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

We're live. Good afternoon. Welcome to the virtual fireside chat with Hologic's Chairman, President and CEO, Steve MacMillan. And I believe the man who has defended his title of having the best hair in IR for 15 years straight, Mike Watts, is in the room as well. I believe Mike is celebrating a birthday this weekend on top of it. My name is Brian Weinstein and I am the analyst here --

A key birthday, by the way.

Yes, a key birthday to a [ great ] employee. My name is Brian Weinstein, I am the analyst here at William Blair covering Hologic and certain areas of diagnostics, life science tools and medical technology for our firm. Joining me is my associate, the team's COO, Andrew Brackmann. A reminder that Team Weinstein is hosting some events with the conference here. We do the [ Teleton ] right each of the last two mornings and we'll host a final one tomorrow at 4:00 p.m. Central. In addition, we're hosting a nightly recap [ dial-in ] that we are calling the Lido Lounge, named after the Lido Shuffle, which is the official song of Team Weinstein. That takes place tonight at 5:45 p.m. Central Time, so not long after this call wraps up. Finally before jumping on to the call, the best compliance officer in the business and the man who brings a smile to everybody he meets, Mr. Michael [ Bezenchek ], has told me, I am required to inform you for a complete list of research disclosures or potential conflicts of interests, to go to our website at williamblair.com. Okay, all that out of the way. I know you want me to ask you about the Eagles and the Bears and who's going to have a better record this year, we'll leave that to some other time.

Lots of important stuff to really get to though. You guys put out a kind of soft pre-release, soft in the sense it wasn't -- not in results, but kind of just generic in terms of some of the commentary that was in there. Well, I think the breast business was kind of in line; surgical, maybe a touch better than what you thought, and maybe we'll get around to that here in a bit. But obviously, the focus is on diagnostics right now. The 20% to 25% seem to be a little bit better than you guys thought and that we had thought. And maybe you can talk about kind of the drivers there? It seems like it's mostly COVID, but would love to kind of hear about the drivers that were driving all of that. And then we'll talk in a lot of detail about COVID here in a second.

Sure, Brian. Yes, I think our Diagnostics business is probably a little bit better than just a little bit better than what we expected. So -- and I think at the end of the day, I'm not sure it's fully appreciated yet, the magnitude of the impact that we as a company are having on COVID testing in U.S. And when you think about, we got our TMA assay approved really in May, and we watch the daily uptick in testing volumes. A big chunk of that has been Hologic coming to the market. And as a reminder, while there's been a whole bunch of -- I know it's hard to keep track of all the different approvals, this and that coming and people adapting technologies or products, I think -- and you understand it, but I'd reiterate the point, making high-volume assays that run on the world's largest installed base of high throughput instruments is our core competence. This is what we do. So we're not having to adapt supply chains, everything else. We have now pivoted so much of our work that we do every day on HPV testing, sexually transmitted infections, using our TMA assays and pivoted it to being the COVID response. And clearly, from -- we had committed to 1 million tests a week when we came to market. Obviously, from the filing of the 8-K, you can see we're doing a little bit better than that. And the demand has been amazing. We feel very proud of the role we're playing. And obviously, it's going to be very strong financially for our company as well in a nearer term, but also strategically, it's putting us in a great position for the future. Because at the end of the day, why are we bringing something great to the market? As you know, it's the workflow that comes with Panther, it's the proximity of having 1,000 machines already installed in United States, when having brought and installed these things. They're there. The lab techs know how to do it, and they're simple to run. And the sheer scale that we bring coming into this market is just really unprecedented and putting us in a great position. So we're proud to make a difference in the world today and where it's going to go for the future. So I'll shut up on that, because I'm obviously excited with all the impact we're having.

Yes. And you should be because it is a big deal. I mean it's no coincidence to your point that where we saw the spike in test volumes in the U.S., that was not long after you guys came on to the market. So you guys are making a very big difference there. You mentioned that your manufacturing capacity was maybe a little bit ahead of schedule. Can you give us some idea about where you guys are right now in terms of that capacity? How you're driving it to be maybe a little bit better than that 1 million a week and where you think it can ultimately go?

