I think that fundamental demand for diagnostics -- and we're even seeing it -- we track the mammography market, the actual usage because our machines have so much software embedded in, we're seeing a dramatic rebound with women going back in for their mammography exam. It really looks very close to review. And so I think that also bodes very well for the annual checkup so people needing to get back in. And will it be fully back to a 100%? There's probably always going to be a little bit of not full recovery there. But I think for the most part, we feel very good that all of our business is coming back.

Okay. And just back to COVID for a second and thinking about flu in the fall, did you have plans for or should we expect a broader kind of respiratory testing panel of COVID plus flu from you?

We're in discussions with the authorities. We are in a tremendous relationships with FDA and everything else is figuring out how we want to best play that, whether it's combination, whether it's individuals, but -- so we haven't made our final decision for our ability to respond very quickly with our team. I feel great about it, as we think about we're going to shift quite a bit of COVID business this quarter, that literally March 1 of this year, we weren't even working. 90 days later, it's contributing massively to our success this quarter. So our ability to stay close to the emerging trends that I could see there.

Yes. So let's move over to Surgical. And this is where you talked about the largest observed headwinds ahead of the second quarter call, and I think you expected 85% declines, yesterday's release to get maybe down only 65%, 70%. Can you talk about what you've seen in the quarter that kind of led you to update those comments and whether that generally gives you confidence in the second half of the calendar year being better than what you might have thought a couple of months ago?

Yes. I think this one, we've been really seeing the rate of recovery, even though that's 65% to 70%, it's still a scary number. I'll go a little deeper than I typically would in these kind of scenarios, share something I shared with our Board in early May, which I -- first, I mentioned earlier, our Surgical business is down by 90% for several weeks. In April, when the hospitals dried out, that business really took it on the chin. Then we doubled the -- after a couple of weeks down there, there was a week where it doubled. And so great, it doubled but still down 80% at that point in time. And obviously, it's tough. Since that time, we are seeing it come back at a very different pace than a quarterly rate. So when we exit this quarter, we're going to be nowhere near 65% to 70% down. We're clearly seeing it coming back into a much better trend. We have a month, it's a down 85%. Even May -- the first half of May, we're still struggling. But the last few weeks, it's coming back much stronger. So I think as we go into our fiscal fourth -- the calendar third quarter, it's still going to be down, but it will be significantly less. It's really coming back by the day.

And so this is I know going to be a pretty tough question to answer just because it's all too raw right now. But do you have a sense just anecdotally in talking to your customers, whether this is deferred patients or new patients?

It's more deferred at this point in time. It's people who are either scheduled or coming up. But there are a number of new patients. I think at the end of the day, what we're getting more encouraged with and the big piece that we've been talking about a lot, I'm sure every medtech company was, the doctors were dying to get back to work because they've never been sidelined so much. You know the hospitals need them to get back to work because of the financials where we've shut down all the hospitals in this country and waiting for COVID -- New York City and isolated areas were jammed, the rest of the country ready to go and saw all that. So the question was would patients come back? And the encouraging part is we've seen a lot of patients coming back, which does include new patients as well, particularly probably even more so on, let's say, the fibroid side than necessarily endometrial ablation. So our MyoSure business is clearly more critical. And I think we're seeing that come back even faster.

Right. And on the new patient side, it's a -- are you confident that, that's also coming back at a similar...

Yes, I think that's lagging a little bit. I think first, you're making up the bolus deferred. But there are -- people have been experiencing symptoms all through the last few months and they're dying to get them checked out and get back into to see doctors as well. So we're definitely seeing new patients also.

Okay. Obviously, I wanted to just ask one quick one on just the U.S. uninsured, and it speaks for itself. We all know the numbers, but maybe this is just a good refresher on -- since some of these categories are more exposed to non-Medicare patients in Diagnostic and in Surgical. Are you -- as you think about that, what do we take away from the last recession? And when unemployment went up again in terms of just some of the pressures we might expect? Did you see those come to fruition back then? Is there a framework to think about it this time?

Yes. I think having navigated through the '08, '09 downturn, probably one of the longer-term people now in these jobs had actually suffered through that and led through that. I think clearly, it was as close to some demand smoothing and declines we saw in some categories through that time as people lost their jobs and all of that. So we, again, back to planning for the worse, we're making that assumption, given where unemployment rates are and could well be persistently here into the balance of this year and probably not -- we wouldn't expect or -- being back at the employment levels we were at until way into next year. And I think it's still the true realities of restaurants going to operate less than full capacity and all kinds of things being shifted. We are a little concerned about what would be happening to people's health care benefits and planning a little more cautiously for that. I think for us, it would be still a little bit more manageable. I don't want to say on the margin, but probably a little more on the margin because fundamental demand will still be there for a lot of -- or most of our products.

