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

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Great. Thank you, and thank you, everybody, for joining us for this fireside chat with Hologic. From the company, we're lucky to have Karleen Oberton, CFO; and Mike Watts from Investor Relations. This will be a fireside chat format. So if you have questions, please e-mail them to me at [email protected] or you can use the question tab on your conference portal. With that, let's kick things off. Welcome Karleen and welcome, Mike. So much to our chagrin, I want to start talking about COVID testing.

Can you update us on what you had baked into guidance for the September quarter vis-a-vis COVID testing? And how the world has evolved in comparison to those assumptions?

Sure. So when we guided for Q4, I would say we had, in relation to COVID, was what we call high confidence guide. So at that time, we had our July actuals. We knew OUS, what our commitments were under certain contracts and made probably pretty conservative assumptions on what U.S. testing would be for August and September. And certainly, at the time of our guide, we're just seeing the impacts of the delta variant. So while I'm not going to give an inter-quarter update, certainly, everyone has seen the testing rates in the U.S. go up. And I think as we've always talked about, we maintain flexibility to provide -- to service our customers to the extent there's demand for testing.

And Karleen, remind me where you're at with your capacity expansion efforts?

Yes, sure. So we have continued to increase our capacity such that we'll be able to produce about 75 million molecular tests a quarter. So our capacity isn't just dedicated for COVID, that capacity is for all of our molecular tests, and that gives us the flexibility to service our base for our customers as well as provide COVID testing to the extent there's strong demand there.

And Dan, I think we said that even in our second quarter results, so not the quarter we just recently reported but our second quarter results, we produced, I think, more than 60 million tests that quarter. So have roughly tripled our capacity and still working toward more.

Okay. And just the 75 million time point, that was a Q4 event or a Q4 calendar '21 event?

Early '22 calendar early '22.

Any early thoughts on the Biden announcements from last night and how that might impact your COVID business?

Yes, I think still absorbing the announcement, I think, at this point, I don't think we see a big impact. And again, we're just focused on our customers at this point.

How are your thoughts evolving in terms of COVID only versus combo testing?

Yes. So if you think about last year, there really was no flu. And so the demand was just for straight COVID. We really haven't entered the flu season here yet. So it's little hard to know. I think we do have a COVID test -- a combo test, I'm sorry, to the extent there's demand for it, but also on our Panther Fusion, from the same sample if someone can test for COVID and flu A, flu B.

Do you have aspirations to or do you believe it's a market need to include Respiratory Syncytial Virus on a combo test today or in the future?

I think we view it as a nice to have. We can also test for the RSV on the fusion as well, but don't think it's quite necessary from a COVID perspective.

Our fuion assay, Dan, that we've had for a while, if I remember correctly, is flu A, flu B plus RSV and you can also get that same sample with a COVID test on the fusion side of the box as well.

Okay. But that would require 2 separate wells, correct?

Yes. The machine takes care of it for you, but it is separate amplifications.

Okay. Remind me how much of your installed base of Panther is a fusion enabled versus Panther standalone?

Yes, it's probably about 15% of the installed base also has the Fusion card attached to it.

Okay. Okay. So they would, in theory, be able to run a 4 in 1. But theoretically you cut the throughput of the instrument in half, if you were to use 2 sample wells instead of one for accomplishing all 4 measurements from one sample.

Just I think it's just going to depend on what their total menu is and what other tests are doing those kind of things, but definitely have the ability to do -- to get both results from a single sample. I think that's the point.

So bring me up to speed on the regional trends within your molecular business. I know having a larger installed base of Panthers globally has been a big theme. What can you speak to in that respect?

