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

Thanks for joining us on day 1 of our health care conference. I'm Tejas Savant, and I cover the life science tools and diagnostics sector here at Morgan Stanley. I'm delighted to have Hologic join us today. And representing the company are Steve MacMillan, CEO; and Karleen Oberton, CFO. Welcome to you both. Before we kick off with the Q&A, just a quick safe harbor here. Please see the Morgan Stanley research disclosure website at www.morganstanley.com/researchdisclosures. And if you have any questions, please do reach out to your sales rep.

So Steve, with that, on the -- let's get right to it. On the last earnings call, you provided a long-term organic revenue growth guide of 5% to 7%. Could you walk us through what you view as the key drivers behind that long-term organic growth? And what gave you the confidence that the business is now on structurally better footing versus pre-pandemic?

Sure. Why don't I take it in couple of little chunks there, Tejas, and thanks certainly for having us. Those of you who want to read that safe harbor statement, that's always one of the most exciting things to read right now. But on a more serious note, the background...

Steve, I think we may have lost you there. Justin, do we want to try and switch to audio? All right. So we're back. Apologies for the technical difficulty here. So Steve, I'm going to start with the long-term guide question again. I think you were just about getting started when the video cut off. But if you can just walk us through the drivers of that growth rate, and what gives you the confidence that the business is now on structurally better footing versus pre-pandemic?

Yes. I think, as I was saying, when we took our Board through the long-term strategic plan in June, they really looked at it, and they were blown away by how much progress we've made. And really, to a large degree, I think we were just about to showcase a lot of that, as we entered calendar 2020. We really had done so much of strengthening every franchise in every geography through the years. We had our R&D pipelines coming through and felt like really 2020 probably would have been a breakout year for us and then COVID hit. So I think one interesting piece is we felt really good there. Then when COVID hit, frankly, our response and the additional revenues and candidly profits and cash flows that we've generated have actually even turbocharged the business to where we look at it today and say, each of our franchises, Breast Health, Surgical and clearly Diagnostics, we see in that 5% to 7% growth category here out through the strat plan. Plus, we really have the additional acquisition activity coming in that really can push us towards that higher end certainly of that range. And so I think if you take a longer-term view back, 5, 6, 7 years ago, really, our international business was a distributor-led business. Today, we have people on the ground in the key countries, affecting policy, affecting decision-making. And we've just never felt better about our own capabilities and, frankly, our own financial position. I'd say it's the first time really since I've been here, the last 1.5 years is about the first time where we haven't had kind of one hand tied behind our back.

Got it. Super helpful. The topic du jour, obviously, from investors is the durability of the COVID tailwind. And I just wanted to pick your brains on that in light of the climbing cases due to the Delta variant and potentially other variants coming -- cropping up as we speak. Do you think that the outlook may prove overly conservative for the fourth quarter? And how are testing volumes trended over the last few weeks? And operationally speaking, can you tell us a little bit about how flexible your capacity is in terms of ramping up and down to meet these rapidly evolving testing trends?

Sure. I think that was about 4 questions, Tejas, so I'll try to get them all. If I miss one, circle back on it. I think back to actually the reason our Board suggested that we think about putting out the long-term guidance is we continue to think about ourselves as we have really strong core business, and COVID is really an optionality, right? It's largely an upside. And we feel like, especially over the last 18 months, a lot of the focus has been on COVID, not on our core business. So we're very proud of what we've done in COVID time to make a massive impact both on the world, but also financially for our shareholders. So -- but we really want to kind of continue to have people thinking about the strong core business. Now to address the issue, we can't give a long-term -- nobody in their right minds can give a long-term perspective to COVID. It looked very different in July than it does today. But what we said, going back a year, a year plus ago, is we did believe this thing would last longer. We knew the vaccines were not going to be the magic bullet that everybody said. And particularly when you consider the globe of 7 billion-plus people and the ability for this thing to move around and lockdowns have or have not worked, at the end of the day, we're 20 months into this thing and still battling it. We said we thought this would create a new assay for us on a fairly longer-term basis that would be as large as big or bigger than any assay that we had on the market pre-pandemic. We continue to feel that way. And we've watched the vicissitudes even in the stock. As the vaccines come out, suddenly, our testing business is going to go away, this and that. And at the end of the day, even though it's had ups and downs, our ability to respond all of the additional production capacity we put in place, we feel really good. And while we're not going to give an intra-quarter update on our sales, I think it's pretty obvious, as you've seen and as you referenced, from the externally available data, that August was clearly a different month than July in terms of testing in the United States. September is likely to be a continuation of that uptrend. And so I think we feel pretty good about our ability to respond and the position that we're in today.

