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

Okay. Great. Let's go ahead and start our next presentation. So I am Frank Jarman, again, our high-yield technology analyst -- or sorry, high yield health care analyst here at Goldman Sachs. And I am very pleased to have Hologic here with us today. From Hologic, we have Michael Watts, who's Vice President of Investor Relations and Corporate Development; and Marci Lerner, who is Vice President and Treasurer of the company. So Michael and Marci, thank you both so much for joining us today. The Hologic team is going to start off with a couple of slides, and then we'll wrap up with some Q&A. And with that, Michael, I will go ahead and pass the floor over to you.

Yes. Thank you, Frank, and thanks to Goldman for having us. We're glad to be here. Let me just reference Slide 2 to begin. That's our safe harbor statement. Obviously, we will be making some forward-looking statements this afternoon. Those are not guarantees of performance. You can find more information in our SEC filings. I would also refer you to our non-GAAP statement. We will be using some non-GAAP measures today. Those are mainly to exclude onetime costs related to acquisitions. There's a reconciliation to GAAP at the end of the slide deck or you can find that in our press releases as well. So turning to Slide 4. Marci and I would like to cover 4 topics with you today. First is a brief introduction to Hologic, if you're not familiar; second, just one slide on how we've really made a tremendous difference and continue to make a massive difference in the COVID-19 fight; third, how we're positioned to become a stronger company after the pandemic is over; and then finally, I'll turn it over to Marci and she'll wrap up with the financials. So turning to Slide 5. We've spent a lot of time over the last several years really defining and focusing on what makes us tick as an organization, and that's shown here. Our purpose, as you can see, is to enable healthier lives, everywhere, every day. Our passion as an organization is to be global champions for women's health. And if you think about our product portfolio across the board, I mean, really no company in the world has probably done more, certainly, to prevent breast cancer and cervical cancer than we have, it's something we're really proud of. And then finally, our promise is something we call the Science of Sure, which is all about developing and commercializing truly innovative, clinically differentiated products that really make a difference in women's lives and in the lives of our customers. Turning to Slide 6 with the pie charts very briefly. This is a bit of an overview of Hologic at the end of our fiscal 2020, which ended in September. You can see revenue of about $3.8 billion, very strong growth both on the top line and the bottom line, driven by our contributions to the COVID fight, which I'll get into more in a second. If you look at the pie chart on the left, you can see that COVID contribution in our Diagnostics segment, which was a little bit more than half of our revenue last year. Our Breast & Skeletal Health business is about 1/3. And then our smallest business, our Surgical franchise, was about 10% of revenue last year. In the middle, I wanted to clear up a little bit of a misconception that some investors have, which is that we are primarily a capital company, selling mammography machines. And of course, that is very important. But as we've diversified over time, capital has become a smaller and smaller piece of our business. It was only about 17% of revenue last year. Consumables, which would include our COVID assays, we're almost 70% of revenue. And then we also have a very large service business that's almost as big as our capital franchise across the company. On the right there, you can see very significant opportunities to grow outside the United States, which we'll talk about since only about 1/4 of our revenue comes on OUS. Skipping over to Slide 7, which is the divider slide and then turning to Slide 8, I wanted to talk a little bit about how we have made and continue to make a massive difference in the COVID-19 fight. Even before COVID, we were one of the world's largest and leading molecular diagnostics companies. So we were in a unique position to help against the pandemic. First thing we did is develop 2 highly accurate, high-throughput test really in record time, in a matter of months after the COVID sequence was first published. Next thing we were able to do is really leverage a large installed base of Panther instruments on which the test run. Typically, in an average year, over the last 5 years, we've placed about 200, 225 new Panther systems a year globally. In the last 12 months, we placed more than 700 Panther systems, so more than tripling our recent run rate based on the incredible COVID demand. As a result of that, we've increased our overall installed base by almost 40% to about 2,600 instruments. So the largest installed base of fully automated, high-throughput instruments out there. We also dramatically increased our production of tests. We have, to this point, provided roughly 100 million COVID tests globally, so making a huge contribution there. That has generated more than $2.3 billion of revenue through the end of our second quarter, which we just reported a couple of weeks ago. And we do expect that revenue to decline from COVID tests as vaccines roll out, that will be a good thing for humanity as a whole. But we do think that COVID testing is going to be -- continue to be very important long term and will be -- continue to be a large product for us for a long time in the future. Finally, the only thing I would highlight is that we do think that the COVID pandemic has really strengthened our diagnostics business for the future. We do have -- on that larger installed base of Panther instruments, we have signed up record levels of new non-COVID business in the future, what we call test of records, which we've talked about in some of our earnings calls. So we