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

All right. Good morning, and welcome again to the BTIG Virtual MedTech, Digital Health, Life Science and Diagnostic Tools Conference. I'm Ryan Zimmerman, Senior MedTech Analyst here at BTIG. We're excited to have Hologic here with us today, coming off of a wonderful article, I might add, this weekend from Barron's. If you haven't had a chance to read that, you definitely should. With us from Hologic is Karleen Oberton, Chief Financial Officer; and Michael Watts, Vice President of Investor Relations. Thank you both for joining us.

Maybe, Karleen, let's just jump right into questions. I think most investors know Hologic. We can skip the intro spiel. But if I think back before COVID, Hologic was a low single-digit to mid-single-digit growth company. And in the process of moving to mid-single digits more consistently, I think with improved growth across the business segments post the Cynosure divestiture. Now with the cash you've generated, the M&A done as a result, when COVID subsides, how should investors think about the company from a growth perspective?

Yes. Thanks, Ryan, and thanks for having us here today. We're pleased to present. Yes. If you look back at probably the last quarter or 2 before COVID hit, obviously, the revenue growth was improving and was about 5% pre-COVID. And obviously, the COVID revenue has a free stock profitability in cash really allows us the opportunity to strengthen the business long term. So given what we've done specifically with Panther placements, the acceleration of those placements really, we'd be certainly disappointed if we didn't have a higher growth rate post COVID definitely in the molecular business. And we like what we're seeing in the rest of business in terms of recovery as well as the recent acquisitions while small thus far, will be implemented to the growth rate.

Got it. On the COVID testing dynamic, pricing has been surprised, but prices stayed relatively consistent thus far. And I think the last time we spoke, there was a slight chance that pricing could come down a little bit or maybe you were preparing investors for that expectation, certainly as the market has gotten more crowded today than even it was 6 months ago. So what's your current thinking around pricing for COVID test today? And is there a level of testing, you're kind of at around 30 million tests now that you just reported out, where lower pricing will be needed to maybe encourage more demand? Or do you think this is going to remain completely inelastic in terms of consumer demand?

Yes. So if we look at Q1, you're right, pricing is held at about $25 per test. It was a little bit better than we had expected. I think in terms of the current quarter, maybe a slight decline but nothing significant. But we do believe over the longer term that pricing trends will come down over time as significant increases in tests satisfy supply versus demand. And also, the potential for changing reimbursement has obviously put some pressure on pricing. But at the end of the day, Ryan, if we had to take the price down a bit, this would still be a highly profitable product for us.

Yes. Now Steve made a comment on the last call. He called COVID testing the Wild, Wild West. And I'm just curious if you guys have a view as to whether the FDA could start revoking some of the EUAs that they were giving out -- that have been given out so frequently over the past year from maybe some of the other tests that have lower performance than the PCR test that Hologic offers?

Yes. I mean, obviously, the FDA could go back and look at some of the performance and even make adjustments. But we haven't seen them do that thus far. I think there's still a fair amount of people using the antigen test off label just -- again, just given the demand for testing out there right now. But we haven't -- I haven't heard any revoking of approval at this point. I think for us, the good news is our test performance is actually outstanding and that we actually go after 2 targets on the genome. So even when there's variance out there, we're still going to pick those up. So we're really pleased with our product and the indications we have for asymptomatic improvement.

Okay. Now you guys are scaling manufacturing up through the course of calendar year '21. I think your -- the goal is to be at 75 million tests by early 2022. What happens to all of that capacity over time, especially if demand starts to wane on testing? And to that point, kind of your expectation for demand of tests, does it get repurposed for other molecular diagnostic testing? And how should investors think about that -- those investments you're making over this year in the COVID manufacturing space?

Yes, Ryan. So the good news is that the government is actually funding a fair amount of that investment to scale up from a -- so from a financial risk perspective, it's going to be pretty limited when we think about idle capacity. But I think really what we're excited about is what we've talked about in the test of reference that we've done for the non-COVID assays. We did 35 million in '20, off to 20 million in Q1 alone. So that gives us insight that the molecular business is going to be stronger and we'll take out some of that capacity as well as internationally. The placement of Panther internationally is going to drive demand for the rest of our assays. So to refresh, we have 18 assays approved, including -- to COVID on the Panther. And I think getting more customers familiar with our Panther, I think, is going to get them excited about putting more menu on that platform.

