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

Hi, good afternoon, everyone. Welcome to the Virtual Vegas Conference. My name is Ivy Ma, the Life Science Tools and Diagnostic analyst here at BofA. I'm very pleased to have Hologic with us today. And from BofA, I also have my colleague, Juan Avendano joining us. From Hologic, we have Karleen Oberton, Chief Financial Officer; and Mike Watts, VP of Investor Relations and Corporate Communications. Thank you once again for being here. It's [ easy ] that it's always for you guys.

Thanks.

And thank you. So a quick reminder for investors. You can submit questions via the webcast, and we'll try to incorporate it into the Q&A in a bit. So since we started a few minutes late, I guess, I'll give you guys to -- a couple of minutes to just quickly -- maybe do just really quick opening remarks, and we will jump right into questions.

Sure, Ivy. I'm glad to be here today with everyone. To remind everyone, Hologic is a medical technology company uniquely focused in women's health. We operate within 3 major divisions: Breast Health, Surgical and Diagnostics. And in 2020, we did about $3.8 billion in revenue, about 80% of our revenue on a recurring basis. And within our Diagnostics business, we are really pleased with what we've done to bring COVID testing to be part of the solution for the world for this pandemic and believe that the COVID opportunity has been a unique one for Hologic and that we'll be a startup company post the pandemic.

Great. So I wanted to start with a bigger question today. Hologic has done -- has played a really important role fighting the COVID pandemic and sold maybe over 100 million tests today. But now people are incrementally more worried about COVID-free, so the optics are -- and as far as tough comps in the prior year. So I just wanted to start with, in your view, I know it doesn't really sync to future, but what the Street doesn't appreciate enough about this current situation? And if you can provide any color to help guide investors through the uncertainty here?

Yes. I think right now, there's probably an overfocused concern over the short term, right, and what does COVID revenue do over the next several quarters. The reality is that no one knows what the trajectory of our COVID testing will be, both in the U.S. and outside the U.S. And to frame our latest estimates is that we estimated for Q3, in a conservative fashion, that COVID revenue would be $200 million to $250 million and then likely down sequentially into Q4. I think what is actually more importantly, what's being overlooked is what the COVID testing has done for Hologic over the longer term and how we will be a stronger company. So Ivy, if someone had said to us 18 months ago that, could you have imagined that over the next 18 months, you will dramatically increase your Panther installed base, that you will move forward 2 years' worth of Panther placements in 12 months and that we still have very high demand, that we would have the ability to deploy $1.3 billion on strategic M&A, buying assets that will help the business grow faster in the future as well as buying back stock to also strengthen the business internationally, delivering on our commitments and increasing our brand and commercial capabilities globally. Those are tremendous things that even despite having to deal with COVID revenue coming down, we would have committed to that 18 months ago. All those things make this business much stronger. And in fact, on -- what we had said on the last call is that pre-pandemic, heading into the pandemic, the business was growing about 5%, and we expect post pandemic to the business to be growing stronger than that. So we're extremely pleased with everything that we've done during this pandemic, and we're really excited about the future trajectory of the business. And I think when you think about all that and you think about our current stock price, there really is no COVID benefit in our stock price. So we will have hundreds of millions of dollars of COVID revenue from here on out. And I think the people can think about that as simply upside to where we're at now.

That's a great overview, Karleen. And you've probably touched on a few of my later questions as well. So I want to follow up on that COVID benefits on more normalized basis. So it's very unlikely that your COVID-related testing sales would drop to 0. But just wanted to see if you could give any incremental color on the demand for those tests beyond '21? And what's the potential durable tail?

Yes. I don't know how much more clarity I can provide. But as we said, we've given our best estimate, a conservative estimate for Q3, the $200 million to $250 million. Whatever Q3 is, we likely believe that Q4 will be less than that, as you think about vaccines continuing to roll out and really moving into those summer months, not your typical flu-type season. But -- so we really don't know what that tail will be. But I think as we go through the balance of this year, we'll start to get more clarity, and hopefully, we can give some more clarity to that by the end of our fiscal year. But again, I think the opportunity here is huge that whatever the tail is, it's going to be likely our largest assay in our molecular business for several years.

