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

No. And they're really -- at this stage, they're apples and oranges. So there are different settings, different ways, and frankly, that will help you. To some degree, we also see that expanding the testing market, that will probably feed back in. There's so many of the positives that they get out of antigen. They're going to want to reflex and oftentimes test -- run a molecular test on that as well. So we are not seeing or feeling any pressure right now. We've actually had customers come to us offering to pay a higher price if they could move up the food chain for basically the supply-demand game. If we offer you more money, will you give us more of your volume? We've actually had more discussions like that than asking for pricing cuts at this stage and time.

Okay. It makes perfect sense.

Again, over time, like everything, we, of course, will assume there'll be some degradation but right now continuing to feel very good.

Okay. And you referenced stock price movements in these various diagnostic testing names in your preamble a little bit. It is funny when low-cost testing came out, people thought Hologic and other stocks went down because of direct competitor. That was probably part of it, but there was this whole full recovery trade. Even traditional medical device companies we used to hang out, those companies went up as well. So here we're coming into vaccine data that's going to be coming in several weeks. In probably next 4 to 6 weeks, we're going to have a lot of vaccine data. If we get positive vaccine data and the diagnostic testing names sort of trade off, the sense is once again, a full recovery trade. We don't need testing anymore. What would you say to investors? If this stock is down the day of positive vaccine data, what would your message be to investors that day?

That they'd be making a mistake. Here's something -- by the way, we all want a vaccine because I happen to have a daughter who just started at Cal Berkeley, her freshman year and...

So where is she?

She's at home in her bedroom, here on Zoom. And this is no way to live life. We have to get back and get our societies back, frankly, get our economies back. And please bring on the vaccines for all of us. Having said all of that -- and we've said it from the outset, there is good -- the day a vaccine gets approved, I think the big problem in the media in the U.S. is they've led people to believe a vaccine gets approved and this thing goes away. And as you know, there's a couple of problems with that. First and foremost, many of the vaccines are going to be double -- are going to be 2 doses a month apart. Also, the true rollout of this -- if the vaccine is approved even November 1, the rollout, you're going to be going all through this flu season without a bunch. Then there's all these other factors. Keep in mind, we have a flu vaccine every year. There's this thing called an HPV vaccine. We happen to have a huge HPV testing business, right? There's hepatitis B. There are vaccines in a lot of cases, but there will be a lot of people that do not get them. And on a global basis, you are going to have a bunch of people that will not be vaccinated. So fundamentally, our viewpoint is, we need to help the world actually get used to realizing this is going to be here for a while. We have to learn how to function with COVID. It's not getting this number to 0, this mythical goal that, by the way, nobody had ever really -- even Fauci. Nobody set the goal to be 0. It's all about flattening the curve. So we believe there's going to be so much more persistence as well. Now ultimately, is it going to be as big as it might be in the coming quarters? Probably not. But I think we see a much longer tail because of all the fear, anxiety, awareness that's been created not just in the U.S., but on a global basis. And so I think the way we view it, really how this is going to play out for us is we're placing Panthers at a 2x rate. If you could have designed into our strategic plan, hey, create an event that's going to do the following 2 things: one, it's going to allow you to place twice as many Panthers as you ever do. By the way, you're also going to place those in customers that are going to provide enormous trailing revenue for other stuff and all of that. And then you're also probably creating an ongoing test that even a couple of years from now will probably be bigger than any test we have today. That's -- so the way we think about it is there's a lot more here that, because of our unique position, will accrue to our business over time. I don't want to sound -- you've known me a long damn time that -- I'm not ever going to be accused to having my head in the sand or being too Pollyannaish. If anything, I'm usually the other way. I think we see some real opportunities here for much more business than what these headlines and the daily trades of the latest vaccine news, whatever. We want the vaccine. We want to help people get back to work.

Okay. So that's a fantastic color, Steve. Let's focus on 2 critical issues for the stock. One is this perpetuity dynamic, and the second is this long-term tailing you just referred to. So perpetuity, I know it's challenging. You must talk internally about some perpetuity model that your team is working on. Ours is a very crude one, where we simply say, look, the percent of peak capacity, what percent of that can happen in perpetuity? We have a range of 10% on the low end to 50% on the high end. 50% seems a little hot to me. 10% feels a low. We kind of run in between. Can you just help us understand, with investors, what is your perpetuity model? And how do you think about the perpetuity of testing? If Hologic capacity is at the peak, what percent of that do you think exists in perpetuity? Is it 10% or...

We probably don't think about it as much as percent of capacity as much as we're just trying to project out what we think the demand, the volume demand could be. And the reality, David, is we've got pretty broad ranges. But even at the lowest end, again, it probably goes down to -- this will be very meaningful addition to our product line. Even at the lower end, this was $100 million or $200 million a year much further out. That's still a nice little piece. Now again, I'm not giving a -- I'm not giving that as a range or a guidance. We'd be saying that alone is bigger than our -- basically all of our assays today were in that range. So -- and we just think there's going to be a lot -- what's going to happen around the world, right? This is going to be popping up and bouncing from one hemisphere to the other. You're going to have various movements where we really do believe there's going to be ongoing testing. And a lot of that's from a lot of the discussions we're having with health ministers around the world, not just the U.S. I also think the investor community has really been incredibly focused on the U.S. and I think missing what for us will be -- and as we said on our last earnings call, we booked a lot of business over the next 12 months from foreign governments that have already committed to purchasing our assets.

Okay. How do you think that the $400 million to $500 million of ex U.S. contract revenue, do you think that rolls out faster than you suggested on last quarter's call?