think that we are well set up for COVID to help diagnostics become a faster-growing company after the pandemic than we were coming in. Let me flip over to Slide 9 and then Slide 10, how we're a stronger company, we believe, after the pandemic. One of the major things we've been able to do on Slide 10 is really redeploy some very strong cash flows into a series of tuck-in deals. We've actually invested more than $1.3 billion over the last 12 months on 6 acquisitions that we think are going to significantly strengthen us for the future. You can see them listed here, but I'll just touch on them very briefly. Acessa was the first acquisition. This is a laparoscopic, fibroid removal product that we acquired, really complements our Surgical business. Puts another product in that bag for them to sell to the same customer base of GYN surgeons. That was about an $80 million deal. We bought one of our small U.S. distributors, very small deal, in our breast health business to be able to get closer to the customer and secure that service revenue. Then we bought a company called SOMATEX, which is a -- they've been a long-time supplier for us, breast biopsy markers as well as other localization technologies. They're a company based in Germany, also have a European sales force, about a $60 million deal upfront. Acquired a company called Biotheranostics, which let us move into the oncology space, the lab-based oncology testing space. Company based right here in San Diego, down the street from our Diagnostics headquarters, about a $230 million deal. They have 2 primary tests, including a really important test for women trying to decide whether to continue with long-term endocrine therapy as part of their breast cancer treatment. So an important product there. And then finally, 2 other deals in Diagnostics. We bought a company, a Belgian company, called Diagenode, which think of them as an assay, an expert in assay development, that we have partnered with for a couple of years to develop several of our tests for Panther Fusion. About a $160 million deal that will help accelerate those tests outside the United States, particularly in Europe, and also give us some additional capabilities in terms of manufacturing and other things on the continent. And then finally, our largest deal and most recent deal is the acquisition of Mobidiag, which we expect to close in Q4. This is a Finnish company that really is an innovator in an adjacent Diagnostics segment, which is near-patient, rapid-turnaround acute care testing market that we have been -- and high multiplexing that we've been watching for a number of years. And we think that Mobidiag really offers a unique, differentiated solution to move into that very large and growing market. And then finally, we've been able to do all that even while repurchasing more than $300 million of stock over the last year, and we've got almost $900 million of authorization left on our $1 billion authorization through the end of our second quarter a few weeks ago. Turning to Slide 7. I just want to touch -- or Slide 11, excuse me. I just want to touch briefly on our breast health business. As a result of the acquisition of SOMATEX, which I mentioned, as well as acquisitions of SSI, Focal and Faxitron, combined with our internal development, we've really been able to broaden this business across the entire continuum of breast health care. So rather than just being a company that's selling mammography systems, now we go to the customer and we say, "Hey, how can we help you with your breast health care overall?" All the way from detection at the beginning of the patient journey with our 3D mammograms, all the way through the biopsy business, the analysis of that biopsy and even extending into treatment in surgery, in some cases. So a much more integrated, much more cohesive breast health business that we built over the last several years. As a result of that, you can see on Slide 12, that the revenue from the business has become increasingly diversified. The gantry revenue or rather the 3D mammograms have clearly been affected by the pandemic, but those are recovering nicely. And the business has still grown as a result of the service revenue that I mentioned earlier as well as some of the consumable revenue streams in our biopsy business. We did post high single-digit growth in Q2 toward that end. And you can really see the composition of revenue in the charts at right that shows revenue in fiscal '15 by type and then revenue in fiscal '20, last year, by type. And you can see that our U.S. capital business was only about 17% of revenue last year, smaller than our U.S. service business. And that's why we've been able to achieve that very consistent, much more leveled out growth in breast health over time. I'd also just point out really quickly on Slide 13 that our Surgical business is rebounding nicely. As I mentioned, this is only about 10% of sales. But as you can see from the chart, it was our fastest-growing business before the pandemic before falling off very rapidly in last year in Q2 and Q3, but now rebounding very nicely and in fact, was up about 7% in the quarter that we just hosted based on really some best-in-class products, NovaSure for endometrial ablation and then MyoSure for fibroid removal, supplemented by the products coming out of our R&D pipeline as well as the Acessa acquisition, which I mentioned. And then finally, the final reason we think we'll be stronger after the pandemic is really the growth of our international potential on Slide 14. And you can see there that international had been a very solid, low double-digit grower even before the pandemic, and that accelerating based on our COVID assay sales to more than 30% in 2020. We also know that we've built lots of great relationships, better relationships, deeper relationships with lots of national governments, ministers of health, et cetera, that we think will help us after the pandemic as well. So with that, I'll flip it over to Marci, who will finish with the financials and wrap-up.

