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

Okay. Hi. My name is Casey Woodring from the Life Science Tools equity research team here at JPM. Welcome to our Annual Healthcare Conference. I'm pleased to introduce our next company in Hologic. [Operator Instructions] So with that, I'll turn it over to Steve. Steve?

Thanks Casey, for having us. And I'm sorry, we're not there in person because I only wish that my excitement and enthusiasm for how strong we are as a company today and the difference we're making in the world can fully come through for those of you who are largely probably watching this on a computer screen. And I just don't think it can fully come through as well as we would like it to for what we're doing as a company. So if you pardon me, I'm not going to read every word of the safe harbor statement. I think we'll just jump right through that since we've got a lot to cover here today. And I'm going to jump right here to really Slide 5, which is that we, as a company, today, are a fundamentally different company than 8 years ago. More purpose-driven, much more diverse and higher-margin recurring revenue, far more global and a much stronger diagnostics business, and we'll go into all of these as we go through the presentation this morning/this afternoon depending on where you are. All of this strength is also enabling us to make a unique difference in the world. And again, we'll go through these. Our impact on women's health, on COVID and on social initiatives, both in the U.S. and around the world. And finally, just how much stronger we are getting for the future, an accelerated top and bottom line growth rate and certainly much stronger increased capital deployment opportunities for us. So as we move here a little bit further, obviously, it starts with our purpose, which is enabling healthier lives everywhere, every day. But what really differentiates us is our passion. And that is, I will argue that no company on the planet is waking up every day with more of our employees focused on becoming global champions for women's health. It's an incredibly motivating mission that everybody is excited about within our company. And it's built on the promise of The Science of Sure. And that may sound like words to you, but for those who aren't close to it, let me just tell you how it really plays out in the real world. And that is it's about clinically differentiated products. If I can tell you all of the products that have been berated by us, especially just in the last few years in COVID time for us to distribute or sell whatever, our scientists are very rigorous around wanting to make sure that our products are differentiated and are meaningfully superior, and we stick to that very strongly. And we don't just chase the extra revenue that we could get or extra profits in the short term. We're building this fundamentally for the long term. And this is, I think, the essence of what our company is about. While we're built on the purpose passion promise, this is what we call our virtuous circle that we developed last year really for our employees, but also very relevant for all of our stakeholders. And that is, as you can see, as we grow our revenues and profits, it is enabling us to fund things like the Women's Health Index, that we will talk about later, and Project Health Equality. As we fund those initiatives, they are fundamentally helping to increase access and policy changes and ultimately, more diagnosis, which is leading to helping more women in the world. And as we help more women in the world, that accrues back to us in growing our revenues and profits further and allowing us to start the cycle all over again with additional investments. So fundamentally, as Hologic gets stronger, we have a bigger impact on women's health around the world. Now we want to show you, obviously, also some measurements on the ESG front. And I'm going to start with a long-term slide here, our employee engagement journey. When you go back to 2015, I remember we initiated what we call the Gallup Q12. And if you look at that time, we had about 36% of our employees engaged. And I still remember rolling that out across the company and a lot of people, I think, were looking and shaking their head and said, yes, management won't do this again because look at how bad we are. But fundamentally, we learned so much from that, and you see incredible progress through the years as each year, we learn what we can be doing better. And now we are one of the best-in-class on employee engagements. And similarly, if you look at our corporate sustainability scores, let's go back to 2016 when we were only in the 16th percentile. And what we always say as a company is, as we get into things, whether it's employee engagement, whether it's enterprise resource management, whether it's broader ESG things, whether it's diversity, equity and inclusion, we don't do these things out on the side and just appoint somebody to go manage these. We fundamentally take the time to incorporate them into our culture so that they are at the essence and the center of everything we do. And what that means is, over time, you see this steady progress and an inexorable strengthening of our company. And we think it's really shown here on our ESG and the CSA scores, where you can see we've gone from 16th percentile, steady march up, not always linear, but steady up to the 87th percentile. And just in this last year, some of the accolades that have come with that, I think it's really showing the result of this multiyear journey. We were added in the S&P 500 ESG Index. IBD named us one of their top 100 ESG stocks. We were added to the Dow Jones Sustainability North America Index, Newsweek's list of the most responsible companies and the Drucker Institute has ranked us among their most effectively managed companies. And if you just think about that, I'll give you a quick tidbit. Four years ago, we debuted in the top 500 on that at about #440, and we've steadily marched up to the most recent ranking at a #148. So we love that progress. What we also love is being #148 reminds us we still have opportunities to continue to get better and better. Now let's look at a few of the numbers. This shows our 3 key franchises back in 2014 and where they are today. And in very simple terms, at the bottom there, you see our Breast Health business, which in simple terms, by the way, is about 40% larger than it was in 2014. Our Diagnostics business in the middle there clearly helped certainly by the COVID revenue. But even without that, in that 30% to 