No. And by the way, we don't want it to be -- it's -- we like the persistence. And to a large degree -- and this is something I'm also very proud of our team. When governments came calling, there were a lot of people that just jumped in and said, "Yes, we'll give you whatever you need." And they couldn't deliver. We purposely said -- we knew what we were doing scaling-wise. We booked long-term contracts that were only up to the amount that we could deliver. And we've had frankly, virtually every country that we've booked revenue with for the next 12 months or what is now 9 -- or at least 9 or 10 months from now, we booked it by month through the time period. Virtually, all of them have come back, and we'd take more if we can provide it. And they appreciate the fact that even though they didn't like it at the time, we said, "Hey, maybe we can only give you 1 million doses, 1 million a month." They wanted maybe 2 million so that -- somebody else might have promised them, then they realized they couldn't get it from them, and they've all stuck with us and really see us as a company of our word. And I think that accrues very importantly to us, particularly on a global scale, in ways that we never could have achieved or would have achieved without, frankly, this current situation, which is not great but we're using it to elevate our own reputation in it.

Okay. Totally understand. And one other factor that will help perpetuity is going to be a combo flu A/B, COVID-19 test, which we know you're working on. What is the right time frame to think about that test? Is October or getting something before a flu season? I'm sure it's a critical priority of the business. So should we be thinking September or October for that test launch?

Yes. We'll give more of -- we'll be in a position to give more of an update certainly when we do our next earnings call. But clearly, based on the seasonality and the expectation, you can expect there's a lot of work going on right now so that we're there for that.

Okay. And then the other thesis is you have a durable test even at a low level of perpetuity and durable level of COVID testing, and that's important for Hologic's perpetuity evaluation. The second thing you talked about multiple times, which is, we're just going to take share, right? Replacing a dramatic number of systems out there. So on one hand I say replacement of their systems. They have x utilization. I can come up with some revenue figure. Now due to a dynamic that was your systems running -- at least running at 100% capacity. They're probably running at closer to 35% capacity. And then you also -- you can't invent viruses and bacteria. So there's some upper limit of how much business can be run through these systems. So help us understand the right way to think about it. We just sort of foolishly said, "Look, it was a $6 billion MDx market. That's obviously going to grow because you've got base-level COVID in there and then some level of perpetuity. And Hologic is going to take some percentage of share." We said you take 10% additional share of the MDx market. How does that number grab you? And how are you thinking about this opportunity of placing these systems and share capture over time?

Without commenting on the specific share number because the shares, especially when you go on a global basis, it's pretty hard to parse out. But I think in real simple terms -- once again, your basic logic and math, I think, are very solid. Think about it this way, right? So first off, one thing we're doing is we're putting Panthers into accounts that had -- that currently have TIGRIS. TIGRIS has 4 assays. Panther has 14. So at a bare minimum as well, where we're putting Panthers in now, there's far more menu. And as you've also known, our average sales per Panther -- and they haven't been fully utilized, we have so many customers that have really been in, call it, the 3 assays per Panther. Now and watching particularly how the Panthers are holding up under these extreme conditions of being run, run, run, there is so much more interest that, a, on the other side of this, we want to add more of the menu that we've been cranking out menu for the last couple of years. So as we think about it, it's that wonderful combination in this diagnostic business. Every year as we expand menu, we're going to get more revenue for Panther. And you've seen that generally growing at close to a double-digit annual growth rate. And as we place more Panthers, that just becomes the wonderful trajectory up. And in this case, we've placed -- literally, we'll do 2x plus the number of Panthers that, that just bodes really, really well for us. And there's also the reputational piece that so many government leaders around the world that never really knew Hologic, they now know us. And there -- we're already in so many more dialogues about what else can you bring to the business. So that's where I think we see a true -- outside the U.S., we were pretty small player, diagnostics-wise. We're now going to be on a very different, very different playing field. And even in the U.S., hospital leaders that never really thought much about this, they all see us in a very different light. And I think that's it.

And we're -- we have a little time, Steve. I do want to close before asking you this. Regardless of what happens here with COVID testing, this company is going to be -- have a lot of cash flow coming in the door. This is a very unique opportunity to reposition the company both molecularly but just through strategically. How quickly can you reinvest that money? What do you do with this cash and cash flow to position this company for success in the next 3 to 5 years versus the next 3 months?

Sure. It's a great question, David. I would also tell you our Board met in person last week for 2 days in Marlborough. Our entire Board was there in person, which I'm very proud of, and this is obviously a key part of the discussion. Think about it in these buckets. First off, we're looking to be able to make more investments in our R&D in some of our international sales expansions. Karleen has been challenging really the business leaders over the last few months. What else can we be investing in now? Are there product launches that are scheduled for 2024 that we can pull forward to 2023, right? So we are using it to make additional investments in R&D, in projects, and to some degree in some limited sales force expansions, internationally. The other piece is, what other external capabilities? Building on our tuck-in strategy, still, are there other things we can be doing? So we did Acessa Health just last month. That was a deal we were very close on in March, had put it on hold when we weren't sure where the world was going. And then as we're coming out, we're obviously in a great financial position to do those deals. But make no mistake about it, just because we're getting a lot more money doesn't mean we're going to feel an urgency to just go blow it and spend. We're very disciplined as we go forth but really probably looking certainly to supplement the existing 3 businesses that we have, probably more likely to shop and broaden out our diagnostics capabilities but all still being very smart. And share repurchases will still factor in to our ongoing capital allocation.

Okay. That's a couple of minutes over. Thank you so much for being here this week. Thank you all for listening, and we'll talk to you soon. Thank you, Steve.

Great. Thanks, David. Take care.