Great. Wanted to stay on diagnostics for a few minutes. So how are you progressing with the back-to-school, back-to-business program? And I also see a DoD contract came through sometime last week. So wanted to see if there's any color there.

Yes. So gaining that back-to-school or back-to-business contracts is really driven by our customers. We don't really have insight into what they're doing. But the reality is that we are well positioned with our customers, to the extent they get that business, right? So we have placed many of our Panthers in smaller reference labs, in hospital labs, again, closer to the patient. And so whoever gets that business, we'll likely share on that, for sure. And I think on the DoD, they have what I described as a purchase order almost for up to $179 million over the next 3 years. So it's not a guarantee, but to the extent they have demand, we'll be there to deliver on that business.

Got it. That's actually a great segue into my next question. So one of the most frequent questions I got from investors is that now that you significantly expanded your global footprint with Panther instruments, almost tripled what you used to play in a year over the last 12 months. So the question I keep getting is, what differentiates Panther from the competition? And what makes customers wanted to speak with Panther in a more normalized basis post pandemic?

Yes. So we have strategically placed those Panthers over the last 18 months with an eye towards non-COVID testing, right, so that we wanted to place them where customers are willing to commit to our other assays beyond when COVID and the pandemic subsided. And I think what we've seen over the last 10 years is that once a customer has a Panther, they essentially fall in love with it, right? The workflow, the automation, the time and money that the Panther saves, the lab or the hospital, that gives us confidence that new customers having those Panthers will want to load more on those Panthers as the pandemic wanes.

Right. So just a follow-up on that. What's Hologic doing to expand test menus that can be used on Panther, both internally and through acquisitions. I know you did a series of acquisitions this year. So just appreciate any color there.

Yes. I think, Ivy, we still have plenty of runway with our existing menu. If you think about the Panther, 16 assays approved, many of those assays were approved in that 2018-2019 time frame. And so we think there's still a long runway on assays such as the virals, which will take market share over the coming years as well as newer assays where the market needs to be developed for our vaginosis assay and our Mgen assay. So we really think that plenty of runway with that [ may good to go ]. But also, we announced the acquisition of Diagenode, which we partnered with them before to bring some other PCR assays onto our Panther Fusion platform, such as hospital-acquired infections, syndromic panels, et cetera.

Great. And just on that, in order for customers to pick up and use more of the assays on Panthers, what are Hologic doing? Or what are some of the commercialization effort in that front to drive more utilization?

Yes. So during the pandemic, what we did is we incentivized our sales force 2x the normal commission rate to get non-COVID assays test of records, they call it. So a test of record is the estimated 1 year's revenue of a newly validated assay on Panther. And so we purposely incentivized the sales force to go and do that. And what we said is in 2020, we did about 30 million in test of records, which was an all-time high. And I would say that through the first 6 months of '21, we've done about another 30 million. So strategically focusing our sales force to contract non-COVID assays, so when capacity comes down -- capacity is available on the Panther, as COVID testing comes down, our customers can ramp up those other assays on that platform.

That's great color. And maybe one last one on the diagnostic front before we move on to the rest of the business. So we touched on acquisitions earlier and recently the more sizable one is the acquisition announced earlier on Mobidiag. So just wondering how does that one play into the overall longer-term diagnostic strategy there?

Yes. So we're really excited about the Mobidiag acquisition. They play in the syndromic panel GI and hospital-acquired infections and represents an underpenetrated over $2 billion market for us to play in really close adjacency with an opportunity to shift near to the patient. And we believe that nearer to the patient is a trend that will continue as a result of COVID, for sure. And the platform itself is differentiated in that it does both PCR and micro-array, which allows it to do both low-plex and high-plex testing on one box. And this closer to the patient area is an adjacency we've been looking at for several years. And one of the issues that we always come up against is the cost, the cost of the test itself. And we believe Mobidiag has really took that challenge on and solved it with a cartridge that has a limited number of parts, very simplified parts so that we're able to kind of address that margin profile on that test. So -- and I think really a great way to put our COVID cash flow to work.