40% growth. And our Surgical business that kind of quietly goes under the radar sometimes is 60% larger than it was in 2014 and continuing to grow. The other big difference is how different we are geographically, and you can see how much stronger we've gotten internationally now, as -- and particularly, again, helped by our COVID response. But we have a fundamentally different organization that I'll touch on here in a few minutes. Now let's look business by business, Breast Health. It was always thought of as largely a gantry business. But when you look at it, what we've really done is grown the gantries while also further diversifying the business. And that teal-ish segment in the middle has gone from 17% to 22%, which is the Interventional Solutions business, clearly been a source of great growth, and that's where our Brevera business. So it's a combination of both organic and inorganic revenue coming through there as that business continues to get stronger. Our Surgical business. We think this is another great story. Obviously, NovaSure, which was this was primarily a one-product business. Going back a decade or so ago and even in 2014, NovaSure was over 70% of the business and in a category that fundamentally is declining a bit. So what do you do? We've grown our MyoSure business incredibly, and we've been adding on both with Fluent, which again, is organic, as well as the inorganic things like Acessa that we have acquired to build into the laparoscopic business as well. So you now see that business pushing $0.5 billion in revenue in 2021. And again, with very good growth trajectory and a much broader base. So hopefully, you're starting to see this picture that each of our franchises within them, they're all more diverse and stronger than ever. And here's our Molecular business. And if you look -- or really our Diagnostics business in total. And when you look at going back to 2014, our Cytology business was actually bigger than our Molecular business. And how we have transformed that over time. Again, Cytology, a low growth to no growth-ish business, yet we've maintained that very well, while we've dramatically expanded our Molecular business. And we divested the Blood Screening business, so that little 1% there is just a tiny ongoing revenue trail. So we've strengthened that by getting stronger. And then clearly, that 58%, which is the COVID assay, it was all enabled by our molecular platforms. And speaking of our molecular platforms. Really, you go back in time when we had really TIGRIS was our big innovation that was for the main central labs and a great innovation almost 20 years ago. But then Panther came out in 2012, and we launched Panther Fusion in 2017 and now Novodiag, which has come to us from the Mobidiag acquisition that we did last year, and we are feeling very good about having that smaller footprint that is going to also really enable growth and allow us to continue to broaden our Diagnostics business here over time. And digging into that as well, what is the fundamental strategy? It's about more menu on more instruments. And so you go back to 2014, '15, we only had 4 assays approved and our R&D teams have been cranking out assays over the last 4, 5, 6 years. And you can see we're now up to 19 assays approved on Panther, and we've done all of the new assay approvals on Panther. We have not done those on our TIGRIS system, which will really be legacy and eventually end of life here. So the magic has then been placing Panthers. And as you look at it from the 2014 to 2019 time period, a very steady growth in that $200 to $250-ish per year. And then in 2020, as we responded to COVID, we more than doubled our annual placements there to 511 globally. And even in 2021, we built on that further with 646 placements. So the other way to look at this chart is go back to the 2018 number. At the end of our fiscal year of 2018, we had about 1,500 systems installed globally. We have doubled that in the last 3 years. And we're now on that verge of 3,000 Panther placements. So as you think about that going forward, we now have twice as many Panthers as we had 3 years ago. And we have a menu that's 4x larger than it was 4 or 5 years ago. And that is what gives us so much confidence here as we go forward on our Diagnostics business. The other piece that is really, I think, hard to get a grasp of if you're just looking at numbers from the outside of this company is how different our International business is today versus what it was back in the 2014 time period. And in simple terms, it was an export business. We would dial around and we had a bunch of distributors around the world for the most part. And it took us a few years. You can see those 2014, '15, '16 time periods, we're not a lot of fun. But during that time, we were laying the seeds and building management teams and putting things in place to start to generate sustained double-digit growth as we put our own feet on the street. And there is no doubt, as you see that '17, '18, '19 time period, all double-digit growth and continued even into 2020, where we didn't take a step back on our base. And the way we've responded with our COVID revenue in 2020 and 2021, we never could have done 5 years ago. So now we have a belief and a team in place around the world that is going to generate, we believe, double-digit growth here over our strategic planning horizon. And that alone is a very impressive and very different state than where we were. Now we want to talk a little bit about what we are doing to uniquely influence the world and especially women's health. And that is, you see here, we're clearly the global leader in breast cancer screening, STI testing, cervical cancer screening. And we're building on these strengths, both internally as well as our business development initiatives. One of the things we've clearly done and you've seen is the way we rapidly developed 3 molecular tests. And we've sold over 150 million tests in over 50 countries around the world here over the last couple of years. And while it's an ongoing debate, we want to be very clear that we still expect COVID to be one of our largest molecular assays, not only in the near term, but with a longer and fatter testing tail in the long term. And if anything we have seen over the last couple of years and increasingly watching this pandemic play out, as we move to an endemic state on COVID, we believe like so many things, there is going to be a meaningful tail around molecular, the state-of-the-art gold standard tests required to keep societies going forward and keep our