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

Okay. Thanks, everyone, for joining us this afternoon. The last meeting for the day, but certainly should be an exciting one, given all the diagnostic commentary we've heard in the past 2 days. We have Hologic with us. Representing the company, we have our CFO, Karleen Oberton and Mike Watts from Investor Relations as well with us. Mike is from sunny San Diego. So he's looking good. Well, maybe Karleen, I want to start off with just looking at what the stock has done in this year.I mean these numbers you guys have put up it's -- I mean, truly astounding. Yet the shares have been range bound. There is a debate on sustainability, what's the base business work, is COVID just a one-off? And what happens when those revenues eventually do fall off? So let's start with the sustainability side, talk to us on -- Q4 was strong for you guys, your fiscal Q4 ending September. How has the second wave impacted your business so far as you look at your fiscal Q1 and perhaps after the March quarter?

Yes. So a lot packed in there, Vijay, let me see if I can get it all. So yes, certainly, this has been a tremendous year for us. And been through a lot, but really excited about what we've been able to do on a testing front and bringing one of the most accurate tests to market and our Panther instrumentation able to bring a test where and when we need it. So I think the COVID testing, as we've said in Q4, demand has certainly on strict supply, we continue to invest in capacity for our overall molecular business, both the base and COVID. And I think from a tail perspective, it's certainly -- it's -- I think as we sit here today, it's hard to believe that the demand for testing is going to decline any time before the second half of FY '21, right? And but we do believe it will decline and God willing, we have vaccines that are effective that are in the marketplace. That's good for all of us. But even in that scenario, we believe that the tail will be a considerable product for us moving forward. And likely our biggest molecular product for some time, and we are continuing to invest in our capacity to support that scenario.

And just maybe on the capacity question. I think your current capacity was 50 million per quarter. And you had plans to raise it to 75 million. Where are we on the capacity front right now?

Yes. So I think over the next couple of quarters, we will increase slightly, but not meaningfully. I think that 75 million number really happens at the second half of fiscal '21, those are those investments that we're making right now.

And maybe just one small clarification on that, Vijay, for those who aren't as familiar with us, so that those numbers the 50 million and 75 million represent total molecular diagnostic test capacity, not just COVID. So for example, in our Q4, we made a little more than 50 million total test, about 25 million of those were COVID tests sent to customers.

Thanks for clarifying that, Mike. And the -- I guess, when you think about demand outstripping supply, I mean, one of the more interesting dynamics has been asymptomatic labeling because I still like -- when you think about vaccines and the logistical issues, who gets vaccinated, I think asymptomatic testing could be a large market. I don't see too many companies getting the claim. I think it's a handful of companies have gotten asymptomatic. One, I guess, is asymptomatic label a differentiator for Hologic? And how do you think about that market longer term, I guess?

Yes. We certainly think it's a differentiator. And I think, Vijay, to some respect, we're not surprised that we achieved that differentiation given our robust chemistry in our history in developing highly accurate assays, coupled with our installed base. So we believe that, to your point, we have vaccines in place and asymptomatic becomes more predominant, we think that's where we gain share in that tail of COVID testing, in that asymptomatic market that there's a lot of talk about rapid antigen tests, which aren't as sensitive, right? And so when we talk about asymptomatic, you want a highly sensitive test, which ours is, to avoid those false negatives and have super spreader events, i.e., the Rose Garden.

And is there -- I guess, when you think about the asymptomatic market, does it make sense to do a population screening type of activities? I know you guys have been working on pooling. And because a lot of questions I get is, I need to travel with family, but I do need to test myself. And I think you need a simpler testing solution. So I'm curious on how we think about screening market and is pooling the answer for that market?

Yes. I mean, I think there's not a lot of pooling happening today, right, because it's difficult, it is cumbersome technology, challenging to conduct it, keeping lots of samples in place until all the testing results are back. So we are making investments to partner with our customers to make it simpler, because I think ultimately, they -- with a simpler solution, this could be part of asymptomatic screening for large populations. But I think for us, when we think about where testing is going, testing is continuing to go closer to the patient for a quicker turnaround time. And that's where the Panther plays really nicely in that hospital lab, 3- to 4-hour results, highly accurate. Again, I think as -- when demand kind of satiates a little bit, that's an opportunity for us to continue to gain market share.