Yes. So if we look at our total installed base of about 2,700 Panthers, about 55% are in the U.S., 45% are OUS. But certainly during -- the recent trends have been more 50-50 as we have really satisfied demand in Europe, specifically COVID testing, with our leadership over there. I think we've really elevated our brand recognition and our ability to deliver test to those markets. But even though we've kind of -- what we've talked about is we've accelerated probably about 3 years of Panther placements in the last 12 months. But what's interesting to note is that even in Q3, our fiscal Q3, the June quarter that just ended, we still place 160 Panthers globally even though testing demand was coming down for COVID. So still great demand for Panther out there. People love the automation, the menu, it's a really great instrumentation.

And Karleen, can you frame that for us 160 Panthers in a quarter compared to what you used to do during pandemic?

Yes. So pre pandemic on average, we placed about 225 to 250 Panthers in a year. So that 160 million is really meaningful in a month quarter alone.

Okay. Can you update us on trends you're seeing in your base diagnostics business, excluding COVID?

Yes. So strong recovery of that business, feel really good about what we've done for non-COVID assays. So think about -- I think we've talked about test of records. So the test of record in the U.S. is the estimated value of 1 year's revenue of a newly validated assay. And what we've talked about is prior to the pandemic in any year, the highest test of records that we had done was about 20 million. And we've done 35 million of non-COVID assay test or records in the last 2 years. So we've been really strategic with our sales force and incentivizing them on non-COVID assays so that we continue to have that strong revenue stream post the pandemic. But I think there is a portion of our business that is tied to, well, women's visits. And so those are probably about 90% of what they were prior to the pandemic. So still little bit of recovery to do there, but feel good about our position in the base smart business.

And how are you thinking about or framing the opportunity for market share gain in molecular diagnostics at the other end of the pandemic?

Yes. I mean, I think, certainly, there's opportunities to even grow the market, certainly, with the new guidelines from the CDC that really are -- you have to opt out of screening for STI really is an opportunity for us to continue to grow the market. I think the rough metric is that only 50% of the women who should be screened for STIs actually are. So that is an opportunity for us, I think, as well as we have opportunities for some of our newly IVD validated assays to grow the market for Mgen and EDCD and there's also opportunities for us and that menu to take share as well.

Okay. So let's move on to the Breast Health business. So one of the other large medical equipment players, the other day, flagged supply chain issues, they had to pull down their guide as a result of supply chain issues, are you seeing any supply chain issues in your Imaging business?

Nothing that's impacting our revenues. Certainly, there are some supply constraints. But I think, thankfully, our supply chain groups have been able to manage around that. I think we're seeing some higher costs for sure, but things that we're able to readily manage at this point.

Okay. What sort of recovery are you seeing in the Breast Health business?

Yes. So I think our diversification of that business has really served us well during the pandemic. So certainly, the capital piece of that business was probably hit pretty hard early days in the pandemic. But even in Q3, our last fiscal quarter, in the U.S., that capital business is less than 20% of the total division but it has recovered nicely. I think the capital was slightly above 19 levels last quarter? Or was it just...

Capital, I think, was still below.

Still little bit below, yes. But feel good about the recovery. I feel good about our service revenue. That is actually the largest piece of our revenue in that division. Feel good about new products, the Brevera relaunch that happened late in '20 is doing really well. So a lot of good things happening in the breast business. But I think from a recovery perspective, screening rates, mamo screening rates are about 90% of what they were pre-pandemic. So it looks like a majority of women are getting back for their screening visits, which is really good.

Okay. And what are you hearing from the field in terms of capital budgets in the hospital systems?

Yes. I mean, like I said, the capital business is probably performing a little better than we thought, recovered a little faster than what we thought. So we're not really hearing a lot of noise as to budgets.

Okay. And that less than 20%, that was a U.S. capital number, right, not a total capital number?

That's right.

Okay. What does the product funnel look like in Breast Health? I know that in the imaging businesses more broadly across the industry, artificial intelligence as a theme, there's other themes. It's like what do you have in your portfolio that gets you excited?