So in the similar light, we talked about hospital CapEx, which was also an issue back in '09 and a few years after and mammography, and you guys, I think, have done a pretty good job of just explaining that capital is no longer as big of a piece as people might think of that business and certainly not as big as it was when I was covering the company years ago, but how are you thinking about the severity of impact in these next few quarters and kind of this more acute phase, if you will. And then just the duration of hospital CapEx pressure, just given what we've learned in the last decade?

Yes. I think, obviously, it's a different source of pressure this time. So last time when the credit markets froze up and everything else. Now it's really the individual hospital budgets under more pressure from having lost a lot of revenue for a few months. But as those -- as the procedures come back and the hospitals get back on track, we're hearing some discussions or maybe trying to push some orders out again, plan for the worst and hope for the best, we're still winning new customers even through this time. Our sales reps have really doubled down to try to stay very close to the customers. And so I think we're definitely going to see slowdown this quarter in terms of active capital orders will be down, and it will come back over time. But I think there's definitely going to be some pressures that we will see in the [ overall ] growth. It is a huge validation of the strategy we have taken since you did cover us many years ago where the diversified revenue stream, both in the Breast Health business, but also geographically because I think we're also seeing -- we've been really making nice progress with our Breast Health business internationally. A lot of those businesses didn't take as big of a dip. So that's also becoming a better off, so it will help us power through this. At the end of the day, too, we're actually having the flip side, and I wouldn't start to bake this into our plans. But with all the question of social distancing and scheduling patients, there are some hospitals talking to us about whether they think they may need more mammography machines because they want to have some time in between. They may not schedule the patients quite as tightly as they have historically. So do they actually need more? Again, we're not getting orders for that or anything. So let's not take that anywhere, but it's...

I don't have a model anymore. It's all right.

All right. Yes, but it's an interesting part of the equation. So again, I think that's probably more anecdotal, but as people rethink everything, there probably will be some opportunities for us there with the offsets to some folks that may defer. But I also think our capital is not for any given hospital system. If you're buying a few mammography machines, [ it's all set]. These are not multimillion-dollar major CapEx purchases, and they are very patient critical, and like most hospitals, they want a strong mammography program. So I think we'll still be able to fight through that.

Okay. So let's kind of -- you've talked about this in the beginning and during times of this discussion. But as you think about your medium-range plan, so next 2 or 3 years, you obviously are looking like you're in a much better position now than you were just a few months ago, what's changing in your strategy as a result of COVID as you think about the next 2 or 3 years?

Yes. To a large degree, it's really a validation of the strategy you can take, which is -- so it's a doubling down in a lot of cases of the strategy we already have, which is Panther, a machine that can be used in a lot of different locations and adding menu to that. I think it is a complete validation of that. Our Breast Health business going more global as well as -- and Diagnostic going more global as well. So there's those pieces that are really saying, "Hey, wait a minute, it's a good time to pressure check are we on the right path?" And I think those answers are, absolutely. The additional shift, we're looking more at our footprint. In the case of our Diagnostic division, we're actually probably one of the few companies that's going to increase our CapEx spending for the year instead of cutting it. We're clearly going to spend more as we're ramping production. I think it's going to set us up for the future. I do think it will probably position us better to do the true tuck-in acquisition. I think our leadership teams are more mature in their roles, know the markets better. And financially, I'd like to think just as Stryker came out with the -- the '08, '09 with a strong balance sheet, we're going to be coming out of this with a strong balance sheet, and our teams are actually accelerating some of their discussions on potential tuck-in deals that I think we'll be able to be in a position to move on and further build really the 3 core businesses that we have.

Yes. So on that point, in terms of capital allocation, just given the environment today, obviously, you're coming off of a good press release, 8-K last night, are you comfortable if the right deal came along? Are you comfortable even in this environment, making that happen?

Yes, yes. And I would say 60 days ago, we kind of shut down any actual -- we continue to keep the relationship let's say, we're not going to go just as we're worried about cash and everything else. I think the position we're in right now seeing that cash flow for us is not going to be a concern, I set the goal if you do not want to go cash flow positive -- or cash flow negative in this quarter when we were looking at the start of the quarter given that -- and that now is no longer a concern. We're clearly in much better shape. We've not had to tap into the equity markets to raise more capital and I think all of our discipline that's gotten us to this point, served us well and then the business health that we have, we think it will allow us to be nice acquirers of tuck-in assets as we go forward.

That's great, Steve. That's a great place to end it. I want to thank you again. Very grateful for your time and these are busy times for you. So thanks for joining us. And we're going to have you on a little bit later on our COVID panel as well. So I'll see you again, but everybody else, take care. We'll be on with our next panel in about 10 minutes.

Great. Thank you, Amit.

Thanks, Steve.