Sure. I think clearly, we're running -- I think what's just been so amazing about our team. Obviously, when we first announced 1 million a week, there were still a lot of bottlenecks in our supply chain, whether it's the tubes, whether it's caps, whether it's swabs. And there's not a today or every other day that doesn't go by where Pat Brady, our Head of Operations, or Kevin Thornal, who's running the business, don't come to me saying, hey, there was another bottleneck that we've kind of knocked off to the tune of allowing us to get some more batches, more throughput. And I just continue to be amazed. Our teams are working 24 -- 24/7 is one of those overused words. It is happening. We ramped up production. We ramped up hiring in our San Diego facility. This place is running flat out. A lot of people [ full of pride ], our procurement people, everybody working to keep that capacity. The other piece is we have then also dramatically boosted our CapEx. So in a year when many companies are cutting back on CapEx, we've actually also boosted our CapEx to provide for more [ CAT ] machines, more filling capacity. That will come online as soon as really the fall, the September time frame. And I know there's a lot of questions right now as to durability. Make no mistake about it from all of the discussions that we are in constantly around the world, [ by the way ] but just plain U.S., there is not a university president in the United States, there is not an employer in the United States, there is not a governor in the United States who does not expect and need more testing capacity come the fall. We believe this will absolutely be there throughout the next cold flu season. And if anybody [ want to ] bet on something, anybody gets a sneeze or cough in September or October, November, December, are they going to want to be tested for COVID? That answer is absolute. And for all the talk of vaccines, at best, at best, even if something came by year-end, this calendar year, let's remember that vaccine efficacy, people seem to think vaccines are 100% effective. Let's go back to the flu vaccine is like 50%, 60%. Let's say a vaccine gets approved, it's 70% or 80% of that. You're still, a, there's the sheer reality of getting those out to everybody, and they're not going to be 100% effective. Now they will help reduce [ for the immunity ], but the way we're thinking about, this thing is going to have a lot of legs for at least a number of quarters. The other piece that it's doing for us is it's also dramatically created huge additional demand for Panthers. So despite the fact we've already got 1,000 in the United States, we have about 1,900 Panthers globally. And as you know, we've generally placed about 20 a month, call it 250-ish a year for the last 5, 6 years, it's like clockwork. Trust me, the demand has completely spiked on those. And part of our long-term strategy has been real simple in diagnostics, place more Panthers, develop more menu. What we were suddenly seeing is a dramatic increase in desiring Panthers. And frankly, a lot of the customers, they didn't always want one, and now they suddenly are coming to us in unprecedented ways. They want the Panther, and we're not going to put Panther in just per quote. Now, that Panther, once it's in, it's going to have legs. And those are all the discussions, by the way, that we have with customers right now because we're in a very unique situation, and our salespeople reacting in a very different way. It's the first time everybody is coming to us. And we can choose which customers candidly, we're going to put them in. So in all of those discussions, it's giving us the chance to talk about our full menu and how much our menu has expanded just over the last few years. So that when the COVID testing opportunity, which will eventually come down, but I think it's going to have far more persistence than many people expect, and we are ramping our capacity for fall to be in even a stronger position come that time.

There's a lot to go into on that. And you seem as it's fired up as I recall seeing you in the many years that I've known you from both Hologic and at Stryker. So it's clear you guys are -- you're very passionate about this as you should be, given this opportunity. Just to go back on the capacity side, though. One of the things that I'm trying to understand better is as the country does open up a bit, and it clearly is doing so for how long and if there'll be a second wave, I don't know. But clearly, there's going to be an increase back in some of your core diagnostic testing. And how does that compete for capacity in your manufacturing with COVID testing? How do you balance that? And I know you have some pretty big contracts in place with some large reference labs for some of that core stuff that you're going to have to serve. So is there a risk that you just have too much demand? I mean, it's a great thing, but how does that interplay go back and forth?

Sure. In real simple terms, we've built our business certainly on our women's health assays. We would never sacrifice the ability to continue to offer that. So the reasons we've been making the investments is exactly that. As our core business come back, we need more capacity to be able to really offer the [ product ]. In very short term, call it, May, as we were launching the TMA assay, our core business was much softer. So it gave us the capacity. We want to be in a position come the fall that we can obviously be able to do both. And that is why, as I mentioned upfront, we literally -- we've exceeded our CapEx budget for the year because we moved very quickly. I'll tell you one great story, we had a packaging engineer, who was ordering a couple of extra cappers, called Karleen on a Friday night, she was home. And he called her and said, hey, we've got -- we need your approval to order this capper, damn it. Would you get in and approve it? That's the kind of pace at which the team has been operating.