Yes. So we certainly have artificial intelligence products in our pipeline. We have products out there that are already helping radiologists read images. But I think certainly, from ultrasound, if you recall, we did the SSI acquisition a couple of years ago. So we have some new products in the pipeline related to that as well as continued improvements on the gantry side. Those are probably a couple of years out, but certainly focused on patient experience, workflow and image quality.

I would just add, we still got some runway on some of the recent products that we've launched as well. I mean Brevera who's on the market now as an example, you mentioned that earlier. And I think through the first 9 months of the year, Brevera is around $30 million of revenue or a little bit more than that. So I think back in the day, that will be a pretty big deal. So happy with how that's progressing and certainly pleased with the positive customer feedback we're getting on it.

Okay. Can you offer an update on the integration of SSI?

Yes. So I think we just actually went live on it from a systems perspective. So I think we're in a good spot from an integration perspective there.

Okay. So here's a question from the audience. As you look at and continue to refine the portfolio, where are you pulling back? Where are you investing and why?

Yes. I mean, so I think from a breast portfolio perspective, certainly, we -- I wouldn't call it pulling back the projects have life cycles as to the point you just made with Brevera was relaunched at the end of '21. So that spend has come down and going into, as I mentioned, the SSI and the ultrasound, we're looking at some things from a treatment perspective. And again, I think a lot of focus on next-generation gantry.

Dan, I'm not sure if that question was just in breast or for the company as a whole. Maybe I'll take the other angle of it for the company as a whole. I mean I think one of the things that we're excited about and gave us confidence to give the medium- to long-term guidance that we gave in our last call of kind of 5% to 7% ex-COVID top line growth, was the fact that all of the businesses and all of the regions are performing pretty well right now. I think compared to perhaps the Hologic in the past that might have been driven by 1 or 2 products. I think now we have significant growth drivers in each of the businesses. In Diagnostics, obviously, the Panther increase in that installed base is super helpful for us. The ability to layer menu on that. Breast Health, as Karleen said, is not just about gantries now. It's also the biopsy products, some of the AI tools and service, right? Our biggest product within breast is actually our service franchise. And then finally, in surgical, it's not just MyoSure anymore. And I think we have now added an important future growth driver in Acessa as well. So that kind of broad-based performance gave us a lot of confidence to give that guide. And certainly, if you cut it by geography, our international businesses have never been as strong as they are today and beyond Verstreken's leadership boosted by the impact we've had on COVID.

Okay. Is there an easy way to bridge the old Hologic prepandemic revenue growth rate to this new Hologic 5% to 7% post-pandemic quantitatively? So one point might be x, another point might be y? Like how would you cartoonishly illustrate that for folks?

Yes. I mean I think as Mike just talked about, there's a number of drivers of that, and that's what gave us the confidence. It's the international growth that we've seen and we'll continue to grow. It's the Panther placements, along with the menu that we have and it's the acquisitions along with the R&D activity. So I think there are multiple characters from a cartoon perspective that are contributing to that growth. I think to Mike's point, that old collage jacket that growth might have been based on only one product or 2 products, not the multiple items that we're looking at now.

Okay. So can you offer us an update on the recent acquisitions you've done in diagnostics?

Yes, sure. So Biotheranostics was entry into molecular oncology, and that one is off to a great start, given that we got the NCCN guideline for that test. I think we talked about that we did about $13 million of revenue last quarter, which was tracking well-above the last 12 months revenue of $33 million. In the last quarter, it was about 30% higher than the best quarter prior to the pandemic. So really view that as fast-growing, 20% grower, and this could be a revenue of greater than $100 million within several years. Then I'll talk about Mobidiag, so that was the acquisition that -- the last acquisition that we did, and that is -- gets us into -- closer to the patient molecular diagnostics is the box can do both low flex PCR as well as high flex testing. And we really believe that's best in -- now the best-in-class instrument with ease of use with minimal prep time. The other thing that we really liked about that asset is the low COGS that the design of the cartridge was simplified with a small number of parts, which allows us to have good COGS on the production as well as allows us to scale over time, and it allows easier to scale manufacturing of the cartridge. Actually, Kevin Thornal, our Diagnostics Division President and some of our R&T team are over in Finland right now, and they're working on finalizing the clinical strategy on getting approval for some assays in the box in the U.S. in the next couple of years.