people healthy. The other piece that we're incredibly proud of is in the midst of all of COVID and the responses and everything else, we had undertaken an initiative in 2019 where we partnered with Gallup to create what we've called the global -- the Hologic Global Women's Health Index. And I would argue this product in its own way, which we will never sell nor monetize, might have a bigger impact on women's health than any single product we've ever developed. Because what we have done is we've now, with Gallup, been gathering data and we unveiled it last year and we're doing the update on it now. We interviewed 60,000 women and girls in 116 countries and using 140 different languages. And our goal is very simple. There's a lot of people that know women's health has been ignored and is not invested in enough but there's never been the data. And as a diagnostics company, we know that what gets measured gets acted upon. And this is a massive investment on our part that we believe is going to fundamentally, over the next decade, make a very meaningful difference on women's health around the world. We've also been investing in Project Health Equality, which one of the findings out of the Women's Health Index, and it's not a shocker, is that women of color have largely been being left behind. While there have been so many great advances in medical technology over the last few decades, they are not being equally applied across the population. And so we have invested more than $20 million, and frankly, that number is probably going a little bit higher, which for a company of our size, is a massive investment to really help the underserved, both in the U.S. and around the world. And ultimately, all of this is leading to really, really strengthening for our future. And as you look at it, we, last summer, put out a new top line organic growth rate target of 5% to 7%, which is above where we had been. And we feel so good about our ability to do that. In fact, the first 2 quarters since we put that guidance out, as you can see at the bottom, 12% and the quarter we just announced, 9% growth, feeling very good about that. And ultimately, the drivers of this, as you look to the third bullet, are clearly our Molecular business, and that's both, again, it's organic innovation, it's our developing more assays, it's continuing to refine and upgrade and make our Panther system better and better. It's that International business, and it's the acquisitions that we have also done here that are -- will turn into accelerating growth rates as we go forward. So again, every business has both organic innovation coming and inorganic innovation also contributed. And it's part of what helped us deliver these results that we just preannounced on Sunday afternoon. And I think it's very important for everybody to realize, if I could just put you over on the right side of the page there, that our Breast Health -- every single business grew more than 8% globally. Breast Health at 8.4%, GYN Surg at 8.2%, Skeletal, above that. And our organic Diagnostics business, people keep asking the question, okay, what about your base business in Diagnostics as we look at COVID. Our base business grew 10.2%. And candidly, if we were not using our Panther so much for COVID, that those numbers would be even higher because we have so many customers that have committed to taking on our additional women's health assays around the world, but they've had to defer putting those on because they continue to run COVID. So we win either way. If COVID stays longer, we are getting that revenue. And if it goes away sooner, our core business will probably accelerate in its growth rate. The other piece that's hard to describe is how different our balance sheet looks over this time frame. And you go back to the 2012, where we were 5.5x levered to today, we're under 1x levered. And clearly, it's been a lot of work over time combined with, frankly, some very strong free cash flow over the last couple of years. It gives us firepower for both the internal investment, tuck-in M&A and share repurchases, and we extended out the debt maturities. I remember when I first arrived, all the maturities were coming in the next few years, and we've systematically changed all of that through our finance team that's done an exceptional job. And we now are in a very good position. And the other great part as it does come to capital deployment is because our core businesses are now so strong. It also gives us the luxury of being patient and selective as we scan the universe of what is out there. And so we don't feel any need to act. We feel so confident in our core businesses, and it's giving us the great opportunity to be opportunistic as we were last year with Biotheranostics, with Diagenode and with Mobidiag, all that will strengthen us for the future. And clearly, you see those deals, and we also picked up Acessa and Bolder that we feel great about for our Surgical businesses. And these are now gaining traction and will add significant revenue this year and most of it in the second half will be -- will turn into organic revenue growth. So again, feeling very, very good about these businesses as we go forth and the ability to continue to do them now that we've gotten much better at our due diligence, much better integrations in everything that we are doing. So with that, in summary, I hope you take away that we are a fundamentally different company, more purpose-driven, back to that much more diverse and recurring revenue, a very different global footprint, a much stronger Diagnostics business that supplements and clearly complements the Breast Health business that was always a strength, and that very positive Surgical business. We really are very proud of making a unique difference in the world. What we've done with women's health, what our teams have done in responding to the need for COVID testing over the last couple of years has been nothing short of astounding. And we're so proud of what our teams have done and continue to do, especially in this recent Omicron surge, where all of us are dealing with extra people being out and our teams' volunteers showing up to continue to keep our lines running to serve the world's needs for COVID tests, and what we're doing on the social initiatives. And fundamentally, we are now a faster growth, stronger company than we have ever been at any point in our history. And we're very proud of that and excited to keep telling the story and excited to keep making a difference in the world. So with that, thank you all very, very much.

