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

Welcome back, everyone, and good afternoon. Next fireside chat presentation is going to be with Hologic. And we're really fortunate today to have Karleen Oberton, the CFO of Hologic; and Michael Watts, VP of IR and Corporate Communications. And for those you who don't already know, I'm Rich Newitter, medical device analyst here at SVB Leerink. Welcome, Mike and Karleen. Thanks for joining us.

Thanks for having us, Rich.

Terrific. So just there's a lot of ground I'd like to cover today. And COVID obviously is always topic du jour these days. So it's good maybe we'll start there. It's been an enormous boost to your revenue and cash flow. And there's been some volatility in the testing numbers in recent weeks. And not to mention weather. That complicates the story a little bit. Would love to just kind of hear kind of how some of these moving parts -- how do you think about them? How they may or may not have affected the way that you guided to the COVID impact in the first half of the calendar year and your guidance for fiscal 2Q?

Yes. So that's certainly -- it's an important question. And the downward trend cases and testing number seems to be generating quite a bit of excitement lately in the market. And we can't give an inter-quarter update. So maybe what I'll do is step back and make 4 points on this topic and share some perspective with the caveat that certainly a lot of this is uncertain and unpredictable. So first, let me just say that we're really, from a global perspective, the good of our nations of the world. We're really happy that we're finally getting this pandemic under control. Molecular testing has played a critical role in this, and we believe it will continue to be important for a really long time. In terms of the rest of the business, we're really excited to get back to normal in growth. And as what we've seen is that our base business, the rest of the business is actually strengthened in this uncertain times. So that makes us positive on the outlook for the rest of the business. The second point I'll make is, it's clear that the testing market is changing as vaccines roll out and as more people have been infected. So this is not news or at least this shouldn't be. Everyone has seen the U.S. COVID tested numbers. The positivity rates are all declining over the last 5 weeks. Weather certainly could have played a role in it, but it's really hard to quantify how much the weather is playing into this. So the third point I'll make is that, even though testing rates have declined, there's still lots of testing being done in the U.S. Over the last month, for example, the U.S. has done more COVID tests than chlamydia and gonorrhea tests for the entire year. Within that, demand for our test remains very healthy. And as we said, we believe this is because we have the gold standard product in terms of automation, differentiated labeling and broad installed base. So as the market consolidates, we think we will be a sheer leaner in that and as the market changes and really as the cream rises to the top, so to speak. I think the fourth and final point is that what we don't know is that it's impossible to forecast as the pandemic has repeatedly shown us is how those last 2 points balance out. In other words, much like our market share gains offset declines in overall testing volumes, assuming those declines continue. Our baseline assumption has been and continues to be that our COVID testing revenue will decline sequentially in the back half of our fiscal year. But it's hard to be more specific than that. Also want to state the obvious and emphasize that things can change very quickly in this market, but that's how we see things today. And we're staying very close to our customers and can adjust quickly just as we did earlier in the pandemic works.

Yes. That was very helpful context, Karleen. And just maybe one follow-up to that. I mean, the way you guided to F2Q or fiscal 2Q in the context of a likely anticipated declining COVID testing trajectory. You had always assumed that -- was it fiscal 2Q would be the peak? Or was it that fiscal 1Q would be the peak?

Yes. I think we have guided specifically in this quarter that testing would be roughly flattish with Q1. So I think this would -- and we've also said that the back half our Q3 and Q4 would see declining revenues. So yes, I think this would be how we assumed this would be the peak.

Okay. And just how do you think about the kind of PCR? I know you guys aren't in precisely PCR, but the bucket PCR, the more [ sensitive ] test and antigen-based test. And do you think or had you prepared for an eventual decline in testing numbers to coincide with a bigger shift? Or do you kind of see PCR maintaining as prominent of a role even in this kind of transition period before we get to normal?

Yes. So I think you're referring to PCR. Obviously, our test is a molecular test, done in a different way. But so I think the comparison of molecular testing versus point-of-care antigen, I think, molecular assessing is always going to play a key role given societies going to need highly accurate results to reopen effectively. If you think about some of the use cases for molecular, specifically like screening before surgery in a hospital, it's unlikely that people are going to use a rapid antigen test that's less accurate to conduct that type of test. And I think what we see in most molecular markets is a decentralization over time. And I think that's what we're seeing happening with COVID today. And we expect that to continue. And really, that's why Panther is really so well positioned. The majority of our Panthers are in hospital and public health labs in all 50 states. We have been placing Panthers in small and small labs as our menu has expanded. So Rich, while it's not true point of care, we can provide fast and accurate COVID results, and that's what we really need.

Got it. I want to shift the conversation a little bit to post COVID anyway. I mean COVID trends are going to be what they are. They're going to happen. It's something we've all known, including you guys. I think the more important aspect to your story is that your business has transformed a bit overall and the strength of your position in all of your more international markets and diagnostic markets has gotten stronger because of COVID and will likely continue to be so post COVID. So I think it would be good to talk about the recovery. Maybe as the transition, how should we think about COVID tail testing in your recovery? Like what is going to be the COVID -- the lingering COVID portion once we are normalized? How do we think about the size of that? I know it's going to be dwarfed in comparison to what it is today. But is there any -- can you bookend us a little bit? And how to think of that?

