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

All right. I think we're good to go. Thank you, everybody, for joining us today. We've got the management team from Hologic. We've got Steve, Karleen and Mike with us. So welcome to you all. [Operator Instructions]

I thought, Steve, I'd start out with the guidance update you provided last week. And you're talking about better revenues, obviously. I'm wondering if you could just talk a little bit about what's embedded here by segment. I think, previously, you've been talking about COVID demand increasing sequentially. Diagnostics as a whole, potentially doubling. Can you just maybe give us a little bit more of the nuances behind the increased guidance?

Yes, sure, Tycho. I think, obviously, you picked it up, and it's a pretty good-sized beat that we feel like is probably being overlooked by a number of folks when you strip it out. But at the highest level, we updated our guidance for this quarter last week to what is going to be 55% to 60% growth for the total company over last year. So that $1.225 billion to $1.275 billion revenue number we put out last week, that -- it equates to some pretty healthy growth for the total company. Obviously, that means our diagnostics business is more than doubling. COVID is clearly a big chunk of that, both domestically and internationally. I continue to think the international piece has been completely overlooked and what that's really going to do for us, both short term, medium and long term in terms of strengthening our business. And what you really saw, we said breast health and surgical, a little bit better than expected. But clearly, it's a massive beat, driven -- and massive growth for the company, driven by incredible performance out of the diagnostics business. And the base diagnostics business is also doing very well in addition, and then COVID, clearly, on top of that, providing the exceptional growth.

And from a manufacturing standpoint, I know at one of the conferences this week, you talked about that you've got obviously some partners, Tecan supplying some of the pipette tips and the like. I mean, have there been any supply chain challenges that you've had to look for? Anything that still needs to be resolved in terms of scaling up on the manufacturing side?

There's been massive challenges every step of the way from cap. It started with swabs to caps, to pipette tips to all other ancillary things used in Panthers or used in the supply chain. But what I'm incredibly proud of is our team has been identifying them. We mapped out a plan. Think about it, right? We're making 20 million tests a quarter. And in the spring, we made a bet to be able to make 40 million by the fall. To do that and to scale every element of the supply chain, because it's one thing to get tubes, labels, it's another when you start getting into all the specific products and everything else. And our team went out, mapped out what it's going to take. And each time we get to a new level, you might end up with a new constraint. So okay, we can overcome the cap supply, now we have a tip problem. Okay, once we overcome the tip problem, now we have what's known as an MTU problem. But they've been proactively planning all along. And when we said we wanted to exit this quarter, really in the September time period, by being at a capacity of about 40 million, the guidance clearly suggests we are at that ahead of schedule. And it's both our team. It's also so many of our suppliers, vendors at STRATEC making Panthers in unprecedented levels. And all of these things that we see, incredible responsiveness, incredible agility and strengthening our business, not just for today but for the future.

Maybe we can just talk a little bit about where we are in the continuum of COVID testing. I mean, I was surprised to see the volumes yesterday went down to 348,000. They've been hovering around 700,000, 750,000. we were north of 1 million back in August, all while schools are getting back up and running. So a couple of questions there. Do you have a sense of what's going on in underlying volumes? Is this the CDC maybe not reporting the data accurately? And then do you have a sense of where we should be as we think about the next couple of months in terms of daily or weekly volumes?

Yes. I think some of the daily data -- if somebody's slow to report, whatever, I can't believe it was only 348,000 yesterday. Yes, I think we're in a pretty consistent range on the molecular side. I would say, at this point, every single customer that we provide -- that we deliver to wants more. We see no sign of it letting up. And if you think -- and it's where, frankly, all of the antigen stuff coming on, that's all going to be supplemental, that there is so much demand even if you're -- I saw the headline this morning, the Big Ten is going to start playing football again this fall. They want to test every player every day. Right? All of those, there is just -- it's hard to describe the insatiable demand out there. And I know everybody sees a new test gets approved, and I think it's going to be a share shift. We welcome it. Even the companies that have gotten antigen test approved are looking and saying, there's more molecular capability. So we see this being a far bigger and more enduring level of volume than what some of the dailies may be suggesting.

And we've had a lot of questions on antigen testing. I know you had some questions at the Morgan Stanley conference on it as well. I mean, one question we've gotten is just how close does antigen testing need to be? Is 97%, 98% sensitivity good enough to compete? Or is this really all market expansive? And how do you see this split playing out? Do you think antigen versus PCR ends up being 50-50, 60-40? How do you think about the relative split over time?