So on the capacity side then, are you talking about a 50% addition in the fall to where you're at? A 20% addition to where you're at? Are you comfortable given any goalposts around that?

We don't want to fully -- actually, fun, you mentioned goalposts.

Yes, I know.

I can't help but think about a Chicago Kicker going [ blank, blank ] a couple years ago. I'm sorry.

I gave you that one.

So now that was a layout there, [ right ]? We obviously will provide more on our upcoming call. But I think as you talk in that, it's clearly not a 20% number that we would consider it significantly [ important than that ]. So as you go into that 50-ish percent number, we're clearly thinking not just incremental, which I would consider as a 10 to 20-ish, but they will win that. So you're into, I believe, a good part of the goalpost there.

Got it. The one part and then the other part on the bottom, the double [ zoning ]. So how is pricing holding up? I mean given the demand that you're seeing, have you been able to work price higher? Or is pricing sell sticking in that kind of mid-$20 range?

Yes, we feel really good about -- and it's back to hate to say it's a supply/demand thing. But I think given the reimbursement levels for the total testing, we've certainly been able to maintain that level of pricing and expects to.

Okay. So we've talked about kind of durability as you see it for your business. But one of the questions that I get is durability of testing in general. And you've talked about vaccines a little bit, but I'm curious as you think about Hologic's place in a broader COVID-19 testing market. You have over 100 molecular products that are approved. You've got new technologies coming on like sequencing. So do you worry about oversaturation? It sounds like there's as much as people can put in the market, people want to consume. But is -- do we run the risk of some oversaturation at some point with everything coming into the marketplace?

I think what you have in any market like this is the mad rush of approvals, the mad rush of getting everything out there. And then what you're going to have, what we have in most markets is, as we talk with our teams, the [ queen ] rises to the top. There is a reason why Hologic has become a world leader in virtually every category we have gone into in molecular diagnostics. And it is built around the Panther system, that the workflow advantages are there, the proximity to help get turnaround of results in real-time. We believe our advantages are very durable because they've been very proven over time in very competitive markets. And as we also say within our team, we're not one of these that shows up for the pictures, we just deliver the results. And it's not loss from us that even as major customers have been down to the White House and talking about their ability to ramp up their testing, that there's a quick phone call to Hologic to help them out.

Absolutely.

So we're the ones behind the scenes. You talk to the lab directors. And I'll tell you one really cool anecdote that Kevin Thornal popped by to tell me this morning. And we've had virtually every governor in the U.S. just talk to us directly over the last few weeks, month, pleading their case for why they need more. Kevin had another one of these calls scheduled this morning, all geared up for the usual request, but yes, my state's more important than the other. And this particular governor, who [ chubby name ] -- that is a fairly big state. He just said, I just want to call and say thank you. I have been touring labs in our state over the last few weeks. And there has been a common theme that the lab directors just keep telling me, that the Panther system has really made a huge difference. And so that is, we believe, that the people running the tests, they know what is best. And I just thought that was a really cool story to -- just literally Kevin told me a few hours ago.

That's great. And that is a great story. I'm curious to hear about your thoughts about as we start shifting from symptomatic testing, which is primarily what we've been doing right now, right? Patient is not feeling well. They're showing up at a hospital, a testing clinic or a drive-through clinic or whatnot to be tested for this. And we've seen the positivity rates start to come down a little bit. But the idea here going forward is testing more asymptomatic folks. How do you see the role of molecular in an asymptomatic type testing environment as opposed to patients showing up, maybe where there is a Panther already in place or a relationship with a hospital or somebody that can send it to a reference lab, right? As you start talking more decentralized, how does molecular play into that?