The other thing that plays into that, Vijay, is just the increase in production capacity, right? I mean, it's an important factor there. I mean, if you think back to the very early days of the pandemic, when tests were in much more limited supply, those tests had to be almost reserved, if you will, for the sickest patients for the actual clinical diagnosis. Now as we and some of our peers in the industry are ramping up production. We've got a lot more volume to get after some of that asymptomatic more population-based screening.

And another question, Mike, when -- you mentioned after 50 million tests you guys did in the past quarter, half of it was for COVID, but correct me if I'm wrong, the reimbursement on COVID is a lot higher for -- as against some of the base business. Why shouldn't COVID be a higher percentage of your revenue mix? Does it make sense? I don't know if it makes sense, but I thought I would ask.

Karleen, go ahead.

Yes. I mean, financially, it makes a lot of sense, but we also have these customers and patients that we want to take care of, right? So it is a huge balancing act, Vijay, for sure. I mean we really want to make sure that women are getting screened for STIs and patients who have HIV are having viral load assessment. So yes, it is a balancing act as well as not only just testing overall, but between the U.S. and OUS. I know we've talked about the international contracts that we've signed. And certainly, to the extent we had more supply to allocate outside the U.S. The demand is certainly there. So we're balancing demand not only in the U.S. but outside the U.S.

Understood. And on the topic of international contracts, is there any color on the duration of these contracts? Are they longer-term or shorter-term? Because I've seen some of the U.S. government contract. I mean these things go through fiscal '22, it seems like those government contracts have a pretty long tail. Any comments around that would be helpful.

Yes. So certainly, international ones that we talked about, about 600 million is over 5 quarters, which began in Q4 '20. So goes through the balance of '21. And like I said, I think there is the opportunity to increase those commitments since once we feel like we could clear supply chain hurdles to commit to that. But I think, Vijay, a guiding principle for us through all of this is to be -- not to overcommit to our customers and to make sure that we can deliver what we say we can so that we meet their expectations.

Understood. And maybe a big picture question. The speed with which Hologic has responded to this -- the pandemic. I mean you guys were right up there along with the Abbots and [indiscernible] with a lot more resources. When you think back I -- it's fascinating for me because I remember, I mean, innovation was always a question what does Hologic have and how can I innovate? I mean, it feels to me the speed with which you guys have responded that certainly shows you guys are right up there with that when it comes to innovation with some of your larger peers. Curious on -- if you had any comments in how fast, how quickly Hologic has responded here?

Sure. I mean this is -- we're still proud of so many of the R&D and operation folks out in our San Diego facility that were primarily, what I'll call, our first responders, our frontline workers that really just ramped up incredibly to do this. And I think some of the scientists that we have, this is their lives passion, their lives work. And so there was a lot of passion on bringing this test to market and the solution I think fueled by, Vijay, what we really have done over the past several years to continue to place Panthers globally. And that's really the result of kind of strategies, commercial strategies over the past several years, expanding our assay menu that in this moment in time, we're able to really be a big part of the solution in testing.

And maybe a related question, has -- sometimes it's harder to get our hands around a change in culture, has this made Hologic a more confident organization? The ability that you guys could react so fast, place the amount of systems you have and scale up manufacturing the way you have. I'm just curious, if that has some sort of impact as you think about the next 3 to 5 years?

Sure. I mean, I think we run the company as a global leadership team, and I think Steve being in his role and being out in San Diego and Kevin Thornal, who runs the Diagnostics division, reporting directly into him, they were really able to partner together to drive the organization and the solution. I think as a global leadership team, we were all able to rally around that. But in taking measures early on, when we weren't sure we were going to have this COVID testing solution. So I think the culture of Science of Shore, the culture of growth and the culture of our people really all contributed to what we're doing here now.