Thanks, Mike. And I'm on Page 16, and this shows our annual growth from 2014 to the present, and we grew at an average annual rate of 7%. And if you look at prepandemic, the 2019 growth, we were at 5.7%. So solid growth coming into the pandemic. And because of our COVID testing that Mike has spoken about, our growth has been accelerated. So 12.1% on a reported basis for 2020, but excluding our divestitures really 22.5% in 2020. And as of last quarter, our growth rate doubled. So the business doubled. So Page 17 showing the bottom line. We try to grow the bottom line faster than the top line, and we've had an 18.2% annual growth rate since 2014. And again, looking at 2020, you see that it's much accelerated due to the COVID revenue, which brings a higher profit rate than the house margin. So 63.8% EPS growth in 2020. And as of last quarter, our EPS quadrupled over the previous year. And then finally, on Page 18, showing strong, consistent cash flow each year over the past 7 years, more than $600 million of free cash flow each year, very, very consistent. For 2020, you'll see, because of COVID, we're in the mid-$700 million, and the first half of '21, so 2 quarters, we generated over $1.1 billion in cash. Again, due to the COVID revenue profit generating nice cash flow that's been able to pay for the 6 acquisitions that Mike spoke about. So now I'll turn it back over to Frank. And we can go to the Q&A.

Great. Thanks so much, Marci and Mike, for those comments. Maybe you guys talked about the benefit of the COVID diagnostic testing and the profitability and cash flow benefits that you've had. But I'd love to maybe just dig a little deeper there to better explore what the opportunity and the forward looks like ahead. And can you just give us a little bit more perspective on maybe, number one, how to think about the environment for COVID testing over the past year? How should we potentially think about the ramp down in a postvaccination environment? And then longer term, how do we think about the demand for COVID testing as the world shifts into sort of a new reality?

Sure. A lot of questions in there, Frank, I'll try to make sure I get all of them. But certainly, we mentioned in the presentation, more than $2 billion of COVID revenue to this point in time. We certainly expect to generate cumulatively hundreds of millions of dollars of COVID revenue from this point forward. So it will be a very important product for us. Having said that, clearly, as vaccines roll out, we've always expected that COVID testing demand would come down. That's good for society. It's good for the world. It's good for the rest of our businesses that will continue to recover. And we did guide to that effect in our last call. We generated about $680 million of COVID revenue last quarter. We said that we would expect between $200 million and $250 million of revenue in our fiscal third quarter. And as vaccines continue to roll out, that's likely to go down further in our fiscal fourth quarter. I would say, however, that even that $200 million to $250 million is an enormous product for us. That is actually larger than our entire molecular diagnostics business was before COVID. And we would expect that COVID will settle down over time into a fairly long-term annuity that's very important for us and substantial for us. I don't know what that's going to be. That's obviously an important question that, frankly, is unpredictable at this stage. But as we -- over the next couple of months, as we get more color into the fall, hopefully, we get a better sense of that and we can give more specific guidance. But we do think it will be an important product for us going forward, particularly as we get into the flu season here in the winter. And again, I think a lot of doctors, a lot of patients are going to want to test for COVID as well as flu to see what they really have and what actions they can take. So I think the ability to test for multiple anolytes will be important and that could have a big impact on the market as well.

Great. And maybe just as you think about the recovery across the rest of your business, ex testing, what are you seeing from providers in terms of them opening up their CapEx budgets for 2021? And are there certain providers that are accelerating a little faster than others?

Yes. I think things are definitely getting better. As it relates to our business, things have probably gotten better or a little faster than we expected. So that's the good news. You can see that a little bit in our Q2 results. Our breast business, which, as I mentioned, is the most capital-dependent business, although it's fairly small, was up about 7% in the quarter. That is really a function of the strategy that I outlined to build other products around that mammography franchise that really span the breast health continuum of care. So for example, what we call our interventional breast business, our surgical solutions, biopsy solutions, was actually up about 14% in the quarter based on some new product launches, including something called Brevera, and that really drove that 7% growth. So I don't think that capital is quite back to normal, Frank. I mean -- I think probably we're in the low 90s percentile there relative to pre-COVID, but certainly heading in the right direction. And then our Surgical business, Surgical was also up about 7% in the quarter. Now that's a much more consumable-based business. That's women going in for fiber removal going in for their ablations. So seeing a nice recovery there as well, almost 7%.

Great. Maybe, Marci, just to bring you back into the discussion, obviously, since the tailwinds on the business over the last year have kind of played out, leverage has improved pretty meaningfully. And can you just give us an update with regards to how you're thinking about capital allocation priorities? And just where you're targeting as you think about kind of the balance sheet, leverage goals and things like that?