Okay. Now there has been discussion, will you or won't you pursue anything in terms of point-of-care diagnostic testing, whether it's related to COVID or not. I'd love to just kind of revisit this topic and get your current thoughts today in light of the success you have had with COVID. Has your view changed at all on this area? And could we see Hologic in a point-of-care situation -- or a point-of-care acquisition?

Yes. So I think certainly point-of-care is something that we look at, we have looked at, we continue to look at. I think specifically right now, at this point in time, a lot of point-of-care have taken advantage of the COVID as well. And so evaluations are pretty high. We want to stay disciplined in our M&A strategy. So we might stand on the sideline a little bit now. I think given the other challenges in that space is gross margins being given that most targets would be dilutive to our gross margins at this point in time. But the other thing for investors to think about, Ryan, is if you think about that plant, Panther size, the Panther is like a little bigger than a photocopier you see in the office. And so it can sit in the smaller lab, the midsize lab. And so while it's not point-of-care, we're pretty close to the customer. So we can get that quick turnaround, high accuracy that customers are looking for.

Yes. No, fair point. Looking past COVID, though, you mentioned the tests for record metric, and I think is a great one that investors have started to appreciate more. You did about $20 million or so in the quarter. It kind of annualizes to $80 million. It's certainly up significantly from last year. Just talk about kind of which assays you're seeing the most robust demand for outside of COVID and whether you can continue to add to that menu of assay offerings over time? And should we think that, that gets bigger or your penetration and, say, some of the existing assays continues to grow at a higher rate?

Yes. So we're off to great start in '21, for sure, with the $20 million that we just talked about and we're really a testament of our sales force to drive pull-through on the Panther. And I guess as we've talked about, we've incentivized purposely our sales force on non-COVID assays through a higher commission rate than on COVID to take advantage of this opportunity, if you will. But I think from a menu, I think we're really happy with what -- the menu that we have. I think from a newer assay perspective, certainly, we're excited about our vaginosis panel, BV/CV. Mgen is another new assay that's going nicely. We're investing and developing in the market and creating awareness of that test. And certainly, our viral loads, our respiratory panels have a way to go. Those are newer. If you think about this business, it's a business that's typically under contract for multiple years, so -- as those contracts are at renewal. So we think this is -- this moment in time is an exciting moment for our molecular business.

Certainly. Let's turn to GYN Surgical for a moment here. Now you've had your first growth quarter in a few quarters. The portfolio is more comprehensive today than it has been some time. You added the Acessa Health deal. What kind of growth should investors expect out of GYN Surgical in a normalized environment? Because this has been -- time is a very key growth area for the company?

Yes. So I mean, to refresh investors, if you look back at what the Surgical growth rates were in Q4 '19, about 7%; in Q1 '20, it was 10%. So yes, I think when we get back to normal, you would be disappointed if that business wasn't growing in the highest digits -- highest single digits. I think one of the key things that we've done over the last couple of years is really invest in that sales team, have rebuilt a fair amount of that sales team. That was a group that's basically 100% commissioned. So we made sure we took care of them in the early days, if we go back to Q3 of '20. So we kept that sales team intact as we do that. That's really a key asset to that division. But we see opportunities in the laparoscopic space inside the acquisition of Acessa. We're excited about what we're learning with that space now that we own that asset. But we're also looking at opportunities as -- for instance, in product of public health, what else is that physician -- or procedure that, that physician is doing that we cannot do ourselves.

And Steve alluded to this on the call a bit but he said -- alluded to the pipeline here a little bit. Is there a cadence or anything you can share at this point? And it might be getting ahead of ourselves but around the GYN Surgical business that we can expect in terms of new product flow from the company over the next year or 2?

Yes. I mean, this has been -- talk about organic investment. This is a division that historically hadn't invested in our R&D and has been a key focus for that team over the last 24 months. And I think in fiscal '20, they had a number of new product approvals. So looking at procedures that are performed today, how can we enhance, improve those procedures. One of the newer products is Fluent Fluid Management, which is doing really nicely and actually enhances the pathology which the MyoSure product can be used for. So I think a regular cadence of new product introductions and probably more cost singles and not home runs is what we'll continue to see for that division. But clearly, that is a division where M&A would be great.

Okay. Well, turning to breast health for a few questions.