Yes. I think there's probably an external piece of that too, Vijay. Certainly some significant changes internally on the culture that Karleen talked about that worked well for us. But I hope that as the external world looks at this pandemic, I hope there is a growing recognition of the importance of diagnostics from a funding perspective, from a reimbursement perspective. I mean diagnostics is only a couple of percent of the overall health care spend and drive 60%, 70% of decisions. And never has that been more clear than during this pandemic. I think more people probably know about PCR and molecular diagnostics today than they ever have. So hopefully, that results in a more supportive ecosystem for the industry as well.

No, people certainly know, Mike. Anecdotal common, we had management call with JetBlue Airways. I think the CEO of JetBlue knew the full form for what LAM stood for and I had to look up what LAM was, but it's amazing what the pandemic has done in terms of people's awareness on testing. Maybe switching gears to the base business. I think let's look at the base business within diagnostics itself. When you look at STIs, HPV, some of those base businesses, I think some of your peers have commented base business being back up to 90%, 95% of pre-pandemic levels. What are you seeing in your base business right now? And when do you think that base diagnostic business could get back to pre-pandemic levels?

Yes. So we're certainly continuing to see improvements in that business each quarter. And we really believe that, that business, in particular, that base molecular business is going to be stronger post-COVID. If you think about all the Panthers that we've placed over the past year, that will continue to place over the next year, coupled with our menu, our assay menu, we think this is a moment in time for acceleration. If you think about prior to COVID, that molecular business had been growing globally double digits in the 11% to high single digits to 9%. So we don't think that there's any reason that, that business won't be stronger post-COVID.

Absolutely. I do want to get into that, what that larger installed base means? But have you seen any impact from this ongoing second wave on your base business? Because I think the guide assumes some sequential improvements within that Breast Health and GYN segments? I'm curious.

Yes. At this point, we still feel good about the guidance that we gave that we should see a sequential improvement. Certainly, that's what we are experiencing right now. More anecdotally, we're starting to hear about some disruptions in the middle of the country and where you think of Wisconsin and those other Midwestern states where the surge is significant, and they didn't really experience that first wave. I think what we're seeing is that most hospital facilities have figured out how to deal with the COVID and still allow elective procedures and screen procedures. One of the things that we look to in the breast business specifically is actual screening activity. So we're connected to a fair number of gantries in the U.S. and what we've seen over the past several months is a consistent high 80% to low 90% of pre-COVID screening level. So that means we've figured out a way to keep women coming back for their annual screening, and that really bodes well for the rest of the breast business that is on interventional and biopsy and breast surgery.

Yes. No, that's extremely consistent. I think what some of your peers have been talking about in terms of base business coming back, that 90% level, I think it's very, very consistent. I do want to get back to your comment -- earlier comments on the Panther placements, right? And I think the math is you place north of 500 systems in fiscal '20. I mean you could be exiting fiscal '21 in the north of 2,700, 2,800, assuming a similar amount of placements in '21, and most of your peers are assuming installations to be pretty robust for the next 6 months. I'm curious how you guys think about Panther installs in fiscal '21.

Yes. So we definitely think they're going to be in excess of what I'd say at the historical 5-year average was roughly 250 million a year. We may not get exactly to that 500 million, but certainly, it's going to be well above that 250 million. And I think one of the things to think about on those Panther placements is the -- what we've talked about is the non-COVID test of records, right? So we talked about in the fourth quarter call that we had 35 million of test of records completed. So that is new assays or assays validated, new assays validated on a Panther and that's equivalent to 1 year's revenue. That 35 million was 50% higher than any other year. And that we had another 35 million kind of in the queue waiting to be validated. So we intentionally, in this COVID time, switched or focused our sales force, incentivized them to sign up non-COVID assays, and that's playing out. So that as we continue to place these Panthers and we have this menu of 16 assays that are non-COVID, getting customers to sign up for more of our assays.

That's really interesting. And just so I understand the numbers, Karleen. Is that the annualized run rate, that 35 million number or once you validate should these customers ramp that up? And could that actual rate -- maybe give some context around what those numbers mean.

Yes. The 35 million would be an annualized, 1 year after it's validated.

Understood. And how should ...

Certainly, that's a number that we would expect to grow over time, right? I think what we've seen over the 6, 7, 8 years that Panther has been on the market is that once a customer gets the razor, if you will. They love it. It improves their productivity. It helps them make more money. So that volume does tend to increase over time. So think of that as the starting point.