I think there's still so much market expansion that's going to occur, that the antigen is going to allow people to be closer. But by the way, there is so much -- the way a lot of these tests are approved and how they use the controls, right, there's a lot of data that's pretty squirrely as to their true sensitivity specificity. At the end of the day, this comes down to -- we believe nucleic acid testing is the gold standard. Anybody that gets a positive in an antigen is probably going to reflex to have that really tested to find out, do you really have it? So we think those are all just going to continue to feed the labs and feed our business. And then I think the other piece that's getting missed in all of this is, while there's been market expansion and approvals, eventually, what I always say is the cream rises to the top. And let's play this out and we're right. Nucleic acid testing is going to rise to the top. There's -- the antigen is going to be great feeders. At the end of the day, hospitals and decision makers, everything else you're going to want that. And within that, lab directors and lab techs are exhausted right now. So our entire strategy of developing the Panther, which is incredible workflow automation, what is -- what are our competitive advantages in the lab? It's workflow, automation, simplicity and incredible sensitivity and specificity. That is going to prevail. And ultimately, even if the market comes down, like every market we compete in, when we go in, we end up doing really, really well against very strong competitors. And I think, to me, that's part of -- I know there's questions about durability, everything else. All I can tell you is every customer we talk to they -- as they keep watching their labs run, they want more and more on their Panthers, and they want more Panthers. So we feel pretty good in even 3 months, 6 months from now, this thing is still going to be there as I keep -- I think the media in this country is doing a terrible service to the American public, particularly around the vaccine, right? It's like people think a vaccine's going to come, and, 2 weeks later, this thing is gone. Fundamentally, we need to learn to live with COVID for probably the next few years. Because if you really start to look at all the issues on vaccines and cold storage and distribution and everything else and double doses a month apart and then possibly boosters, right, this thing is going to be much more persistent. We need to learn how to live with it. That's where Diagnostics come in. And the best Diagnostics are going to be needed in that world.

The question we've gotten is, is flu a good proxy for the kind of the PCR antigen dynamic, right? There's a lot of lateral flow flu tests and then a certain percentage get kicked to the reference labs for follow-on PCR. Is that a good proxy of where this market could go?

I think it's a fair proxy. The bottom line on all of this is we don't know the answers to exactly -- but I think that is a very good proxy, that there's going to be a lot that's going to be done in quick point of care, and then it will reflex. And I think, particularly as you come to this season, by the way, right, everybody's going to be wanting to find out, flu is actually going to be, okay, no big deal. Do I have the flu or do I have COVID, right? Never before will people be, oh, great. It's only the flu, yay, right? So I think that the persistence of demand certainly through this coming season in a molecular panel -- in a molecular channel is going to be critical.

Tycho, just to maybe clarify on that. Were you asking about the potential split between antigen testing and flu testing or…

Correct. Yes. How much gets kind of referenced to PCR versus rapid lateral flow? And is that split going to be similar for COVID over time?

Yes. I mean, I think it's -- I mean, on that question, I think, as you know, the vast majority of flu testing is done via rapid antigen. There's a couple of reasons for that. One, it's a much less serious disease. Two, there is a treatment that you can give, Tamiflu, within a couple of days of symptom onset to get a better response. But I do think in terms of the split, the COVID opportunity is very different, right? I mean, what you're seeing now because it's a more serious disease, for example, everybody who goes into the hospital for a knee procedure or hip for something like else -- something like that is getting screened for COVID. I mean, clearly, that is not something that we believe is going to get done with rapid antigen overtime. And as Steve said, I think molecular for those kind of health care settings for confirmative diagnosis, even for confirming antigen negatives and positives, and that will continue to be the gold standard. I would expect a much higher portion of molecular testing for COVID.

Maybe we could touch on pooling. You were the first to introduce a pooling protocol. Labs can have -- run 5 samples at a time. Was this prompted by customers? And was this in anticipation of increased demand as the market shifts toward asymptomatic patients? And what does pooling uptake look like for you guys?

Sure. I think the way we think about it is ultimately pooling really works best when the prevalence is very low in the population. So it's really a bet for the future, probably more than current. But in the nearer term, when there was so much pressure on the labs to -- that were constrained by supply and everything else, that was a chance to help them out. I think the reality is the uptake in the current environment, the labs have gotten a lot more efficient, a lot of these long turnaround times that were happening, things have really settled in. And it's probably not as big of a deal in the short term. Long term, part of where we think this will go from a tail standpoint, we think there's going to be population screening, testing that will probably go on for years at a minimum once we get through this. And in those cases, pooling may -- like us, we always want to be a step ahead if we can and ready so that our customers will have that option. But we have not seen much uptake or use right now because it actually still requires a fair amount of work, right? It's -- particularly in higher prevalence, if you're pooling 1 out of 5, and then you've got to rerun the samples and everything else, it can actually slow things down in the short term because of that incidence, which is why when the prevalence gets really low, at some point it may make some sense.