Thanks, Steve. That was a great overview. Maybe we can touch on the 1Q pre-announcement here. So the base business had a very strong quarter, as you noted, growing 9% organically above the 5% to 7% growth algorithm. So there isn't much indication that Omicron had an impact on the base business. Maybe can you talk about what you're seeing in terms of trends heading into the new calendar year here?

Yes. We stayed very close to it and especially our Surgical business that is the most sensitive to the ups and downs and the vicissitudes of hospital staffing. We continue to feel very good about the trajectory of all of our businesses. And we had started -- or every Tuesday morning, we have a call with our global presidents and continuing to feel very, very good. There's little pockets here and there, and things could change here in the coming weeks. But as we sit here right now, we feel very, very good about the continued trajectory of the businesses, particularly in the U.S. I think internationally, we do see a little bit more of a trade-off and some pullbacks, I think, in both Surgical and Breast Health as the COVID surges goes country by country. So I think they're a little bit of a touch but nothing material over the long run here as we press forward. And I think part of it is just increasingly have it -- when you have the products that the doctors want and the patients need, it really does help us differentiate and power through even some of the downturns.

Got it. And then I guess on the other side of that, the COVID piece. So your first quarter COVID revenue came in above your full year expectation. So do you have some comments around maybe like what the new baseline should look like for 2022, fiscal '22? Any sort of comments on how you're thinking about things on -- as it relates to...