Got you. And I know historically, you guys have given a throughput per Panther system and how that throughput was increasing given the expanding menu base? Now that you have 2,500 systems, right? How -- I mean that's a big number. How many of them -- like, do you still expect throughput per system to be at those levels or perhaps some of the newer COVID customers to be below trend? How should we think about throughput per system?

Yes. I mean, I think it's a little difficult to think about it because a lot of that throughput per system is going to depend on what that COVID revenue does, right? So I mean, if you kind of put COVID to the side, would think it's more practical to think about revenue growth versus the utilization because I think there's going to be some variability. But if we were growing that utilization high single-digit prior to COVID, you should still be able to do that moving forward given the test of records that I talked about.

Understood. Understood. I mean how should I -- I guess, if I had to roll all of this in, right, the diagnostic business on the molecular side will emerge much stronger post-pandemic, it was growing double digits pre-pandemic. So perhaps it accelerates from the current low double digits or high singles rates that you guys are seeing. But you do have cytology, some of those parts of the business, which has been flattish, low singles. What is the overall outlook for your diagnostic franchise? You have molecular and you have cytology combined, is that like a high single grower for you guys emerging from the pandemic?

Yes. So I think if we look pre-COVID, it was growing 6% globally. Diagnostics was growing over 6%, right? So if you think about all the factors that we talked about in regards to the additional assays, there's no reason why, again, that high single digits is impossible.

That's great. I mean that franchise -- and these are all, remind me, Karleen, the margins on diagnostics should be pretty healthy compared to corporate?

Sure. Yes.

Fantastic. The other part I want to touch upon was within that breast health. There's been some concerns on CapEx environment for next year. It's really been disparate data points. Some companies have said, "Look, we think CapEx could be up next year." Others have been much more cautious. How do you guys see the CapEx environment within that part of the business? I know the gantry piece is much smaller, right? And correct me if I'm wrong, Mike, but I think less than 1/3 of overall breast is gantry, the service and the recurring piece is the much larger piece at this point in time.

That's right. Service revenue is the biggest piece of the revenue of the division. Yes. So I think to answer your question, I think we tend to think about the capital business recovering slower than the rest of the business. I think that's how we're thinking about it, although we've been pleased with what we're seeing so far. But as we think about that piece of the business, again, Vijay, to your point, it's a smaller piece of the business. Insulated service certainly by the service revenue line, which even in Q3 was only down low single digits, right? So that's pretty much back to where it was, a big insulator for that. But also, the diversification of the business that I talked about screening rates being back to that 80% to 90%, high 80s to 90%, the rest of that interventional and the breast surgery bodes well for that business recovering faster than the capital. And then certainly, our R&D investments are paying off, and we recently relaunched the Brevera product, which should add some points of growth. So certainly, that division, as it recovers -- recoveries getting back to a mid-single-digit grower. It's certainly possible and certainly the goal.

Got you. And I did see the press release yesterday on Genius AI detection. Just help us understand what AI -- Genius AI means to Hologic? Is this a separate stand-alone revenue opportunity for you guys? Or what is exciting about this new launch?

Yes. Certainly, it is a revenue opportunity for us, and it really helps the radiologist identify cancers even sooner, right, in early stages, which we know leads to better outcomes not only for the patients, but for the health care system. So -- and with the installed base that we have, that's a significant opportunity to go back and sell that AI to that installed base. But I think it's also part of the bigger continuum of care and that we show up with -- to our customers of not just selling a gantry, but selling the breast solution for the breast suite, and that really plays into that nicely.

Understood. And is there a way to sort of size what this opportunity could mean for you guys? Or is this more incremental and help sustain that mid-single thesis for the overall Breast Health segment?

Yes. I think it's more of the incremental and helps sustain the thesis.

Understood. And I guess switching gears to GYN segment. This is one where it's the procedure category that's largely outpatient. And I guess physician office visits, they're still down 10%, 15% from pre-pandemic levels. Any thoughts around when that business could perhaps normalize to pre-pandemic levels?