Yes, I think LabCorp came out in mid-August and said they hadn't been doing any pooling. So is your view the reference labs in the back half of the year won't migrate to pooling?

I -- really a question for them. We don't see it on the immediate horizon, but we're prepared to be there to help them if they do. What we're trying to do in all cases, and I think even as a company, is position both ways. You know what? If COVID goes away tomorrow, our base businesses look really good, and we strengthen our Diagnostics business forever. And if this sticks with us for a little while, we're also stronger because of our position in COVID. So everything, for us, is really trying to be an "and", which is probably consistent with even antigen testing coming onto the market. It's an "and", not a share shift of an existing number of tests. It's a market expanding opportunity.

How about shifting over to the syndromic panel? And as we think about that coming on -- the combo assay coming online, a, from a manufacturing standpoint, is that fairly easy to transition over? And then how do you think about the pricing premium the combo test could receive? And any updated thoughts on time line?

Yes. We'll probably give more update when we report our earnings. But obviously, a lot going on, on that front will be there. And pricing will -- typically tends to be higher for multiple things, but we have not set those parameters yet.

And do you expect the majority of that market to shift over to syndromic? Or how do you think about that split, COVID stand-alone versus combo?

We're still hearing a big need for COVID stand-alone as well. So we think there's going to be -- back to a lot of the flu may be done just quickly in the physician's office, but they're going to want to send out again back to sensitivity specificity, wanting to be really certain. You don't want to get a diagnosed -- getting a diagnosis is wrong on flu, it's not great. But by the way, as Mike said earlier, give them Tamiflu anyway. Getting the diagnosis wrong on COVID is more critical. So what we keep hearing from a lot of our customers, and even, frankly, hospital customers that want to test patients coming in, right? We're getting into this mode where hospitals want to make sure before somebody has a knee procedure, a hip procedure or a cardiac procedure, they're going to be tested. They want to test them on the gold standard. They're not going to take their chance. And that's going to likely, in all cases, be a COVID stand-alone test run on our Panthers in their facilities.

And how do you feel about the reimbursement dynamic? Obviously, the $100 -- versus is great at some point in October. At the end of October, that ends. Do you think we automatically get a reset down to $51? Or where do you think it goes? And what does that do to the demand curve?

At some point, it probably comes down. But I think the way we think about it, does it come down between now and the election? No. And given the incredible focus on testing, testing, testing, to cut that reimbursement level is probably not going to be the wisest political move. Ultimately, we figure there will be some cuts down the road. But again -- and we always -- we're going to plan conservatively but operate aggressively. Even if it comes down, we're going to be in very good shape, but we don't see it happening probably anytime super soon.

And then on the instrument side, obviously, you've done a great job scaling up through STRATEC on the Panthers. Where are these incremental placements going, reference labs versus hospitals, larger hospitals versus smaller hospitals? Can you talk a little bit about who the incremental customers are on these placements?

Yes. It's -- first and foremost, go back to the real simple piece. If we could have created an event, right, that -- where we could place twice as many Panthers in a year to turbocharge our Diagnostics business further, that's the goal. Our whole strategy over the last 6, 7 years has been place more Panthers and add more menu. And what we're doing this year is more than doubling that Panther placements. We've obviously added some menu with COVID while we've continued to add our other menu, and a lot of products that we were just launching that, frankly, aren't getting much uptake yet but are primed as soon as we come off this -- come off of this volume. So in terms of where they're going, they are going to some of the large reference labs. And ergo, by the way, they are going to help replace Tigris over time. And I think what kind of gets missed is, if you recall, and you know it, right? Tigris, we have 4 assays approved. Panther, we have 14. So as the large labs now have Panthers installed in many of them, the ability to take on more of our menu coming out of this is also strengthened. And then we have put them in more into the regional labs, more into the hospitals and also far more, particularly into Europe. And again, across the board between the reference labs there, hospitals there and our ability -- and I think it continues to get lost. We declared on the last call, we booked $0.5 billion of COVID revenue outside the U.S. over the next 4 quarters. And the demand for that is there, if not well in excess of that if we can continue to scale. So we're also getting -- in all of those cases, every Panther we're placing, we're also linking to increases in menu usage coming out of it. So that's where, I think, again, we feel really good that there's going to be adoption of the rest of our menu on these Panthers. Plus, the reality is as the lab techs run Panthers, they just love them and want to add more to them. So they're being run at incredible volumes today. And then we'll also set ourselves up to transition to our base business for the future.