Is that a road map you'd hope to be able to communicate on your next earnings call?

I don't think we've thought about the next earnings call in terms of what we're going to communicate. But certainly give us some thoughts based on the feedback from the teams.

Yes. I guess the only thing I might add to that, Dan, is there's been a lot of focus on the U.S. opportunity for Mobi, and that's very justified. But as Karleen said, that's a few years out, I think there's significant opportunity in the immediate term just in Europe, right, in some of the Asian markets. I mean, they have tended to be fairly regionally focused with their sales in the past and plugging them into our larger commercial infrastructure should be able to help right away in Europe. And obviously, the CE Mark process is a little bit more expeditious in Europe than it is the FDA process in the U.S.

And it's changing, though, right? Are there changes in European medical device regulations?

Of course, there are, but still, I think, faster net-net over there than in the U.S. And the priority, some of some of those products are already approved in Europe.

Okay. My biggest question on Mobidiag is, is there anything you can do to accelerate the progress a few years out in the U.S., lord knows how big the installed base of gene experts might be. So the sooner you can get menu on the instruments in the U.S., I would think the better. Are there levers you can pull? Or are there just rate-limiting factors from a regulatory standpoint?

Yes. I mean I think this is what the team is over there do now trying to figure out what is the right strategy, right? So I think to Mike's point, even if it is a couple of years out for the U.S., there's still opportunity OUS. And I think part of our diligence that we did for this acquisition was that there was appetite for another box in the lab, right? So even if it's a couple of years out, we think there's still opportunity -- plenty of opportunity for us to place our boxes.

Okay. So -- and they're not offering an intra-quarter update on COVID, but assuming you might have more COVID cash at your disposal than you had planned, what are other interesting areas to the company to deploy that capital?

Yes. So our capital allocation strategy really hasn't changed. It continues to be tuck-in M&A and share repurchase. I think, Dan, we've seen -- while we've seen recently acquisitions in Diagnostics, we also did Somatex acquisition of Breast Health, we did Acessa which was an acquisition in Surgical, and all of our divisions continue to look for the appropriate targets for their businesses. So I don't think the COVID cash will be -- have the same allocation strategy.

Meaning a bit less diagnostics focused and a bit more focused on the other parts of your business?

Yes. I don't think that BD is less focused in diagnostics. Again, they have their own BD capabilities, but they might just from an integration and absorption, may not be looking at -- again focused on integration right now versus another deal.

Okay. What about a fourth leg to the stool, turn it into a table, any logical?

Yes, like I said, we are focused on tuck-in. We are focused on where we have an expertise, where we have a point of leverage. I think we tried that strategy a couple of years ago, and it didn't work out so well. So again, I think it's going to be a focus on the tuck-in.

If you look at a deal like an Acessa, as an example, which doesn't get a lot of attention, smaller deal in our surgical business, but that's a fibroid removal product, very nicely complements MyoSure for different kinds of fibroids and also can be sold through that existing sales channel. So that's the kind of stuff we're ideally looking for.

Okay. How are you thinking about -- and I know we're not at the earnings call yet, but when we arrive there and you give guidance for some period of time, how are you philosophically thinking about communicating the potential scenarios around COVID outcomes?

Yes. I mean I think we -- well, on the Q3 call, we talked about FY '22, that COVID, the floor was likely about $200 million. I think as we think about the long term, the full year guidance, I think there's still going to be a level of uncertainty related to COVID. Our intent right now is to give a full year guidance at that call but we'll likely have wider ranges just given the level of uncertainty and how quickly the testing dynamic changes as it relates to COVID.