Yes, sure. So this business was impacted the most early on in the pandemic, for sure. But had the sharpest recovery certainly within the fourth quarter, and we continue to see that business recover. But I think to get back to pre-pandemic is probably later in the second half of '21, but we feel really good about the ability to do that. I think we have a lot of confidence in our sales force and our leadership there as well as starting to execute on inorganic strategies. We announced earlier or late in Q4, the acquisition of Acessa Health, which we estimate will be roughly $12 million to $13 million of revenue here in the first quarter and really plays off that what I'd say where we have a right to play, so it builds off the MyoSure capability, which treats smaller fibroids, Acessa Health product treats 5 larger fibroids in a more -- less invasive fashion for the patient, really leading to better outcomes. So excited about what that product can do and that product offering within our sales force bag.

How large is Acessa Health? Is there any revenue for this acquisition right now?

Yes. We're estimating for FY '21 to be roughly $13 million of revenue.

Got you. And this is not just given the deal close, I'm assuming this is not baked into the guidance when the guidance was issued, not that it matters.

I think it would have been, yes.

Yes, it would have been. Would have been.

Okay. Okay. I mean, I guess on the theme of tuck-in acquisitions, if I'm thinking about what the pandemic has done, right? It's going to be north of $3 billion of revenues for Hologic on a cumulative basis over the next, call it, 18 months, 24 months and dropping down at pretty healthy margins, and that's a lot of free cash that you weren't planning for. How should we think about Hologic deploying those capital? I know, Steve, on the Q4 call, he sounded pretty optimistic about the pipeline. I'm just curious on where you see those proceeds being deployed.

Yes. We certainly -- I think our #1 priority is going to be that tuck-in M&A strategy, right? So I think what -- there's 2 elements to this on our -- how the pandemic has really influenced the M&A strategy is, one, allowing us to cast a wider net. So looking at maybe potentially earlier stage assets that could be dilutive in the first year or 2, where we have high confidence in revenue we can afford that dilution where maybe before we would not have been able to swallow that dilution. So feel good about casting a wider net. And I think the other thing is, to your point, the free cash flow, we've always talked about tuck-in M&A within the terms of our annual free cash flow. Our annual free cash flow is going to grow considerably. So it allows us to consider either more deals and some larger deals. But certainly, all those deals within our key markets now where we play, not adding another fourth leg to the stool.

It's -- it really is remarkable. And I know you guys have done a couple of acquisitions within interventional breast -- breast health, and those have all been really, really nice tuck-ins for you guys. I know there was a portable ultrasound, I think, the acquisition that you guys made, which worked out pretty well for you guys. When you think about those opportunities, is it -- how do you see the pipeline sort of shaping up? Is that -- do you foresee any meaningful opportunities in the near term? Or is this more perhaps, let's wait and see and if the timing is right, and let's think about these deals consummating?

Yes. What I would say is the BD teams are very active, Vijay. As we've mentioned, each division has their own dedicated BD team. And we are very active, and I would expect that we would close deals here in FY '21. I don't think we're -- we're not in a wait-and-see mode at this point in time. We're probably being a little more assertive on our M&A activity.

Understood. And then margins was something else. I know back in the day, margins was always a topic for Hologic. I mean, right now, it's very hard to figure out what the base business is, just given COVID is dropping down at a pretty healthy margins. How should -- what should normalized margins be for Hologic when you think about the medium term?

Yes. So I think on the base business, if we look back to Q2, we exited with operating margins around 31.5%. I think excluding COVID, we would think that we get into -- as we exit FY '21, back to those rates. And as we move forward, our goal would always be to improve those -- that margin rate slightly each year through leveraging our international, more network optimization, automation, et cetera. So we remain disciplined in that approach to the base business, and I think we'll use the COVID margins as the opportunity to continue to reinvest.

