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

Great. Okay. Thank you, guys, for joining us. I'm Patrick Donnelly, the tools and diagnostics analyst here at Citi. Happy to have Karleen Oberton, the CFO of Hologic; and Mike Watts from the IR team. It will be a question-and-answer session. So if you have any questions, feel free to send me an e-mail. I'll try to get those asked as we go. But again, thank you, guys, for being here.

And Karleen, maybe not surprisingly, to start on the COVID side. Obviously, cases and testing have been quite elevated. They're starting to come down at least a little bit here in the U.S. over the past month. You guys are increasing capacity as we go. The volumes have been obviously pretty incredible over the past few quarters. Maybe just update us in terms of the general supply-demand dynamic for you guys as we kind of enter calendar '21 here and your general thoughts.

First, let me just say, Patrick, thanks for having us. We're really pleased to be here and meet with you all today. Certainly, that supply-demand question related to COVID is creating quite a bit of excitement lately. And what I think I'll do is I'll make 4 points and provide some perspective with a caveat that a lot is still so uncertain and things are changing daily here, so -- but we'll share some perspective as we see it now. First, let me just say that for the sake of the nation and global health, that we are really happy that we are finally getting this pandemic under control as we have seen slightly, as you point out, the cases coming down. Again, molecular testing, we're really pleased to say, has played a critical role in this, and we believe it will continue to be important for a long time. And in terms of the rest of our business, we look forward to things getting back to normal and growth hopefully accelerating compared to before the pandemic as we've actually seen all our businesses strengthen during this uncertain time. And we're really pleased about that. Second, from a macro point of view, it's clear that the testing market is changing as vaccines roll out and really as more people have been infected. This is not new news or at least it shouldn't be. Everyone has seen the U.S. COVID testing numbers as well as positivity rates declining over the last 5 weeks. And weather may have been a piece of this as well, just a little hard to tell at this point. Third, even though testing rates are coming down, there's still a lot of testing being done in the U.S. Over the last month, for example, the nation has done more COVID testing than chlamydia and gonorrhea testing done in an entire year. Within that, demand of our test remains very healthy. And as we said, we believe this is because of the gold standard which our product is in terms of automation, differentiated labeling and broad installed base. So we believe as the market consolidates, that we are going to be share gains. As we like to say, the cream rises to the top. Fourth, what we don't know and what is really impossible to forecast that the pandemic has a repeatedly shown us is how the 2 last points balance out. In other words, how much of our likely market share gains will offset declines in overall testing volumes, assuming those declines to continue. Our baseline assumption has always been and continues to be that COVID testing revenue will decline sequentially in the back half of the fiscal year, but it's hard to be more specific than that. I also want to kind of state the obvious and emphasize that things are changing very quickly in this market, but that's how we see things today. We're staying really close with our customers, listening to our customers so we can adjust quickly just as we did early in the pandemic. And then in terms of building capacity, really the government is funding a majority of that. So the buildup is really financially derisked for us, and we believe that as COVID comes -- testing comes down, we can flex the rest of our molecular business, especially with the broad assay menu that we have.

Yes. That's a helpful overview. And I guess when you think about the go forward, again, to your point, visibility obviously limited on how everything is going to work out in the testing dynamic side, how do you guys think about kind of your position here in the mid- to high-throughput testing area versus areas like point of care and antigen? Maybe just talk through how you see things playing out as we progress through maybe the market shrinking at least a little bit as we work through the year.

Yes. If you look at molecular testing in general, it typically becomes more decentralized. And I think that's what's happening with COVID, and we expect that trend to continue. I think for us, that's why we're really excited about Panther and what it can do. So we've got Panther in all 50 states today, and the majority of those Panthers are in hospitals and some of the smaller to mid-sized labs. So while not true point of care, Patrick, we can provide fast and accurate COVID results, and that's what's really needed. So I think we've talked about if you load a test on our Panther, you can have results within 3 to 4 hours, right? So -- and the size of a Panther is just a little bigger than an office copier so it can fit in those smaller labs and really, again, get the results where and when you need them. And just kind of going back related to your prior question. We believe we are well positioned to gain share as supplies and demand even out. I think in addition to that broad installed base that I talked about, where we are the gold standard in terms of automation and differentiated labeling, including asymptomatic claims. And I think there's just going to be some use cases like screening before surgeries in hospitals that aren't going to be done with the rapid test because they aren't as accurate as ours.

Yes. And then I guess on the capacity side, it's obviously been a talking point for you guys in the past few quarters. You've done a nice job increasing the capacity. Maybe just kind of refresh us on where we stand today in terms of capacity on the molecular testing side and where you guys are expecting that to trend as we go through the year.

