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

Okay. Thanks, everyone, for joining us. I'm Vijay Kumar, cover med tech and tools here at Evercore. Pleasure to have Hologic with us. We have CFO, Karleen Oberton; and the new Head of IR, Ryan Simon, with us.

Maybe, Karleen, to kick things off, a lot of questions around this new variant, Omicron, and -- can these molecular diagnostic tests, whether it's PCR antigen detect them, can your test, COVID test detect the new variant? And maybe we'll start there.

Vijay, it's a pleasure to be here with you today. Yes, we actually issued a press release on that, that confirming that all three of our COVID-19 tests do pick up the new Omicron variant. We specifically designed our test with the idea that there would be mutations in the future. And so we do have affirmation that we do pick that up.

Fantastic. And then that segues me to the -- your fiscal Q1 guidance, right? I think your COVID revenues for -- on the consumable side of about $240 million of related revenues. Given the current surge in the cases and the new variant, any thoughts on those COVID numbers that you gave out for Q1?

Yes. Certainly, at the time we guided to Q1, we guided conservatively. At the time we guided, we had our October actuals, and we knew what our commitments were internationally, and we didn't anticipate the surge that we have here. So yes, I would say that the guide was conservative, and we've seen -- we've all seen the U.S. testing rates kind of sustain over the quarter.

That's helpful. And then just -- I do want to spend time on the base business because I think it's really fascinating hub stories evolved over the last few years. What does Q1 assume for the base business ex-COVID? Is that within your LRP of 5% to 7%?

Yes. Certainly, we would assume that Q1 would be in that mid-single-digit growth, expected to be in that 5% to 7%. I would say the 5% to 7% is a long-term growth rate. You might have some fluctuations quarter-to-quarter in the base, but certainly in Q1, feel good about being in that range.

Got you. And then sticking on to this base business theme, Karleen, I think the 5% to 7% was certainly not expected. Typically, I think some of your peers have an Analyst Day to host and issue LRP. But perhaps the timing was a little bit surprising for us. Maybe talk about the LRP issuance on why you issued LRP at this point in time.

Yes. So certainly, from a timing perspective, we had completed our strat plan process and presented it to our Board in the June time frame. And it was really in collaboration with the Board and kind of their perspective of how strong the story is that they encouraged us to give some more insight into the base business given kind of some of the uncertainty that was around with COVID that collectively, we thought that was the right time. So -- and I think part of that strength in that outlook is that the 5% to 7% was coming from across all the businesses and internationals. It's not just one product or one division. So we feel like there's breadth and diversity on that growth rate. So I think that supported the timing.

Understood. And then on -- sticking with LRP of 5% to 7%, I think certainly, for us, 7% at the high end was surprising. So maybe talk about what needs to go right to hit the high end of LRP. Is it continued uptick in molecular in [ GYN ]? And is anything expected on the Mammography and Breast Health side?

Yes. Well, certainly, Molecular Diagnostics we would expect to be driving to that higher end. Certainly, with the Panther placements that we've had over the last two years, prior to the pandemic, we had about 1,700 instruments placed. Now we're at 2,900 as we exited 2021. And with 19 assays approved on the Panther, that creates a lot of runway for the Molecular business. And certainly, we expect that could be closer to a lower double-digit business that grows in the future. I would say also internationally, our business -- we've been talking about how we've kind of been focused investing commercially, internationally, has been growing double digits for even apps and COVID for several years, and we would expect that to continue to be to be a growth driver, and Surgical as well. MyoSure continues to grow at high rates. And the recent acquisitions are going to contribute to that growth rate for Surgical. I would say, on the lower end, certainly Breast Health we would expect to be on the lower end. If you think about the biggest revenue component of that business is our Service business, which really grows in that low single digit with that installed base, coupled with the gantry is more of a steady state, close to 1,000 placements a year in the U.S. from -- continuing that conversion from 2D to 3D, but definitely have opportunities internationally for Breast Health with some of the acquisitions we did in '08 and '09 -- I mean '18 and '19, I'm sorry. And finally, Brevera, some of the new products that we have out there will help with that growth rate. And then cytology, part of Diagnostics has been flat to a low single-digit grower, and we don't expect that to change significantly. So there's a range, but overall, feel good about that 5% to 7%.

That's helpful. And then maybe diving into some of those comments you made on the segments. Let's start with the Diagnostics. I think one of the questions we get is your -- I think the numbers you've given in the past is your pull-through per system was around 170,000, which is growing high singles, but I think on a go-forward basis, right, because of the higher installed base, the numerator/denominator changes. I guess my point is -- should Diagnostics should we be even looking at your pull-through per box? Because I don't think the historical numbers are relevant anymore. What's the right way to think about that pull-through per system?