And -- sorry, was -- I thought I heard a background noise, but let's get on with it. I think -- I'm not sure what happened there. I guess, if I look at the post-pandemic algorithm for Hologic, right, and this is -- I think it's critical because people are trying to part strip out the COVID-associated earnings, look at the base earnings, assign a value and whatever the present value of COVID cash flows are, layer on top of it. I think that's the valuation framework people are looking at. What should the algorithm for the base business looks like post-pandemic, right? If we think diagnostics overall, perhaps in a mid- to upper singles, somewhere in that range. Breast Health coming in, in mid-singles. I mean, GYN, I remember back in the day, it was high singles, double digits. And I'm not sure how to think about GYN. Is there anything on the pipeline front within GYN? If you roll all of these together, should Hologic be a mid- to upper single top line grower, perhaps in the 5% to 7% or 8% there I say?

Yes. I mean if we go back to -- we haven't given long-term guidance, Vijay. So regrettably, we won't give it here either. But if you go back to where we -- the business was in the end of February, right before the pandemic started, the business growing a little over 5%. So to some of the commentary that you just made, when we kind of get beyond COVID, we believe, given our pipeline that the business would be at that mid-single digit, plus we believe that the molecular business, specifically, will be stronger. And if that business is growing stronger, certainly, the overall business should be as well. Coupled with the tuck-in M&A strategy, maybe not organic, year 1, but if we execute like we believe we will, that's going to contribute to that top line growth strategy as well.

And is there a way to, I guess, quantify what the diagnostic sort of acceleration could look like. I know we touched upon this, and you said perhaps double digits. But I'm just thinking about doubling up of installed base, that just seems like -- I mean, my simplistic math was pull-through per box into a number of boxes, that's a doubling up of diagnostic revenues, but it also feels like it's a pretty simplistic math. I'm curious on how you guys think about diagnostics.

Yes. I mean I think the one thing you need to consider to just -- beyond just the growth of the Panther install, which we totally align that, that's going to be a contributor to growth is our overall capacity, right, to manufacture assays. So we've talked about the 50 million at the end of Q4. Again, total molecular, not just COVID and achieving 75 million at the end of '21. So that's not a doubling of our capacity. So we're not going to be able to double our revenue. But certainly, we feel good about what the molecular business is going to do in the future.

That's a helpful commentary, Karleen. So if we look at the business was doing north of 5% pre-pandemic, perhaps it's going to be something better than that given the higher installed base post-pandemic the risk margin expansion opportunity, what should the earnings algorithm for Hologic look like? Is this a high single-digit EPS grower or should Hologic be a double-digit earnings grower?

Yes. So I mean, I think we've always talked about growing earnings faster than revenue. And if we're talking about revenue, again post-pandemic the base business growing mid- to high single digits, we should see really nice earnings growth.

Got you. I mean because I do feel like a lot of the multiples in the market right now it's highly correlated with the revenues and top line. And I think if the base business is mid to high, I don't see why the base business should be worth the 20 or of 20 turns EBITDA in this market. Some of your peers are trading. Mike, you're laughing, but those are -- that's the norm in this market. And I do feel like with the stock being ranged bound here, it seems like an interesting setup. So maybe...

That wasn't a laugh, Vijay. That was a smile. We would agree. So thank you for that.

Understood, Mike. Maybe in the last few minutes left here, anything else that you would want to add Karleen? What are investors missing here? Or perhaps underappreciating on the story?

I think we've hit on a lot of the major topics, Vijay, certainly surrounding the molecular business and the increasing installed base and what that does for us. I think the one thing we didn't spend a lot of time on here today was international. So the international business pre-COVID had been growing double digits. And I think this COVID moment is probably catapulting moment also for our international business that the Hologic brand recognition internationally is certainly raised because of COVID and what we've been able to do to bring COVID testing solutions to key markets and the brand recognition and key health ministries, and we think this is going to allow us to bring testing strategies, screening strategies to markets for women that don't happen now. So I think that's the only thing I would add and just really bullish about the company and our ability to deploy our capital and continue to grow the organization.

Fantastic. With that, we're at the end of the time. Karleen, Mike, thank you for your time. And wish you guys all the best as the thesis comes to fruition. I know -- it's funny when I think back on the stock, it's always moved in step function. There was always a debate. And when the moves happened, there were always step function change. So hopefully, the current consolidation phase is a precursor to the next step function change. So all the best to you guys.

Thanks, Vijay.

Thanks, Vijay. Happy Holidays.

Yes, same to you. Bye.

Thank you.