Got it. And Steve, what are you seeing outside the U.S.? I mean, obviously, you have meaningful exposure in Europe, Japan as well. The vaccine rollout dynamics haven't been homogenous across the globe. And it feels like the bulk of the growth on a go-forward basis on the COVID side of things will be outside the U.S. Is that fair?

I think taking a step back, by the way, and I think as you saw, certainly, I know, as you know, last quarter, we -- about 2/3 of our revenue was outside the United States. And if you dial back even 3 or 4 years ago, I would tell you, our number would have been 0. We did not have the relationships, the capabilities and it's part of why, again, that 5% to 7% guidance we're giving for our business, our capabilities are so much stronger today. And when COVID hit, because of all the progress we've made with our Breast Health and Diagnostics business, we're able to capitalize on that internationally and get a big chunk of business. And we do believe that is also going to be a fairly enduring business. We made a lot of bets early in the pandemic actually to book some longer-term contracts that we've referenced in the calls with a number of countries, especially Western European countries, that really provided some real strength. And we see that now also probably continuing, really, I'd say, through the next cold flu season.

Got it. How should we be thinking about a floor for COVID test pricing as the mix shifts more to the U.S.? I mean, it was around $20 last quarter? And how should we think about margins as well on the COVID revenue stream?

I think we've always indicated that, hey, over time, we would expect global pricing to probably come down gradually. Could be into the mid-teens or something over time. I think a simple way to think about it is if you think about our CT/NG assay, which has an ASP in the $7 to $8 range, that's still accretive to our company margins. So almost no matter where this goes, we feel very good about it being accretive to margins and clearly generating EPS for the company.

Got it. Very helpful. And then of the 1,000-odd units you've placed since the start of the pandemic, Steve, what does the new versus existing user mix look like today? And what underpins your confidence in placing those 200 units in the next fiscal year as well? And is a return to that sort of 200 to 225 unit run rate post-pandemic fare in terms of the longer-term model here?

Yes. I think, first off, we feel great about that, the fact we've placed nearly 1,000 units. We've grown our global base by about 40%. And that's been a strong combination of both new and existing customers. So we've -- in a lot of cases, we've got existing customers that have added Panthers to their profile, and then we've signed up a number of new customers, both domestically, but also particularly outside the United States. So I think what we feel great about is even as we go in, you figure we've placed almost 4 years' worth of units and call it an 18-month time frame, the demand still looks good that we would suggest probably in fiscal '22, we're probably still going to be in that historic range of the 200 to 250. And after that, does it come down a bit? I -- probably but we're -- the flip side is we're getting so much interest in Panthers. This pandemic has really showcased the advantages of Panther. When you think about it, what is our magic of Panther, workflow, automation, in a pandemic time when resources and you -- nobody has to look very hard to realize, it's hard to hire people these days, especially lab techs and other stuff. If anything, it's making our competitive advantage showcase even better. And then as we continue to expand the menu. So even in the event that let's say, 2 or 3 years from now, if our Panther placements dip a bit, frankly, our menu expansion is going to be -- what's really going to continue to drive that growth. And I think it's again part of what underscores that 5% to 7% ongoing rate. We haven't even really begun to tap into all of the new customers on our base business because so many of the customers that have bought Panthers are using them for COVID, and they haven't even begun to really start to ramp up. So we almost have pent-up demand for our core assays. And meanwhile, we're continuing to build more assays, and create more assays and more menu for the post-pandemic world also.

Got it. And a test of record metric, in terms of committed next 12-month revenue, Steve, that you've mentioned, is a good leading indicator to make sure that these new Panthers are going to generate that pull-through once you lock the socket. How confident are you that, that metric is going to sort of bear out in terms of forecasting future pull-through on that sort of expanded customer base? And then in terms of that 75 million test per quarter capacity expansion, where do you see the most demand coming up for -- among the new users in terms of the Panther menu?