Yes. I think historically, prior to the pandemic, we said the global average pull-though is about 240,000 per box. And you're right, that's not the right way to look at it now given all of the boxes that we have placed. I think when we think about this is that, that increased installed base just gives us more opportunity to continue to grow at that low -- high single digits to low double digit for that business, coupled not only in the installed base but the increasing menu. If you think about our vaginosis panel approved in '19, that was probably about $6 million in 2019. It was $30 million last year. Those are things that have continued to grow. The recent CDC guidelines on STD screening, which are more opt out, those are things that will help to continue to grow that base, and as well as Amgen, growing awareness of Amgen, we have the -- I think the only IVD test out there, that will continue to be a growth driver. And I think the other thing to think about, Vijay, is prior to the pandemic, most of our customers were running less than four assays on the Panther. And now we have more assays. We have more awareness about diagnostics testing and how important it is. And so we do think that will continue to be a growth driver. And one of the other things that we talk about is test of records, right? So, test of record is the estimated one year's revenue of the newly validated assay on a Panther. And prior to the pandemic, our highest TOR, test of record, year was about 20 million, and we did 40 million last year. So that tells us that our sales teams are out there kind of farming that installed base. I think one of the things that will be a challenge is that there's so much COVID testing still going on, that those TORs might take a little longer to be fully realized, but I think it's a really great signal for that business.

No, those are helpful comments. And just maybe one other question on this topic. I think you've spoken about Hologic having a physician sales force. I think it's one of the largest sales force, and that's been a competitive advantage. Maybe talk about how large is that sales force, how do you partner with some of your key customers. And is that what's driving some of the metrics you gave? Pre-pandemic, your test record was 20 million and now that's doubled to 40 million. What is driving that?

Yes. We certainly believe our physician sales force is a competitive advantage, and I think some of our larger customers realize that as well. We partner with some of our large customers on physician level data, who's doing testing and who's not, right, so that we can go out and create awareness of what the guidelines are. And we'll certainly kind of double down on that, if you will, with the recent updated CDC guidelines that are more opt out. So that I think the rough stat is that only about half the women in the U.S. who should be screened for STDs actually are. And so with the new guidelines from the CDC, with our physician sales force, will drive that awareness and hopefully continue to grow that market.

Understood. And what is the still CDC opt-out guideline currently in and how impactful could that be to your Diagnostics franchise?

Yes. It's something that will take time to grow. I mean this is going out to physicians and educating and maybe changing even habits, if you will. So basically, the challenge prior to the new guideline was that a young woman would go in and maybe her mother would be there or be feeling comfortable about talking about her sexual activity with our physician. So this kind of allows the physician to avoid or not to have to have that in-depth conversation about sexual activity to do the screening. So it's more of an opt-out.

Understood. Understood. And then maybe rounding out the Diagnostic discussions, you do have some non-molecular franchises, right, which have been historically growing slow, but you also had recent acquisitions in Mobidiag and Biotheranostics. How -- maybe talk about how meaningful could Mobidiag be? That's a new market for you guys. And what that means to your overall growth rates?

Yes. Certainly, we are excited about Mobidiag in that, that's getting us closer to the patient in that acute care setting. And that's been an area that we've been looking at for years and really have found that Mobidiag kind of crack the riddle, if you will, with a low-cost cartridge. So dealing with the COGS aspect of that point of care -- acute care setting testing. So certainly, we believe that Mobidiag will grow double digits and could be in several years several hundred million dollars of revenue.

And what gives you the visibility of [indiscernible] because one of the things I struggle with is the Panthers are placed in larger labs, and this is perhaps in the more acute care setting or near patient, right? Do you have a core competency in addressing those markets? And why should Mobidiag be a few hundred million dollars?

Yes. So I mean I think we have a core competency, and we have the larger labs. We're also selling to the hospitals, right? And so the Panthers are in hospital labs. So it's not -- it is pretty much an adjacency to where we are today. And I think that we will be able to leverage that expertise that we have. But I think if you think about Novodiag, the box, it actually does both low-plex and multiplex. So you don't have to have a [ BioFire ] in a [ Cepheid ]. You can have the one Novodiag box. I think will give us a competitive advantage as well.

And do you have a pricing advantage? Because my understanding is the technology is slightly different.

So I think we believe the technology is an excellent technology. And so we won't lead with price. But I think as I talked about, we've got a really good handle on the COGS as an advantage if pricing becomes a competitive issue, but we're not going to lead with that for sure.

Understood. And then maybe switching over to -- I guess just to round up Diagnostics. You mentioned high single, so the algorithm would be molecular double digits. You have acquisitions, which would be meaningful double digits, right, 15%, 20%. And you have some legacy pieces, which are perhaps flat to low singles. But the sum total, perhaps, that's how we get to 7%-plus for the Diagnostic segments?

Yes. I mean that's the -- those are the pluses and minuses certainly. We're not -- we're still in the early days of the long-term estimates. But yes, you've got the right pluses and minuses. And I think the only other thing I would point out is in 2022, certainly, Mobidiag has a COVID element to it as well. So there'll be some ups and downs, depending on what COVID does.