Yes. I mean, that is certainly one of the things that is uncertain, what exactly is the channel for COVID testing. I think as we sit here today, we believe it's going to be a significant product for us, if you think about 2022. But we're just not quite sure what it will be. I think if you look at I think peers and other folks have put out some dialogue of the declines in COVID in the second half of the calendar year. And I think they've booked in that as 25% to 50%. So it's going to be significant, but it is going to decline over some of the quarters here in, like I said earlier. I was trying to stay close on that.

Got it. And then the other piece and to be able to stick with your diagnostics business for now is you've really significantly increased the footprint and installed base of your cancer footprint. You should be positioned for, as you had mentioned, share gains. So maybe help us think through what is the likely growth profile of your diagnostics, particularly molecular diagnostics business, when things normalize, inclusive of COVID? But when COVID comps have anniversaried, is this a 15% to 20% growth business? You're already double digits before COVID. How do we think about that?

Yes. So let me take that in a couple of pieces. First, let me say that part of our overall diagnostics business is our psychology business, which has been roughly flattish, if you will, over the past several years as we kind of have flash to declines in the U.S. and offset by growth OUS. So important to make that distinction. So when we talk about the molecular piece of our diagnostics, that business, as you know, has been growing pre-pandemic high single digits globally. And so given the Panther placements that we've talked about as well as our main menu, we believe that, that molecular business certainly will be growing, should be growing faster post COVID. But again, the COVID piece is -- it's hard to kind of what does that tail look like. But I think at the end of the day, that -- whatever that revenue looks like, it's going to have nice profit and cash associated with it to really help continue to invest in the company to make it stronger.

Yes. And then when we think of the other parts of your business that have a recovery angle to them because they've been depressed to some extent, breast -- whether it's breast health or your GYN Surgical businesses. Can you maybe just help us think through what the recovery looks like in each of those respective businesses, which is likely going to be ahead of the other? And how steep is that recovery curve?

Yes. So let me talk about our breast business first. So really pleased that the breast business returned to growth in major geographies in our first quarter. Really, what we've done there with that business over the last several years is diversify away from capital. So while we were pleased with the capital performance in the first quarter, we do believe that is going to be the slowest to fully recover, the capital business, but again, pleased with the first quarter. The other thing that we look to when we think about the recovery of that breast business is look at screening rates in the U.S. And those screening rates have held at 90% to 95% of pre-COVID levels for a while now. So that gives us good insight that, that interventional and the breast surgery business is certainly going to recover faster given people are going back for their mammograms. But we're also pleased with the breast business with new products. We relaunched our Brevera product late at the end of fiscal '20 and saw a really nice contribution from that business first quarter. So feel good about the recovery on the breast business. And then I would say on the surgical business, certainly, early on, that business was severely impacted by the shutdown of elective procedures. We saw some growth here in the first quarter, which is really built off of the strong commercial team, the recovery itself, but also R&D. We've had a number of new products introduced in that division of late and then acquisitions. We announced the acquisition of Acessa Health. So all those things are contributing to the growth. And if we look at surgical pre COVID was growing high single to low double digits. And so again, we think we'll get back to that rate as well.

That's helpful. Maybe you brought up Acessa and the capital deployment portion of the story is very interesting to me, especially as we look to the other side of COVID. Acessa, Biotheranostics, those are the 2 acquisitions that you've recently done. What does this asset do for your margin opportunity in GYN? How does it complement the portfolio? And how should we think of growth contribution from this product going forward?

Yes. So the ProVu product complements our MyoSure product, so it can access fibroids that MyoSure can't. So there's little overlap in the procedures, but it's certainly -- we're already selling to the doc the MyoSure, so to address fibroids. So this is really a natural complement to the selling portfolio of that division. We estimate that it's probably a $300 million to $400 million incremental market opportunity. And so we think that Acessa, again, complementing MyoSure will grow faster than the market, just to remove fibroid treatment.

Got it. And just going to the core kind of GYN rebound discussion for a minute. My understanding has always been that this is very dependent on women going into the doctor's office, and it's not always a prescheduled kind of procedure. Some of it is, oh, there's a treatment for that. We can do that now. How much of that business is what I just described. And I'm just curious. With what you're seeing in recovery dynamics, does that kind of makes you feel better or worse about the potential for that business to get a benefit from a backlog work down, so to speak? It seems like it's more real time.

Yes. I think the MyoSure certainly is used for a number of different things. Women could be symptomatic, for sure. Could be affecting her fertility. So it's probably a little bit of a combination of the both of -- that there could be some scheduling of it versus the women suffering in some way in those -- or doctor. But overall, what gives us confidence in recovery is that what we've seen with the commercial teams and what they did in Q1, where we weren't having significant elective procedure shutdowns. So really feel good about that recovery for that business.

Got it. And maybe switching to another acquisition that you guys just did, Biotheranostics. Maybe talk to us a little bit about why this is the right deal for right now. It's not entirely in your molecular diagnostics wheelhouse. It's a bit more adjacent. But maybe talk about what the strategic fit is and why this is the right asset for you guys?

Yes. It certainly is a near adjacency. And I would think that think about oncology, that is something that we're already dealing with, with our breast cancer screening and cervical cancer screening. So something that certainly we're comfortable with. But I think in order to optimize growth, we need to get into some of these markets that we have a right to win. I think we did some similar with Faxitron and Focal in developing the breast conserving surgery piece of our breast health division. Oncology is fast-growing adjacency, which again, like I said, we have a right to win there, and we intend to leverage our physician sales force to help build awareness and also really pleased with the guideline that was recently announced from the National Comprehensive Cancer Network.

Maybe you can elaborate a little bit on that and what it means and when it could actually help accelerate sales?