Sure, Tejas. By the way, our commercial team would be very happy to hear you using our phrase, lock the socket. So very good. And I think really, to dimensionalize it, we averaged or -- and I guess, you go back to 2019, we had about $20 million or so of what we call new tests of record. And in each of '20 and '21, those numbers have been north of $30 million. Now we haven't yet begun to fully monetize and realize those additional test of records because they continue to do COVID tests. So I think we just feel great of all of the pent-up demand. And everything that we've done in the pandemic, and I think you've heard this certainly in the past, but I'll reiterate it is we compensated our reps not on the COVID revenue, but on if they're placing more Panthers, requiring a commitment to grab our real base menu. So we weren't selling Panthers just to get COVID revenue. We were all selling them or placing them with an eye on the long term. So I think we feel great about that. As well as, to your point on the expansion, you think about this company, we were doing about 20 million to 21 million tests per quarter of all of our businesses globally. And we expanded our capabilities in less than a year up to that 75 million tests per quarter capability between our various facilities. It's more than a threefold increase. And we may not need all of that upfront. We came close to needing it all certainly in the first calendar quarter of this year. And I think we feel great about, by the way, that we also got a lot of funding from the Department of Defense, and we've made commitments to the U.S. government in terms of supplying them over time. So I think we feel great that we have that. We probably aren't going to need all of that capacity every quarter for potentially quite some time. If we do, we're poised and ready. But if we don't, we also aren't sitting with a whole bunch of wasted CapEx or anything else. So -- and then again, as we get our newer menu of BV/CV, Mgen, those things up to speed, they will also -- we basically already got the capacity expansion in place to support the growth of those businesses.

Got it. And then in terms of the new CDC guidelines for STI, Steve, obviously, it's going to happen -- need some time to make an impact to your numbers. But can you help us dimension the potential medium-term uplift that you could see from the opt-out rather than opt-in nature of the new guidelines?

Sure. I think it's hard for us to put an exact time frame or an exact number on what this will mean. But I think the way we think about it is CT/NG was already our biggest assay pre-COVID. And now in a world where we know so much of the STIs have been under -- have not been fully picked up because they haven't been ordered by the doctors, the ability for the doctors to just start to order this as more routine testing we think will be a meaningful step forward certainly for teenage and young women's health, but also for our business. But it's hard for us to put an exact number on it until we see how it plays out over time.

Got it. Switching gears to the Breast portfolio, Steve. I want to spend a little bit of time on the international expansion opportunity that's been an important growth driver for you. Could you help us think about the size of that market outside the states? And assuming that the market is a bit different, where do you see room for the greatest traction?

Sure. First off, there's not great data outside the -- in all of the international markets. But at a bare minimum, there's clearly a larger number of gantries outside the U.S. than inside the U.S. And so much of it, frankly, outside the U.S. is still 2D. So we see major opportunities for us to both continue to place gantries and ultimately to affect screening guidelines and other guidelines to where we shift more 2D to 3D. And I think, again, this is an area where we've gotten stronger. We had acquired a couple of our dealers outside the U.S., where -- if you go back 8 years ago, we were all dealers. Today, we're direct in the U.K., we're direct in Germany, we're direct in Spain, Portugal, and we've been building those out. And there are some opportunities we're looking at to continue to go direct in more of the European countries as well, all of which is beneficial both for our top and bottom line, but also the ability usually to start to affect policy more and drive more longer-term improvements as well.

Got it. And I know the diversification of the Breast Health portfolio away from capital equipment sales has been an important dynamic, and we'll get to it in a minute. But before we get there, can you just give us a snapshot of where the capital spending environment is relative to pre-COVID? Is it at sort of 75%? Is it closer to 90% plus in terms of being in that sort of normalized range again?