Sure. Sure. Sure, Casey. I think we want to be careful not to give guidance. We will give an updated guidance on our earnings call on February 2. Having said that, right, you can very clearly see the fourth quarter -- or the fourth calendar quarter, our fiscal first quarter, so much stronger than we expected. When we put together our budget, we did not anticipate the Omicron wave coming in. And the testing has been off the charts, and we're also starting this quarter off to a very nice start as well. You don't have to be a genius to figure out that the tests are at an all-time high right now, particularly in the U.S., but even big global demand. And I think what we've continued to feel, there's clearly going to be meaningful upside to our original forecast for the year. And we just -- what we're trying to do, it's hard to forecast out because you never quite know how quickly things could drop off. But I think the biggest thing we keep seeing is there are going to be new variants, and we've conditioned the public around the world to pay more attention to these things. And I think it is going to create just a stronger business for us over time. And the other magic that we have with Panther that I think doesn't get fully appreciated is it's the most automated workflow system. And when we think about all of the labor issues right now, we see continued very strong demand for our Panthers. Even though we've placed almost 1,200 in the last 2 years, we think we're going to be at least back at historical levels. The 200 plus this year, it's not like it's going to fall off because everybody needs the Panthers because they just don't have the staff to continue to run. And we're running them in hospitals all around the world. And certainly, the big reference labs and the medium reference, everybody is running Panthers at this point.

Got you. Makes sense. We had a couple come in via e-mail here. First one is can you provide an update on the growth opportunity in Europe for 3D breast screening?

Sure. I think we continue to feel very good about the longer-term opportunity for 3D breast screening because it's still used more for diagnostics. And this is part of the main discussions we're having at the, call it, the ministerial level, the health minister levels, country by country right now, including even in the Middle East areas, that we were never able to have when we were a distributor-led organization. So now that we have our own people, we're in there trying to influence policy and it's where, frankly, the Global Women's Health Index is creating an incredible opportunity to have discussions at the very high level so that we ultimately can start to change and shift the policies. So the 3D opportunity outside the United States, not just Europe, is massive over time. I mean it's still, by far, the majority of the business is still 2D. But more importantly, the markets are so underdeveloped because so many countries are still using mammography as really just a diagnostic tool instead of an ongoing screening tool, and that's the great opportunity for us. And again, does that come through in the next quarter or 2? No. Does it keep coming through gradually over time? Yes.

Got it. And then the other question here is what is the recurring revenue mix now versus 5 years ago? I imagine that's for -- across all the businesses.

Yes. For the total company, let's think about it this way. Effectively, all of our Diagnostics business is recurring revenue. I mean, there's a tiny bit of Panther placements. So as Diagnostics has become so much bigger, the Surgical business is virtually 100% recurring. So that has all -- that's now a bigger percentage of the business. And so you really have the 24% of our Breast Health business, that's the gantries, which now that of the total company is what, last year, 10-ish?

Yes, pretty small, yes.

Yes, probably 10-ish percent of the -- so from what used to be perceived as a company that was on a capital cycle basis back, call it, 10 years ago, today, you're close to 90-ish percent ballpark is recurring revenue.

And I would just add on to that, Steve. If you looked at the Q1 performance, that 8% growth, Mammography was actually down versus '19. And so that diversification strategy that we set out in that business with Interventional, with Surgical, with Ultrasound is all driving that growth despite the Mammography still recovering from pre-pandemic levels.

Got it. That's helpful. Maybe circling back to an earlier comment around labor shortages driving kind of the Panther utilization. Would you say that that's maybe the main driver of base diagnostics growth here in 1Q? Were there other sort of underlying market dynamics such as the CDC's opt-out guidance or anything else that are kind of driving things on the base diagnostics side?