We think it plays perfectly into our wheelhouse, again, because if you think about it, what are most of the tests that we do in sexually transmitted infections or HPV testing, so many of those are asymptomatic. It's actually, in those cases, you want the most accurate test because it's going to be too easy for some of those tests to miss those people. And so again, I think as we think about where things going to fall, couple of other ways to think about this as you think about the fall. One can argue the extreme shutdown that did in the U.S. early this year have only kicked the can down the road. More people should have been exposed or would have been exposed had we kept people out. And so now people that would have developed sort of immunity normally -- and by the way, that April, May time frame, they haven't built the immunity. So even things like serology testing, we're far lower in terms of having an immunity that should have been -- in any other year would have built up during that time frame. We've kept people away from it. And it's arbitrarily created, I think, what is going to create that demand in the fall. And it really is going to come down to symptomatic, asymptomatic. You've got to still test people in real-time to ultimately have people comfortable. Now the other part I would say that we've never seen before, and it's why I think the persistence will be there on testing, this is not just an epidemiological issue. We've created an emotional issue. I would almost call it media-induced fear that even if clinically -- and certainly, in the investment community, we have a lot of very deep analytical right-brained people. While what we've got to remember, too, is the American public has more anxiety. And they don't understand, by the way, a 3% test rate is actually remarkably low. It means generally, we're probably testing enough. We're looking at data -- instead of thinking it's [ sometimes ] 90% -- 97% negative, they're seeing the absolutes, and the media keeps reporting numbers going up, because they keep showing cumulatives instead of dailies. And it's creating an anxiety that, I think, frankly, plays into probably more needs for testing because of that other emotional component that's really never existed before.

That's a great point. And that's why we believe there's going to be a lot more people that will be tested who are symptomatic in the fall because everybody is going to be, "You know what? I don't feel great. I probably wouldn't have gone in to get tested for flu before, but now with this, as you call it, media-induced fear, I had to want to go get tested for COVID." So along that -- those lines, are you guys considering any kind of a combo assay, a flu, a, b, COVID, because that would seem to make sense as we get into the flu season.

Yes, we certainly [Technical Difficulty] which way is to best go and I think the way we've been able to respond very quickly. Obviously, that's easy one to be on our Panther Fusion with PCR technology. But we're certainly looking at the right ways to best test it. We do think the most important test come the fall will be COVID. The regular flu is probably not going to be nearly as big of a deal. As normally, the flu has been kind of a big deal. In our case, we know the COVID test is going to be driving everything.

We spent the majority of these kind of 20-plus minutes or so talking about the U.S. opportunity, because it's what we see in the stats everyday. But as you mentioned, you have, what, roughly 900 or so units outside the U.S. that's probably aren't getting serviced anywhere near to what you're servicing in the U.S. You just got that CE mark recently. So can you talk about your ability to service markets outside the U.S.? And frankly, what -- is the demand similar for this type of a solution, OUS, as it is here domestically?

There is also enormous demand from around the world and particularly Northern Hemisphere countries being very worried about all of next year and the ability for us to work with governments. And I'd say it's going to play in the [indiscernible]. To your point, we just got the CE mark in the last few weeks. So we'll have much more of an update when we report our earnings for this quarter. You can imagine, witnessing really [ stated ] a major opportunity. And I'd say, the interesting part internationally is there are a number of countries that want to sign fairly longer-term deals to guarantee the supply. And I would probably add, with the strength, particularly our European team, particularly even our Asia-Pac team, relative to 3 or 4 years ago when we didn't have a team nearly as strong, we wouldn't have been able to capitalize on it. We're now in a great position, particularly with the strength of our international teams [indiscernible] to really be able to make a difference not just for the U.S. We are a global company and we will make a meaningful impact which is also part of the capacity expansions.

Yes. Is there any restriction that you have on being able to sell OUS? Obviously, the Federal government has made some comments about trying to keep as much here domestically. Do you have the flexibility and freedom to kind of ship product to -- as you see fit?

We feel very good about that in terms of -- we've obviously been working incredibly closely with Dr. Birx and the Task Force and Admiral Giroir. And we've got daily discussions with all of them over the last 2 months. There were days, I would say, in the very early days that we were more nervous about will the U.S. want 100%. But as they all understand the supply chain, a very simple example for us is our Panthers are actually manufactured [ here ]. So -- and I do think the administration clearly understands the global supply chain. So we feel very good. We have a plant in Manchester, England, that's a diagnostics facility. So I know you're updating with football as well. [ So we're right under there ]. And clearly, the U.K. as an example also looks at us and says, "Hey, we [ want you in here ]." I personally -- Boris Johnson, we'd share our personal feelings on this right before he had gone into the hospital actually. So we're going to be a major provider as well.

