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

Good morning. My name is Brian Weinstein, and I'm the Group Head of Life Sciences here at William Blair. And as such, I'm responsible for our coverage of Hologic. Before jumping into a really exciting fireside chat, I am required to inform you that for a complete list of disclosures or potential conflicts of interest that you should visit our website at williamblair.com. Logistically, as I mentioned, this is a fireside chat between us and the management team that will last for about 30 minutes. We have a set of questions prepared, which we are planning to get through. If you do have a question, you can submit it in the question box, we will try and keep an eye out for it, but I cannot really guarantee that we'll be able to get to everything in the time allotted. With that, let's jump in. With us today is the company's CFO, Karleen Oberton; and working somewhere in the background is the man, the myth, the legend himself, Mr. Mike Watts from Investor Relations. Thanks for joining us, both of you. Really appreciate it.

Thanks, Brian. It's great to be here.

This is a Growth Stock Conference and really not a health care specialist conference, I thought maybe we could start with having you give maybe a 10-minute or so overview about the business and kind of where you're playing today, especially in light of some acquisitions and kind of where that positions you guys from a business standpoint. We'll get into some of the more recent drivers of the business and kind of more of a targeted Q&A that we'll do here in a minute, but would love to just kind of hear kind of what is Hologic. So Hologic 101 at this point for maybe 10 minutes or so.

Sure, Brian. That's a great place to start. Hologic is a medical technology company that is uniquely focused in early detection and prevention in women's health, specifically. We structurally operate in 3 major divisions. Our Breast Health division, our Diagnostics, which are our 2 largest as well as the Surgical division. And I think one of the unique things for us is that each division has a market-leading, clinically differentiated product portfolio. It's just here in the U.S. We are typically the gold standard in where we play, primarily in breast cancer screening, cervical cancer screening and molecular testing. In 2020, revenue was about $3.8 billion. And we have multiple revenue streams, revenue models, but about 80% of that revenue buying was reoccurring in nature, whether it's from service contracts or it's from disposables. I think from a legacy perspective, Hologic is sometimes referred to as a capital company, but we have continually diversified away from being a capital company, even though that is still an exciting part of the portfolio. In that same year, about 75% of our revenue came from the U.S., 25% OUS, which for most med tech companies, the split is typically 50-50. So we view that as a meaningful growth opportunity for Hologic for many years to come. In some of that, historically, we hadn't been focused internationally. And over the past several years, we've been keenly investing in our commercial capabilities as well as the COVID. What we've done in the time of COVID has dramatically increased our recognition, our brand awareness of who we are and what we do with health ministries and foreign government. But more importantly, Brian, women just don't have access to the gold standard of care that we have here in the U.S. They don't have the screening program that we have. So that is part of -- as we grow internationally, it's not only good for us and our shareholders, but it's good for the women across the globe, and we're really passionate about that. In 2020, our Diagnostics business was really [ the sting out ]. As you know, with bringing 2 COVID tests to market in the U.S. and really this -- the COVID revenue and the cash flows we've generated have been just a huge benefit for us and really, really guaranteed that we're going to be a stronger company post the pandemic. And so one of the things that you talked about was that M&A activity. And so we have -- over the past several years, we've been focused on deploying our free cash flow between tuck-in M&A and share repurchase. Well, the free cash flow expanded significantly because of COVID, and we were able to kind of continue to execute on that strategy of tuck-in M&A and share repurchase, but it's probably a larger scale than we would have without the COVID opportunity. And I think for us, and if we reflect over the last 15 months, certainly, like everyone else, early in the time of COVID, we were kind of shutting down, cutting back on expenses. But with the COVID test, we were able to really reignite even on the base business, continuing to our R&D projects, continuing our marketing products, helping bring awareness to bring people back to well visits, which will help in the recovery of our base business. So we couldn't be more pleased with what we've done in terms of COVID and bringing the testing to the U.S. and around the globe, the partnerships. Like I talked about with our key customers here in the U.S. as well as internationally, I believe the company is really set up for some great success moving forward.

Thank you for that. That's a good overview. It should give people an idea about where you sit and some of the market-leading products that you guys have. We are asking each company attending the conference this year kind of a set of standard questions so that we can kind of level set people's answers and get an idea that's -- about how businesses are performing that's consistent across the businesses. So we'll dig into that now with some more scripted questions, and then we'll go with some follow-ups to some of these answers here later on. But in terms of the scripted questions, what we wanted to hit was talk about recent trends. I'm going ask you a question about that here in a moment. Then we'll jump into something on supply chain and any inflationary pressures. We'll talk about catalysts. And then a topic that I'm really trying to lean into this year, which is ESG.

But starting with recent trends. As we sit here now post-Memorial Day, summer has finally started, which here in Chicago means it's above 40 degrees, so we're happy. We were hoping that you can provide some sort of an update on the business, both in terms of what you're seeing relative to the legacy business. By "legacy," I mean non-COVID, let's just say, your core business. And of course, a particular interest, especially given Abbott's comments yesterday, what the trends are that you're seeing with COVID-19 demand relative to your expectations? I know you had already talked down numbers on your last earnings call on that side, but how are things trending on sort of the legacy-based business and then on the COVID side at this point?