Got it. I mean it's definitely an incrementally more competitive space and which is the trend of the future. But I wonder how fast do you see it growing, particularly ex-COVID?

Yes. This should be a 20%-plus grower for several years. And think about U.S. -- so they have no revenue in the U.S. today, right? So it's all OUS. We think we'll be on track to get approval for tests in the U.S. in late '22, early '23. And that's really going to be the catalyst for growth when we're able to drop those assays, that box and to our sales force here that we have in the U.S. They do have a little bit of COVID revenue today. So there'll be a little bit of uncertainty next year. But once we get those U.S. approvals, feel really good about that growth rate.

That's really helpful. So moving on to the rest of the business. So in the most recent quarter, Breast Health recovered faster than expected. How it benefited from diversifying away from just capital sales. But the mammography market is still not quite back yet. So maybe how should we think about the 3D gantry ramping going forward in a post-pandemic world? So we hosted a few other clinical lab sessions early in the conference, and some of the experts were talking about CapEx probably will need some time to come back. So just wanted to see if there's any comes there.

Yes. I think overall, really pleased with what the Breast Health business has done. And the CapEx continues to be a smaller and smaller piece of that business. We've intentionally diversified away from capital. And actually, in Q2 '21, U.S. capital was probably only about 15% of the total revenue for that division. So CapEx is still recovering. It's not quite to the pre-pandemic levels, but pleased with what has happened. And when we think about the U.S. market, we still think there's several years of conversion from 2D to 3D, both our installed base as well as the competitive installed base. And Ivy, we still continue to win about 75% of the new 3Ds that are sold out there based on our differentiated platform. So I feel really good about that business and where it is.

Great. And we did notice there's incremental press release around new software offerings and also around the new acquisitions in Breast Health. Is there any way you could size that opportunity for us?

Yes. I mean if you think about software as -- in artificial intelligence is really about how do we help the radiologist read images faster, identify more cancers. So improving that image quality is really great and helps us -- we sell those software upgrades to our installed base, right? So an opportunity to sell to our existing customers. And the acquisitions has really been about diversifying across that continuing of breast health care, allowing the reps to sell into different call points, from radiologists to the pathologists to the surgeon and our breast-conserving surgery, that has played out through the SSI acquisition, the Focal and the Faxitron acquisitions, and again, leads to the diversification of that business. And I think the other thing that's probably a little underappreciated is that the largest piece of revenue in that business is service. It's about 30% of our revenue in that business and grows as our total installed base continues to grow.

Great. With a few minutes left here, I wanted to touch on Acessa. So you bought Acessa earlier in the year. Could you also frame the opportunity there for Hologic? And how does it play into the overall segment growth and maybe driving a higher growth longer term?

Yes. Acessa, it fits really nicely into our existing sales force portfolio. It's selling to the same customers. So what Acessa does, Acessa addresses larger fibroids that MyoSure cannot treat. So really perfect leverage point for our sales reps. And it addresses what we've estimated is greater than a $500 million market today. And we believe over the next several years that, that could be a $100 million product within that division.

Sounds great. And last few questions. I wanted to also focus on some of the international growth there. I mean even before COVID, it was a very strong segment with double-digit growth. And the COVID testing certainly strengthens your international footprint. Could you remind us what's the exposure now? And where do you envision it to go? And maybe how much competition from local players you're seeing in your main segment?

Sure. Sure. So prior to COVID, we were clearly under-indexed internationally, about 25% of our total revenue. In Q2, with the benefit of COVID, that percentage was up to 31%. So making some progress. But I think the -- while we have invested in international over the past several years, the COVID opportunity has really accelerated both our brand and our recognition. We have been really diligent and focused on making strong commitments to our customers on COVID testing and then delivering on them. And we've done that time and time and again. And I think that is allowing us to have higher-level discussions with health ministries, with foreign governments, broader than just COVID, about breast cancer screening, about cervical cancer screening. So I really believe that we've accelerated our profile over the last 18 months. And clearly, outside the U.S., we've got some big competitors, Roche and Siemens, we go up against some big guys. But we do that in the U.S. and believe that with our superior product, we'll continue to do well. And then finally, what I'd just say, what we've also done internationally is gone direct in some key markets. We had historically these dealers. And what we're finding is when we go direct with our market capabilities, that those markets perform better as part of Hologic than on a stand-alone basis.