How -- is there anything different about the contracts today? I mean, one of the questions we've gotten is just the risk in 2 years of customers selling systems back to you, returning them. It reminds me of the Mythbusters you did at our conference one year. I mean, how do we debunk that myth, that in 2 years you're going to have a ton of instruments that are idled that get returned?

I think it's really simple. It comes down to how well the Panthers perform and the menu that we have offering. And it's just -- it's funny you referenced Mythbusters. If I keep living for one thing we discovered, right? It was the breast health was going to hit a cliff. Now it's COVID revenue is going to hit a cliff. In all cases, we manage through these by diversifying the business, by placing more Panthers. And the fact is so many of our Panthers have been underutilized to date because we haven't had as much menu. We've been really bringing out a lot of menu over the last couple of years that's in the early stages. So we -- I just find it -- as well as, frankly, we've been booking long-term volume as we've been placing these Panthers because, again, with all due respect, we've been in an interesting situation over the last 6 months, where our salespeople really haven't had to sell much. They've been more order-taking. The customers have been coming to us. When they're coming to us and they want what we have, the ability to say, hey, great. We're going to help you now. We also are looking for long-term partnership. So we are prioritizing who's getting the Panthers around the world, around people who are going to sign up for longer-term volume. We're not just putting these out here to capture COVID revenue today. It's not how we operate. By the way, there's so much demand. We can work it that way. So I -- it's why I think we come out so much stronger, so much stronger than is probably fully understood as you just talk to our customers. And then they start to get the experience with it. If it's new customers, like, wow, this thing really is amazing. And it's that we're running these things at incredible levels right now.

Maybe a couple of follow-ups there. I guess -- I mean, are you doing anything to incentivize the sales force for non-COVID placements in this environment, given that so much of the volume is COVID?

Yes. What we're doing both domestically and internationally is paying very little. It commission on the COVID revenue. It's all linked to what's the trailing revenue? So in the U.S., our team is basically getting nothing on the COVID, and they're getting everything to, what are we signing up in terms of test of record for the future menu. So that's a huge part. The same, frankly, one of the very first calls we got for more Panthers was from Italy. People will recall that's where things broke out. As we put them in there, we immediately booked long-term multiyear revenue on our STI portfolio. So that's where all of our energy has been on, which is, look, we're going to be there for you. And we're going to be great partners. We also -- we have a great menu, and we want that partnership to be longer term. So I think that's -- again, it will strengthen our diagnostics business in ways that we were working on strategically, but this has created a huge opportunity to do more of that.

Can you maybe just also talk on the menu development strategy, how that's evolved under COVID? Are you accelerating some of the R&D investments? And what could really kind of drive and help fill that gap? I mean, you've got STIs. You've got virology. These are things you've talked about for many years. But as we think about really building out the menu from here, just talk a little bit about how that strategy may have evolved under the umbrella of COVID.

Sure. We still have things like Amgen and vaginitis that are just very new, just launched, that should become very big. But we're also getting into a transplant menu. We're developing additional menu as we look to respiratory, obviously, even GI down the road, to continue to broaden out that menu and more fully utilize Panthers. So in the very short term, candidly, we diverted some -- our R&D organization in Diagnostics, largely shifted and pivoted from a lot of that work. So some of that's pushed out to capture COVID. We think that was the right decision to make. So we are looking at even some supplemental contracted R&D. Part of the magic of going to the PCR platform on fusion is the ability -- there's a little more contracted R&D you can do versus developing things on our TMA platform, where it's -- there's not as much expertise out there outside of our walls. So we are looking and doing some contract development as well.

And is it fair to say the bulk of the R&D for the Diagnostics business is on content as opposed to platform? Like you wouldn't develop a point-of-care system or to go down that path or anything, right?

Yes. It's mostly content. It's mostly -- we're always optimizing the Panther platform. We got Panther tracks. There's additional software. We're always looking at ways. It's the constant iteration we have with our customers, anything we can do to make it better. So it's constantly evolving, but that's -- more of it is definitely on the menu expansion, given the great platform we have with Panther.