Sure. So on the capital allocation front, our first priority is to buy growth-accretive assets that are going to accelerate our growth into the future. And that's across all divisions, where we have our business development folks embedded in each of the divisions, reporting to the divisional presidents. And they're part of the strategy and looking at opportunities across all of our businesses and across geographies. As that plays into leverage, we are a bit underleveraged at this point, with leverage less than 1x due to the profitability of the COVID testing business driving EBITDA up. So net debt has stayed about the same level, but EBITDA has risen quite substantially. So over time, as Mike mentioned, as the COVID testing starts to wane and become at a lower level, but more of a longer-term annuity, EBITDA will be coming down as well. So our long-term leverage target is 2 to 3x, and we think we'll be back there in the next 3 to 4 quarters.

Okay. Great. That's really helpful. And just maybe as a follow-up, in the 1, 2, 3x leverage range, certainly, the debate around investment grade comes up. And I'd be curious, how important is investment grade to you? And is that a strategic priority that's important?

I would say that we're quite happy with our ratings exactly where they are. We're a very high-quality BB company, which allows us to have investment-grade-like covenants, an investment-grade-like pricing, but also be able to retain the flexibility to run our business strategically the way we wish to. So it really gives us the best of all worlds. I think it's really the sweet spot versus being very low quality and the lowest strong BBB- in investment-grade land. So I'm happy where we currently are.

Great. Mike, maybe just shifting back to you, you talked about the acquisitions that you've made over the past year. And maybe we could just dig into some of the more important ones a little more deeply and help us better understand how to think about their integration into your portfolio and sort of where we are along those steps.

Sure, Frank. Big picture, what we're trying to do with our acquisitions is 1 of 2 things. One is leverage an existing strength or an existing channel. And then the second category would be to expand into a nearby high-growth adjacency. So I would probably put those -- put them in those 2 buckets. And if I think about the deals, certainly, the SOMATEX deal in breast health, really markers that we can sell through the same commercialization structure. So a very nice tuck-in there. Same thing for the Acessa acquisition in Surgical. Again, a different kind of fibroid removal product that is used by the exact same physicians that we currently call on. So same channel complementary to our MyoSure franchise. I would also say the same thing about the couple -- about -- certainly about the Diagenode acquisition. Again, that is a partner that we have been working with to develop new tests to put on our Panther Fusion system. So again, leveraging that existing installed base of instruments. And then both Biotheranostics and Mobidiag would be, in our mind, expansions into near adjacencies. In the case of Biotheranostics, obviously, a tremendous amount of growth, both now and in the future from oncology testing. And given the products that they have, particularly that one in breast cancer, which is used to determine long-term treatment decisions, really important clinical product for women. And this lab-based oncology market is one we wanted to get into for a while, and Biotheranostics enables us to do that. Similarly with Mobidiag, what Mobidiag enables us to do is move into another molecular diagnostics market. That's really the acute care market that sits largely in hospitals that is characterized by systems that provide more rapid turnaround time. So Mobidiag could be anywhere between an hour to a couple of hours of turnaround time, but also have the ability to do many different tests at once, which is called multiplexing. And that's really the neat part about their system is it can combine both low-level multiplexing with high-level multiplexing with ease of use and rapid turnaround time. So that's a really attractive market, more than $1 billion market, growing very nicely, largely sits in the same hospitals that we currently call on, but a different kind of testing within that hospital. So that one's a little bit of a near adjacency and a little bit of leveraging the same commercial structure. They, for example, don't have any sales in the United States today. So obviously, as we get those tests approved here domestically with our commercial infrastructure, I think we can take them a long way.

Great. We have about a minute or so left. So I wanted to ask just one question that came in from the investor base. I'll just read it here. But how should we think about the longer-term growth opportunities for Breast Health & Skeletal? Is there any ability to gain market share there? Are you expecting longer-term growth to reflect maintenance cycles in the industry?

Yes. It's a good question. I think as we've diversified the business with new surgical products, with new specimen radiography products, with greater service revenue, those product cycles that we've seen in the past, those replacement cycles, it's been a very deliberate strategy to try to even those out, if you will. Even as we introduce new software packages, new hardware upgrades, we wanted to try to get more consistent revenue each year rather than having this big boom and bust like we've seen in the past. So while there is a next-gen system that's in the labs being worked now, it's probably a few years out. And I think in the meantime, we think we can see very solid growth from some of these more incremental upgrades as well as new products. The other thing I would highlight there that's really an opportunity is OUS, much less penetrated OUS. Even in Breast Health, our market shares are much lower, even though the products are the same and the competition is the same. But we've been catching up in recent years based on some strong leadership outside the United States, and we think OUS can continue to be an accelerator to growth, as we go forward, too, as 3D mammography becomes more standard of care.

Okay. Great. Well, with that, we are out of time. So Marci and Mike, thank you so much for joining us. We really appreciate it. Thanks to everybody for dialing in. With that, we can go ahead and wrap up the panel.

Thanks a lot.

Thank you, Frank.

Thank you.