Great. And we actually have a question come in, which is kind of the frequent questions I've been getting as well on the margin profile. So the EBITDA -- the question goes, the EBITDA margin pre-COVID were pretty consistent in the low 30s, and that has moved up meaningfully due to the testing kits. Just wanted to see if there's any structural change to the margin profile longer term and as the COVID testing continue to drop off here.

Yes. I think the starting off point is let's go back to Q2 '20. That was the last quarter without Cynosure and really without the benefit of COVID, and our op income margin was 31.5% in that quarter. And think about a stronger base business, but also whatever COVID revenue we have in '22 and '23 will be accretive to that margin profile. So while the margin profile will come down sequentially into Q3 and Q4, as the COVID revenue comes down overall, we look at '22, it's going to be accretive to that whatever COVID revenue we have.

Got it. And a follow-up on that is, well, the incremental investments and acquisitions in the near term that has the downward pressure on margin profile. Want to see if you could bridge that for us? And then it also goes into a question, what's your focus to continue to put the cash to use?

Yes. So I think we talked about like Diagenode and Mobidiag will likely be dilutive to margins over the next year to 2 years as we seek U.S. approvals, right? And then from there, as we start to ramp up U.S. sales, we should be, on part, potentially accretive to the corporate average. But again, over those 2-year periods, I think my guess would be that COVID -- any COVID benefit would more than offset that dilution from those acquisitions. And to the point of capital allocation, if you will, from the cash that we've received from COVID, again, we're really pleased with what we have done, deploying $1.3 million in recent acquisitions and believe that we'll have the capital to continue to do tuck-in acquisitions as well as some strategic share buyback.

Got it. In terms of future acquisitions, or just thinking about new products, what do you think is needed to -- in the future, longer term, for Hologic to better position in the market?

Yes. I think we're really pleased with what we have done over the last several years. I think to give perspective, M&A sits within each of the divisions. So each of the divisions are looking for those assets and targets that really will do better as part of Hologic, where are our close adjacencies, where are points of leverage. So as we sit here today, I don't think there's anything that we think we're missing specifically, but more looking for those targets where they'll be growth accretive, certainly on the top line and where we have a strong conviction in our right to win in that adjacency.

Great. And last couple of minutes, I wanted to finish with the question that I -- that we do ask almost all of our companies. Especially for Hologic, I mean the pandemic has definitely changed your positioning here. So I wanted to see what's your view on how the pandemic shaped the company? And what has changed in terms of how you see your business going forward?

Yes. I think this really goes back to those initial growth drivers that I talked about that the acceleration of Panther placements, the acceleration of M&A putting $1.3 billion of capital to work in tuck-in M&A. Our change in our trajectory of our brand and recognition internationally, all those things will accelerate our organic growth post the pandemic and really strengthens the company for the longer term. So we're really pleased with all the actions that we have been taking during the pandemic. And as Steve said on the earnings call, we're really excited about our future more than we've ever been in the past.

And maybe just real last question. What are the most challenge and key risks here with the stock off of its highs? And just wanted to see what's the most debated topics of late?

Yes. What I would say when I look at the stock price is that there's no value for COVID in the stock right now. So I don't see much risk. I see it's all upside, right? I think any value from COVID for '22 or '23 is not within the stock and presents meaningful upside.

Sounds great. And with that, I think we're out of time. So thank you again so much for joining us, and thank you, investors, for participating. Let us know if you have any questions, we can always follow-up offline. But thank you, and Derik would ask me to plug in for II. So we appreciate your support there. And again, thank you for Karleen and Mike for joining us and hope you guys are okay.

Thanks, Ivy, for having us.

Thank you.