Yes. So let me -- I can't give a specific update in the quarter, Brian, but I'll kind of talk about the trends. On the base business, we're continuing to see the recovery, right? So I think as we exit Q2, again, when we -- we're connected to a fair amount of like our gantries here in the U.S. but even in tomography screening, and those screening rates have been holding at roughly 90% of prepandemic levels. And we would continue to see each month that -- continue to improve that trend, and that really drives now that business, but with the interventional piece of the business related to that. As well as kind of on the molecular, if you look at cytology and some of our FTI screenings are really tied to well-woman activities. And those, again, are probably about 90% of where they were prepandemic as we exited Q2. So again, we'd expect as vaccines continue to roll out, as people mandates are released, that we'll continue to see those well-woman visits and screening activities get back to the prepandemic level. So continue to see improvement. As it relates to COVID, you're right, we kind of reset expectations in the last call. We were not surprised that the COVID testing is coming down in the U.S., but it remains significant. And I think we talked about last week, the guide that we expected Q3 to be about $200 million to $250 million in that. Really, whatever Q3 is, we expect Q4 to be less as, again, vaccines continue to roll out in this kind of community within the populations.

Am I muted? No? Okay. Yes. I thought I was muted there. That's helpful. And just to kind of follow-up on kind of COVID for a second here, what are your thoughts on the long-term testing dynamics? So beyond kind of these Q3 revenue numbers that you guys put out there, and you just talked about in Q4 -- fiscal Q4, which for you, of course, is September, being less than that. But how do you guys think about the long-term dynamics and the use cases where testing might be applicable? Steve was pretty clear on the last earnings call, and he's been pretty clear over this entire pandemic that he sees COVID-19 as being impact to revenue in '22 and still having some kind of place in '23 and beyond. So where -- what are the updated thoughts, if any, on that?

Yes. I mean -- I think as we think about -- as we enter our fiscal '22, which is the fall quarter, if you will, there's probably -- continue to have vaccinations rolled out, a greater piece of the population vaccinated, but then we also have back-to-school likely without masks, and we also have the flu season reinvigorating. So how those all intersect, it's not clear, but I think we continue to believe testing for COVID is going to be important. When we get into that time frame that people are going to have symptoms, flu-like symptoms and people that want to know, do they have COVID or not? And so I think we do believe overall testing in '22 is going to be less than it was in '21, again, the impact of the vaccine. But I mean, let me help -- I mean a way to put it in perspective, Brian, is if you look at our molecular business, our biggest revenue test is chlamydia and gonorrhea, right? It's been out there for many, many years. And annually, the largest that, that test revenues is roughly $275 million. So even if COVID is $300 million or $400 million in 2022, it is bigger than any of the molecular assays that we've had historically, and that is meaningful to us. That is going to be meaningful cash flow generation that we'll be able to deploy. So to help folks understand, the COVID manufacturing leverages our molecular manufacturing, it's not separate, right? It's [ fungible from one assay to the other ]. So to add another size product like that just creates, I guess, a new leverage for us as an organization. And so while it seems to be somewhat of an overhang on the stock, it is great for us, but whatever that revenue is, it's going to be meaningful and we're going to put it to good use.

Yes. Do you sense that because you guys are primarily -- not primarily, you're exclusively, of course, a molecular diagnostic COVID player and really playing in reference labs, hospital systems, academic centers, even smaller and midsized hospitals, do you get the sense that, that market plays out a little different than kind of more traditional point of care? I mean -- I think Abbott, yesterday, was talking about seeing headwinds in more of the rapid stuff, over-the-counter stuff. How do you think about the -- just positioning of molecular here?

Yes. I mean -- I think where our disposition probably -- uniquely, as you know, the Panther instrumentation is not -- it doesn't take up a whole room, right? And it does fit in the size of the lab and can be very close to the customer/the patient, right? So if it's in that acute care setting, you need to know, and you have the Panther in your lab, you can have the results in a couple of hours. But -- so we do believe that our Panther is well placed for that. They're -- highly accurate test results in a very timely basis is going to be important, we're well positioned to play. But I think as well as with our acquisition of Mobidiag, I think that also gets us into that acute care, kind of more the quicker turnaround on the highly accurate test.

A couple of companies have gotten into a little bit of trouble in COVID-19 in terms of forecasting the business and citing that inventory levels end up being higher in the field than what they expected and then ordering sort of just falls off. What kind of visibility do you guys have to inventory levels for COVID in the field to kind of base your forecast on at this point?

Yes. I mean -- I think what we have been monitoring is some of the AdvaMed data, which shows the shipments from the key manufacturers and molecular tests. And I think what we -- if you look at that data cumulatively, we're starting to see parity. So I think we feel that the labs that were -- when supply was what everyone was focused on and everyone is looking for tests and would take anything that they could get, I think we're starting to see them work through that is our sense in looking at that data as well as what we've seen in some of our customer ordering patterns is that they've kind of worked through with that inventory.

Great. I want to pivot to some of these other kind of more scripted questions at this point. Every week, we seem to hear about some issues with something in the global supply chain that you never thought would be impacted, right? We heard about the chlorine tablets now for pool companies and just stuff you never would have thought about before. So I guess, as it relates to your supply chain, is there anything that you've seen that you would have thought maybe 6 months or a year ago never would have been an issue? Any issues creeping up whatsoever in terms of access to raw materials? And the corollary question to that is, are you seeing any inflationary pressure on your business as far as those raw material prices go at this point?

Yes. From a supply chain perspective, we haven't seen anything material at this point. I think anecdotally, there's been shortages of components in some of our smaller products, but nothing significant. I mean -- I think, Brian, we've been, historically, a U.S. manufacturer, so we don't have a lot of the exposures that other companies might have with more global supply chain. I think from an inflationary perspective, again, nothing significant at this point in time that we're concerned about. And I think still yet to be determined by the inflationary pressures that are transient or permanent.