Got you. And then the other acquisition, which is interesting for me, was Biotheranostics. There were some NCCN guidelines. Maybe talk about what is this test and could this end up being more meaningful because of NCCN guidelines?

Yes. So certainly, Biotheranostics is off to a great start, getting the guideline from NCCN earlier than we had anticipated. The guidelines related to the Breast Cancer Index test, which is a test that a woman performs post -- five years post diagnosis to determine whether endocrine therapy is a benefit to her or not. There's a lot of side effects, negative side effects to that treatment. And so a woman is not going to want to continue it if there isn't a true benefits to her. So -- and I think we've got a nice leverage point where we acquired a sales force -- a medical sales force with that acquisition who is the actual prescriber of the test. But women will often talk about her symptoms with our OB/GYN. And as you know, we have a significant OB/GYN on sales force -- physician sales force that can leverage and educate the OB/GYN on that discussion with her patient. And I think certainly, we think Biotheranostics could be -- it will be a meaningful revenue component for this division in the future as well.

And just maybe how big is Biotheranostics today? And could this be like $200 million, $300 million of revenues in the next few years?

Yes. Well, certainly, it's -- this year, it's probably around 70 and believe it will continue to grow double digits.

That's helpful. And then maybe on -- one quick one on the GYN segment. I know there was some competitive noise, but what's the -- how penetrated are we on MyoSure, NovaSure? And I think you guys did -- just closed Bolder acquisition this morning. How meaningful could Bolder be for GYN?

Yes. Certainly. So from a market perspective, I would say MyoSure and NovaSure probably both 70% market share in the U.S. Clearly, across the board, Surgical is under-penetrated internationally, which is a good opportunity for us, and excited about the Bolder acquisition closing this morning and welcoming that team to the Hologic family, but believe that, that's a really great opportunity that right now, Bolder is only in pediatric. And we believe that the GYN procedure volume is about 5x the pediatric volume in that this is going to be a great opportunity to leverage our OB/GYN sales force.

That's fantastic. Sorry, just to clarify, MyoSure, NovaSure, you said 70% market share, but that's not the penetration, correct?

Correct.

Okay.

I think MyoSure -- we continue to grow the market. It's continuing to use it for more and more procedures. And now it's -- complements with Acessa than it does the larger fibroids. So we're really kind of rounding out that fibroid treatment portfolio.

Got you. And then last couple of questions here. One on margins. There's been a lot of confusion on margins and what is base margins, what should we [ grow at ]. For what it's worth, I think the way at least investors -- some investors who are doing the math, it seems -- it's apples to oranges, right? We're dropping down COVID profits at close to 100%. Obviously, base business has been impacted by the pandemic and companies are investing, right? You're not cutting sales force. I think the base versus COVID contribution, I think we're doing the wrong math. Maybe -- so talk about margin expansion potential, please?

Yes. So I think the thought process that there is a base P&L and COVID P&L is incorrect. I have one P&L that [ I'm going to trade ], right? And so certainly, we are investing in the base for future growth because we have those COVID profits. To the extent those COVID profits go away, we can ratchet back that spending in those investments. So I think what I would say is if you go back to Q2 '20, prior to the pandemic, margins -- op margins were 31.5%, still pretty rich for the industry. I would say I would make sure as a CFO that if COVID went entirely away, we would still be at those levels with the room for leverage and efficiency as we go forward.

Fantastic. And then maybe last 30 seconds. What progress is Hologic making on diversity, inclusion, equity metric? And is ESG [indiscernible] metrics, are they now being perhaps a part of a management comp?

Yes. I think from an ESG perspective, I think it's part of who we are and always has been. If you think of what we do, Vijay, we bring markets -- products to market that improve women's lives, right? Early detection, better outcomes for women. So we really incorporate ESG as part of all of our decision-making process. We don't treat it as a separate thing. It's part of who we are. And it's not included in comp. It's not part of metrics. And I think we've seen good outcomes. Certainly, we have a diverse board. We have a diverse leadership team. We have a diverse sales force. And it's really a focus on performance and talent versus more than anything else. But I think we are seeing recognition for who we are and what we've been doing, recently added to the Dow Jones Sustainability North America Index at the 87th percentile in 2021, included in the 20% of best run companies according to the Drucker ratings. And certainly, we, because of the COVID profits, have made some significant investments in project health equality, creating awareness and access to better health care and screening for women of color and underserved communities as well as our Hologic Global Women's Health Index, the most comprehensive global assessment of women's health. And we believe we will continue to invest in that index for years to come because we know what were measured will drive outcomes and improvement.

Fantastic. I think with that, we're at the end of the time. Karleen, thank you for spending the time with us this morning.

You're welcome. Thanks for having me, Vijay. It's great to see you.

Bye.

Take care.