Yes. So let me go back to like pre COVID. We were doing a little over 20 million molecular tests a quarter. We said last quarter, our first quarter of the fiscal year, we probably did a little over 50 million, so we more than doubled our capacity in less than a year. And of that a little over 50 million, about 30 million tests were COVID. We are on track -- or what we're working to is about 75 million tests a quarter, and we believe that's probably about a year from now. Late in our fiscal Q1 of '22, we should be there, and I think really the big step change comes, again, late -- in that late fall area, you might see sequentially some increases here, but not -- the big step change, like I said, comes later in the fall.

Okay. And then also, U.S. versus OUS. Obviously, you guys, I think, have -- kind of 1/3 of the COVID testing for Hologic is OUS, mainly Europe. I know you guys have some chunky contracts over there. Can you just talk through, I guess, the differences between the 2 geographies and then the outlook? Again, I think U.S. -- I think we were very centric on U.S. maybe pulling back a little sooner, but I would love your perspective on the different geographies.

Yes. I mean it's really -- demand really varies by country, right? It varies depending on the overall government response to the pandemic as well as the vaccine rollout. But in general, the demand remains strong. And specifically in Europe, that's an important part of our international business, and we believe that will be strong over the longer term. And I think Patrick, what really gets us excited is the level of Panther placements that have happened in Europe because of the pandemic and really our profile with health ministries and different governments in our response to the pandemic and how we've supported in really purposely made sure we've been able to deliver on all of our commitments to each country. So we believe that bodes really well for non-COVID testing OUS for us.

Hey, Karleen, I'm getting a couple of pings that it's a little bit hard to hear you. I mean I can hear you fine. I think Patrick can hear you fine, but I don't know if there's a way to turn yourself up a little bit more, if you can. If not, it should be fine.

Okay. I'll try to speak louder.

Yes, I can hear you okay. But yes, maybe just a little louder, I guess. I guess on the Panther side, you guys talked about on the most recent call the backlog is still very healthy. The expectation, as you noted, is for it to tail off as we go through the year. I mean unfortunately, the demand can't stay this size forever for you guys. So I guess have you seen any notable changes in demand to date? Or is it more just, "Hey, this is -- again, it's not sustainable. As the pandemic goes away, in the instrument side, we'll kind of pull back a decent amount?"

Yes. I mean hard to give a mid-quarter update, but things are changing quickly here. As you know, Patrick, I think I've said that a couple of times, but at this point, the demand is strong. We're really pleased with the 150 Panther placements we did in our first quarter of fiscal '21. And to put that in perspective for folks, prior to the pandemic, we were on average placement of 225 to 250 a year. So I'm really pleased with these placements, again, both in the U.S. and OUS and what that means for the business in the future.

Yes. And another key point, I guess, on the Panther side is that you guys have been very strategic in the way you've placed them, right? I think Steve has always had his eye towards the future that you guys have. Can you just talk through, I guess, the conversations you're having with customers prior to placing instruments that gives you the confidence, "Hey, they're going to use the rest of our menu on the other side of this and we're going to emerge with a stronger business?"

Yes. I mean really proud of the commercial teams. I think they, both in the U.S. and OUS, have been really strategic in the conversations that we're having with existing customers and potentially new customers for Panther placements. And so that strategic view and really viewing it as a partnership has really helped us in those placement decisions and avoiding places like pop-up labs that are only doing COVID. So it really is that longer-term view of our molecular business. In general, we place Panthers with long-term contracts in place, so -- which those contracts are typically 3 to 5 years. But what I would say is it's more of the customer experience with a Panther that gives us confidence in the future business. So it is best-in-class in terms of automation and with our menu, it's really an instrument that's going to save not only customers' time and money on kind of workflow but really brings value in that broad menu. So that's what gives us a lot of confidence that we're making the right Panther placements and that this is going to make our molecular business stronger in the long term.

Yes. I guess one of the questions we get is just on the other side of this, what pieces of testing do you expect to kind of be the big ones to replace -- again, the COVID volume has obviously been so overwhelming. I guess when you guys look at your menu, what do you think are the key pieces here that whether differentiate Hologic from the competition or will play a key role in terms of the recovery of the base business on the MDx side?

Yes. So let me just say, in general, one of the things that we did in this situation is we incentivized our commercial teams 2x their normal commission on non-COVID assays, right? So selling COVID really wasn't hard, right? The customers are coming to us. So we really -- to this point of the eye to the future, we incentivized them 2x normal for non-COVID assays. And we've seen that really play out in what we call our test of records. So the value of a test of record is the 1-year estimated revenue on a newly validated assay on a Panther. And we talked about, in fiscal '20, we did about 35 million test of records, which is 50% more than we had done in any year prior. And in Q1 alone, we did 20 million TORs or test of records, so even increasing that pace from what we had done in fiscal '20. So really pleased about that. In particular, some of the assays -- some of the newer assays get us excited, the BV/CV, the vaginosis panel. Mgen is another assay where we're developing the market and creating awareness for this test. We also have our quant virals, which are on the newer side, which a lot of customers are interested in. And then we obviously have the respiratory panel under Panther Fusion, so broad menu. We have, including COVID, 18 assays approved on the Panther. And right now, most customers only run 2 or 3. So there's just a lot of run room there with our assay as well as just the Panther in general. And what we've seen is how customers really enjoy that instrument and what it does for their labs.