Okay. So ideally, you would like to be in a position to give full year guidance come late October.

Yes, that's our intent. No guarantees, but that's certainly our intent at this point.

And, Karleen, how are you thinking about earnings power of the business in a post-COVID world the 5% to 7% communication was very helpful from a revenue perspective. But when you think about all the other levers, which we turn into earnings from a drop-through, from a capital allocation standpoint, like how are you framing that for folks?

Yes. I think if we look back prior to the pandemic, I think we had a strong history of delivering high single-digit, low double-digit EPS growth. I think that will continue to be our strategy focused to deliver that level of earnings. I think as we look at that 5% to 7% in terms of the growth strategies, the growth levers, some of them are positive and some of them are kind of negative on the EPS. So if you think about international has a lower earnings profile than the U.S., the acquisitions certainly in the next couple of years will have a lower earnings profile than the historical businesses. However, certainly molecular as a growth driver is accretive to the corporate averages. So there's some pluses and minuses as we look at that 5% to 7%. But again, back to our historical performance of high single-digit, low double-digit earnings, that's how we're thinking about earnings growth as we move forward.

But off of what base.

So just that would be the kind of total the 5% to 7% off of that which excludes COVID.

Yes. Exactly. Yes. So that 5% to 7% on the top line excludes COVID assay sales as well as COVID ancillaries. And as we talk about earnings, we talked about reported earnings. I mean, clearly, it's everyone's expectation that COVID sales in '22 would be less than in '21. That's going to have a negative effect on reported earnings. But underneath that, we -- as Karleen says, we would expect to be growing earnings faster than revenue.

Sure. Okay. So another question for the audience. Somebody is asking me if you reorganized R&D under new leadership? And if so, what are the goals or metrics of the reorganized group and how are you tracking against goals?

So we haven't reorganized R&D. We are integrating the recent acquisitions, which have -- for the first time, we really have R&D capabilities outside of the U.S. And we have kind of a structure -- reporting structure of kind of global R&D, but there hasn't been any major reorg of the R&D functions at this point.

And maybe also worth mentioning, the R&D functions sit within each of the divisions. So obviously, we have a team focused on diagnostics, a different team on surgical and a different team on breast, clearly, the technologies are a bit different. But I think that was one of the first things that Steve did when he came to the company several years ago is kind of really started focusing and investing on a more consistent basis on R&D. And it takes time for that to pay off. It certainly didn't pay off in the early years. But if you look back over the last 2, 3 years, whether it's new assays being launched in diagnostics or new AI tools in breast or in surgical, new supporting instruments like scopes and dilates and things like that, really beginning to see the fruits of that consistent investment in the R&D.

Okay. So Mike, how are your efforts going trying to get investors to focus on the base business and focus less on COVID? Curious for an update there.

Well, look, I think we're -- as we said in our last call, I think we're pretty well-positioned either way the world turns, right? I mean, we just finished our strat plan process. And clearly, there was a lot of focus on the base business, some of those deals that we've talked about. And that's really what led to that 5% to 7% top line growth, which compares pretty favorably to where we were before, which was more in that kind of 3% to 5% range. So we're super excited about the base. It tends to get overlooked a bit, and that's why we wanted to kind of draw some focus to it. On the other hand, as we said in our last call, we have ramped up COVID production capacity significantly. That process continues. We've placed a lot of Panthers not just in centralized labs, but also in labs all over the country and all over the world. So we can get closer to the patient, deliver quicker results to our customers. So I think we said that we were well-positioned if there was an increase in demand related to delta or anything else, we were in a good spot to hopefully take advantage of that. So I think we're in pretty good shape either way.

Well, I think with that, we're about out of time. Karleen and Mike, thanks a lot for coming today. We really appreciate your attendance.

Thanks for having us.

Always good to see you, Dan. Stay well. Bye.

Take care.

Bye.