Yes. It's -- I would tell you this, it's certainly better than what I imagined it would be when we went into the pandemic. I'm one of the CEOs that's old enough to have been running a company back in the '08, '09 downturn and dealt with that. And we were braced and Karleen and her team, as we looked at cash flow, everything else, we were braced for a very difficult environment. But in fact, I think, candidly, a lot of the hospitals are doing okay. And again, when you think about what our 3D mammography brings, it also brings workflow advantages. It's a faster scan time. It's very easy to use for the radiologists and the techs. And so I think we're hearing in most places, it's hard to put an exact number, but I'd probably ballpark it closer to that 90% than a 75-ish percent. It seems to be in pretty good stead right now.

Got it. And then in terms of the service revenue component in Breast, I mean, does the attach rate to systems look like today? And how do you see that trending over time?

Yes. It's continued to get -- we have a very high attach rate to begin with, and it's continued to tick ever so marginally up. I think the interesting part, if you look at it is our U.S. service business is now larger than our U.S. gantry business. And I think about when I walked into this company, and all people talked about was the cliff and the cliff, and we're going to have this huge capital cliff when the gantry business drops off. And again, we set out right then and there to make this a much more sustainable, repeatable, consistent business, which included diversifying the product line and getting more disposable revenue and certainly, that service revenue and as well as getting a lot of the international business. And part of the international business, as we go from dealer to direct, we also capture that service revenue that the dealers used to capture historically, which again also creates more of a consistent business for us. It also, frankly, allows us to be servicing our own equipment, which keeps us in our customers and aware of what's going on. And so it's all kind of been a great virtuous circle for us to where the Breast Health business today looks dramatically different than it did 8 or 9 years ago.

Got it. And on the interventional front, the relaunch of Brevera for breast biopsies and the contributions from SOMATEX has helped offset some imaging softness and helped the Breast sort of Health business outperform at least in the last quarter. Can you just provide color on what you're seeing there and describe the longer-term opportunity?

Yes. I think we're so excited by Brevera. As you know, it's kind of been a long time coming. But clearly, the magic of Brevera is we're getting the initial capital sales that you'd seen in the previous, but really, it becomes a driver of disposable revenue over time as we sell the needles. And I think there's -- the initial feedback from our customers on Brevera has been tremendous. Obviously, we generated about -- probably about $30 million year-to-date on Brevera and see that as continuing to be a really nice driver over time. And at the end of the day, it's expediting the procedure dramatically. They don't have to take a sample, walk it down the hall, they can do it all in the same room. So it's quicker for the patient, it's quicker for the doctors, and it's just -- it overall improves the patient experience, the workflow experience. And it's consistent with so much of what we're doing, which is really trying to continue to improve workflow, make things easier to use for our customers and better outcomes for the patients. It's really what Panther is doing. It's what our 3D mammography is doing. It's what Brevera is doing. There's all a very consistent theme there.

Got it. Switching gears to GYN Surg. Same question as the CapEx environment. Procedure volumes, I mean, is that number now at sort of 90% relative to pre-pandemic? And is it sort of stuck there essentially, given what we're seeing with all the new COVID variants and whatnot?

Yes. I'd say a way to think about it is it was rebounding very, very nicely. And now what you have is the pockets. We had certainly some slowdown in Florida and Texas as some of the hospitals scaled back elective procedures there for a little bit of time. But overall, good solid business, but definitely not at 100% at this point in time. So -- but we're poised and ready as each of the hospitals come back online.

Got it. And then I want to touch on Acessa ProVu. How do you see that complementing MyoSure and -- in terms of the contribution to the overall GYN Surg business in the near term, I mean you have the Anthem and Cigna coverage updates. You have the [ Ico ] guidance as well. Help us think through that opportunity both in the near term given those sort of incremental positives in 2 to 3 years out.

Sure. Why don't I start 2 to 3 years out, we're very excited about where this product is going to go. We said at the time we bought it, we can see this becoming a $100-million product down the road. Now it takes the building blocks to get there. But I think the real simple piece is it's very complementary to our existing portfolio and particularly to MyoSure, where MyoSure is good for small fibroids. And Acessa ProVu is for larger fibroids. So it's a wonderful match. You basically -- to get real specific, I think as you know, MyoSure is indicated for fibroid 0 to 2. The way they're distinguished and Acessa ProVu is fibroids 2 to 6, so larger ones. So these work beautifully together. And I think we're very encouraged that they have developed a good product. Key to really getting the breakout is both guidelines and the reimbursement, and that's where we're working our commercial magic here to kind of get those things going. Once we get those wins, which we've just gotten a couple of recently, that starts to take a big roadblock down where the doctors aren't having to go to get preauthorizations. And then that starts to give the confidence of the doctors, they know they can schedule the procedure, it's going to occur. And so I think we see really over the next year, the impact of those things starting to be evident.