Yes. And then maybe one more on the COVID side. How should we think about kind of inventory levels at your customers trending versus the testing numbers we're seeing? I mean was there a big build in terms of people, hey we need X inventory on hand in terms of the ability to handle the COVID demand that maybe we saw 2 months ago, a month ago that continued to rise versus -- again, I wouldn't say it's pulling back too hard, but it's at least slowing a little bit. Is there any dynamic there in terms of inventory build for customers that we should be thinking about?

I don't think until recently that there was the ability to build inventory. But in general, it's probably a good idea that they built some inventory and have testing ready, but I don't think it's been a big part of the dynamics we've seen lately.

Okay. And then the base -- I guess the base molecular diagnostics business, I think you talked about core assay sales being up 10% last quarter. I guess can you just talk through that momentum, how that has built during the pandemic, obviously elective diagnostic procedures were pretty bottomed out kind of midyear, how you saw that progress and then, again, the expectations here going forward in '21?

Yes. I mean, I think, Patrick, that goes back to the test of records that I've talked about, right? The molecular business was -- globally was growing high single digits to double digits and just, again, based on the proliferation of our menu. And we believe that that's going to continue to be the dynamic and actually, that business will be stronger post COVID because of the test of records that we're doing and being strategic about where we place Panthers and the dialogues that we're having with customers.

Yes, understood. And then maybe one last one just on the COVID testing side. Obviously, the vaccine rollout in developing countries is quite slow. So I guess how are you thinking about the developing countries' PCR ability given the lack of real infrastructure? Is that going to be more antigen testing in those areas? How do you think about it? Again, obviously, we talked a little bit about Europe and the U.S., but in some of the developing nations, what's your guys' presence there? And is there room for PCR testing as, again, probably the COVID pandemic lingers a little bit longer?

Yes, yes. It's a good question. I mean we believe that there's going to be a market for molecular testing in developing nations and even in places that have less sophisticated infrastructure. That business for us is very small today in emerging markets, but what gives us -- what makes us positive about that is our global access initiative for virology. Testing has proven that molecular testing on Panther can play a role in places like Africa. Although the pricing in countries will be lower, this is still a profitable business for us. So that's an example we look to that says molecular testing can work within those emerging countries -- emerging markets.

Sure. Okay. Yes. And then maybe moving around the portfolio a little bit. On the breast health side, that rebounded strongly sequentially in fiscal 1Q, the launch of Brevera kind of helping drive some double-digit growth in the international -- interventional business. Can you talk a little bit more, I guess, about Brevera specifically, how that's being received? And then we can kind of jump into the core business and the recovery there.

Yes. We're really pleased with the relaunch of that product. There was really strong demand, probably some pent-up demand for the Brevera capital, and that has a follow-on disposable needle to it. So we really believe off to a good start, still have good demand and again, believe that the more capital we place there in these early quarters will lead to more disposable for the Brevera. I think in general, in terms of breast health, we were really pleased with the quarter. I think from a capital perspective, it rebounded nicely. It could have been some year-end budget flushes for hospitals, but really pleased with what they're able to do. But really, the story there for the breast business is our continued diversification of that business with the acquisitions that we've done with interventional, the biopsy and the breast-conserving surgery business as well, all playing into that recovery.

Yes. And I guess on that last point, Karleen, talking about broadening the business. You guys have done a great job with some of these bolt-on acquisitions to diversify the portfolio and kind of provide this full continuum of care. I guess when you look at it now, maybe just talk to, I guess, first, the kind of evolution of the portfolio. And then secondarily, are there pieces that you're still missing when you look at the breast health portfolio that you guys want to get into, whether it's organically or inorganically, that you feel like you're missing?

Yes. I think when we think of the breast health business, we've really been focused on expanding across the continuum of care and diversifying the business away from capital. There are other interesting adjacencies such as treatment that we haven't really exploited yet. But the real goal is how do we position ourselves as experts within one vertical of breast cancer rather than offering lots of different imaging modalities, if you will, or different therapeutic categories. So focusing on breast cancer detection first and then building out supporting technologies that fit together with the mammo. So for instance, from -- biopsy complements the 3D screening and then the Brevera. So from a business perspective, that helps with large deals, that broad portfolio that we offer and really show us as that breast cancer expert.

Right. And then you mentioned some potential budget flush at the end of last year. I think there was some caution from you and Steve on the call just about what COVID could mean in terms of some of the rising cases as we enter '21. Can you just talk through, I guess, your expectations as of the last call and what you kind of built into the guidance for breast health specifically?