Okay. That's all fantastic. And we've spent a lot of time now talking about the Hologic side of things. But more broadly, because you've been in health care for a while...

[indiscernible], sorry.

More broadly, you've been in health care for a while, what are the changes that you think COVID-19 brings to health care in general? And what changes does it bring to diagnostics over the long term? How do these markets change because of what we're seeing right now?

Sure. I think I'll answer the second part first. I think the strategic importance of diagnostics is permanently elevated in a way that we never could have done to ourselves -- [ onto ] ourselves. If you think about diagnostics or one of those that with PAMA and all the cuts over time, right, you need a little more commodity. And even, I think, as we talk to the number of hospital CEOs, governments, everything else, the ability to think about it more strategically and having that access where you control it, right? You're running a hospital system right now. The next time a pandemic breaks out, you want to be able to test your employees and get the results back yourself, first and foremost, instead of having to ship things out and wait 4 or 5 days. So I think they've all dramatically -- as though rethinking their entire supply chain, right? They all know -- they cut -- why was PPE a problem? Because everybody -- and frankly, I think a lot of the procurement people in the hospitals were making a lot of the decisions. I think a lot of CEOs, they are re-questioning, hey, wait a minute, we've driven the supply chain down so hard that a number of hospital CEOs we've talked to, I think, really are saying, you know what, we're thinking about things a little differently as we come out of it. So I think that plays really well for us. As the total health care -- so things like telehealth will factor in bigger, I think everybody is ultimately trying to figure out how they deal with scheduling. In the shorter term, the whole social distancing, physical distancing stuff, that's going create a whole bunch of logistical challenges. I think over time, that will go back away. But clearly, we think diagnostics is more permanently jumped up on the radar screen [ that's even before us ].

We will be curious to see how industry bands together here, but whether it's infectious disease or oncology or genetic testing or whatnot to kind of bring diagnostics more to the forefront of discussions on reimbursement and whatnot. And I'm sure you guys will be in the middle of that when that happens. Last question for me, because I know we're running out of time here, is a lot of companies in the space have been raising capital because they think they need to boost their balance sheet in order to either compete for assets or because they're just taking advantage of the opportunity right now to load up on cash. You guys have not. What is your viewpoint on your balance sheet right now and the appetite that you have for doing deals? And do you have enough cash to do the kind of deals that you want?

Sure. No, I think we feel really good that we haven't had to tap in. We've got a strong balance sheet to begin with, obviously, we didn't 5 or 6 years ago, we've made enormous progress on that front. And as we see going forward, really wanting -- we think there's going to be more opportunities for us to really start to ramp up the true tuck-in acquisitions in the space. I think, a, we're generating frankly [ 75-day starts, we're worried ] that this 1 quarter could be a challenge for us given that from a cash flow standpoint. Karleen and her team have done an amazing job in, I think, just the general health of our business. We feel really good, and I think just candidly to throw analogy back at Stryker is, Stryker came out of the '08, '09 time period, I was really able to go on much more of a [ stair ] of the tuck-in acquisitions. We're poised, I think, to be able to do that exact, same situation. And we've got a leadership teams in one place now, that they know this stage. We're actively looking at properties right now and things that we'd be doing to further [ struck in the algorithm on for you ]. So to access the equity markets, to us, just made no sense from our position, [ certainly ] make sense for others.

Okay. That makes sense. And as I've been saying with everybody in all of these calls, 30 minutes flies by. I wish we had a lot more time to go into a lot of additional detail in the other business segments that we didn't get a chance to talk about today, but we'll certainly catch up with you on those on the earnings call. So thank you for doing this. And I know there's one thing that all of us agree on, and that's we may not be all Bears' fans or Eagles' fans, but we definitely are not Cowboys' fans. So you can point to Mike for that one and remind him of that, but that's [ no serious]. Thank you for your time. Congratulations on the success you're having on kind of across your business and specifically with all the success on the COVID-19 test. So we look forward to hearing an another update from you all on your earnings call.

Great. Thanks, Brian, and thank you, guys, for having us.

Thank you. See you, guys.