Got it. A couple of quick ones for Karleen here. Just given current visibility, Karleen, do you feel reasonably confident that you should be able to provide a full year guide for the next fiscal year on the next earnings call? And should we be expecting wider than normal ranges, given what's going on in the COVID front?

Sure. So we certainly intend to give full year guidance at the next earnings call, but to all the points we talked about here that there is a high level of uncertainty related to COVID, so that will come into play. It will likely drive wider ranges as you indicate at that time.

Got it. Fair enough. And then obviously, the decline on the COVID front will hamstring margins as well the investments and the recent tuck-ins in the international expansion, but on the other hand, you do have certain cost levers that you can pull here. Can you just walk us through the moving pieces and your key OpEx priorities for the next fiscal year? And how should we think about potential upside to that low 30s operating margin target you've outlined as a good baseline number for the ex-COVID business?

Yes, sure. So let me first start by saying that low 30 op margin is a very rich op margin that we've successfully maintained. And we'll continue to -- as our priority continue to grow that. But I do think, as we talked about, you talked about the headwinds for the international expansion, the acquisition, but I do think we also have some offsets. Certainly, as we talked about the molecular business, as that will probably be a higher growth driver to the overall organization that those margins, in general, are accretive to the overall business. And certainly, whatever COVID revenue that we do have, as Steve talked about, will also be accretive to our corporate average, and we will continue to be disciplined in OpEx, but also opportunistic as it relates to R&D. So we continue to build our new product pipeline.

Got it. And Steve, coming back to you, I mean, of the several recent deals that you've completed, and then this is a bit of an unfair question because it's like asking you to choose among your children, but which one has impressed you the most in terms of hitting the ground running in a quick, efficient integration? Longer term, it sounds like Mobidiag will win out and become probably the most consequential relative to the other assets, particularly once they launch in the States. But was just curious as to how you view the recent transactions?

Yes. I think we're really excited by, especially all 3 of the diagnostics deals that we did this calendar year. Biotheranostics, candidly, is off to probably an even better start than we imagined. As you saw, we got included in the NCCN guidelines shortly after the deal was done. And that business is running very well. We've reported $13 million of revenue last quarter. That was about 30% higher than any quarter they've had pre-pandemic and the integration is going very well because it's right down the street from us in San Diego. Kevin and team have been over there a fair amount. Their team, I've seen a number of their commercial leaders and clinical leaders over in our building here in San Diego as well. So that is going great. Meanwhile, the Mobidiag, we're so excited as well by that platform. Kevin and the whole R&D team from San Diego were over there this week in Finland. It's about their third or fourth trip they've made over there just in the last few months. I think the chemistry between the organizations and the long-term potential of that one, as you said, that will probably win out as being, certainly from a pure revenue standpoint, really, really big. And frankly, Diagenode is already contributing additional assay strength. So I think we're feeling really good about all of them.

Got it. And then just one to wrap up. I mean, what's your appetite to do more M&A in the near term? I mean, would you be comfortable taking that leverage ratio north of 3 turns should the right transaction come along?

I don't see us needing to go that high for a while, just given both the combination of our EBITDA and our strong cash flow as well as assets that are out there. I think we really -- we've locked into this cadence of tuck-in acquisitions, leveraging our capabilities, division-led and those are the ones that I've done most of my career that create a lot of value for shareholders over time. And we continue to look at those. Frankly, in the short term, we're also spending some real-time integrating. We did a bunch in a short period of time. So I would call our efforts right now are more on the integration front while we're scouting what else is out there. But we think we're going to be in a very good position to continue to do deals, but just like our position right now.

Got it. Well, thanks so much for joining us today, Steve and Karleen. We appreciate it, and we look forward to talking to you soon.

Thank you, Tejas. Sorry, the video didn't work out as well. So...

No worries at all. Of course. Enjoy the rest of the conference, guys.

Thank you. You too. Good luck.