Yes, I would flip it in exactly where you were going with your -- is the labor shortage is probably the bottom side of it. I think the drivers are the new assays. The guidelines are certainly helping, and I'm glad you mentioned that, but let's start with the assays, even things like BV/CV, one of the newer assays. It's one of our fastest uptakes ever of any new product, other than COVID, that we've had within our women's health portfolio. So it's being driven first and foremost by the new products. The guidelines, again, that shifted last year to the opt-out, we believe are going to be very meaningful contributors here over time. Again, these things don't flip -- everybody that's been around health care guidelines realizes it takes a little while for those things to roll in and become effective. So again, that provides growth as we go forward, which is really going to expand the market for us. And then the third, really, the underlying piece is our Panthers. But certainly, I think one of the questions we have heard repeatedly over the last couple of years is, yes, great, you placed a lot of Panthers now. But on the other side of when COVID comes down, are all these Panthers going to be sitting idle? We can say with unbelievable certainty, and you know that we tend to be understated on these things, our Panthers are going to be used because right now, they're in extreme demand. And in a labor-constrained world, we think they're going to be even more important going forward. So I think your question around is I think they're less driving it today, but -- or last quarter, previous quarter, probably even more so now. Exactly, you are right that as the labor shortage is right now and continuing to go forward, really put us in a great competitive position.

Got it. Makes sense. I want to go back to COVID. I want to get your thoughts on the durability of PCR testing for COVID, particularly the Panther product. Where do you see that ending up in terms of when COVID goes endemic? We've seen a flooding of the market for rapid at-home antigen tests. Do you see those taking market share at all? And any sort of thoughts on how we're going to be testing for COVID, say, in 2 or 3 years?

I think we fundamentally believe that in virtually all things medical, the cream rise to the top and the best tests prevail. So as we look forward, we totally believe that as societies are going to want to truly track what is going on, and they're going to need molecular testing, right? Let's face it, first off, the antigen test don't get properly reported. More importantly, they just don't work as well. Let's be -- we'll be very candid about that. They do not have the sensitivity, the specificity levels. And my research from talking to every person we know, most people have had a bad experience with an antigen test. And it is going to play out because most of them are being used off label, to be quite candid. We are approved for asymptomatic screening. The hospitals all know us, the medical authorities all know where we are. And we think in the long run, this might look more like the pregnancy market, where people will use an at-home test, but you're not going to decide your pregnant just based on a home test. You're always going to reflex to the doctor. And we believe the doctor, and particularly for treatments and everything else, that this is going to stay locked in, in society and particularly hospitals, they're going to want to continue to screen patients and screen their staffs. And our Panthers are sitting in virtually every hospital, certainly in the U.S. and many now around the world. So we believe and we said it at the outset, despite -- first off, I laugh. It was only just past a year ago, or not quite a year ago as the vaccines were coming, everybody thought testing was going away, right? And when the antigen tests got approved, suddenly, molecular testing was going to go away. Molecular testing is the gold standard. It will be here for the long run, and we are going to be there with it.

Got you. That's very helpful. Maybe a couple of quick ones on the model here before we have to wrap. Can you talk about your latest capital deployment priorities? You had the slide there talking about the balance sheet and how your leverage is under 1x now. Are you going to be -- continue to be as acquisitive as maybe you have been over the last 1.5 years here? And if so, maybe what sort of gaps in the portfolio do you see?

Yes. Thanks, Casey. I think when we think about the COVID revenue, that is obviously driving tremendous free cash flow for us, which allows us to kind of accelerate our capital deployment, both in M&A and share repurchase. So I think you'll continue to see activity that you've seen in 2021. Maybe not at the same level. But certainly, the free cash flow, our financial strength and flexibility allows us to continue to look at tuck-in acquisitions, look at things that really we have an expertise, a point of leverage to continue to grow our revenue top line. So we'll be doing that as well as it's an and, and the share repurchase. So clearly, where we see disconnects in the market, we'll be jumping in to mop up some shares.

Got you. How should we think about operating expenses moving forward as you integrate Mobidiag and some of the other acquisitions here? And then on the Mobi piece, I would like to hear your updated thoughts on how the Novodiag sort of roll out is going here?

Yes. So let me first start on the Mobidiag. I think we're really pleased about seeing our R&D teams work together. Our folks are going to Finland, the Finland folks that come to San Diego to make sure that we've got the right clinical pathway for a U.S. approval. So that's been our focus. And I think we're on track for a late '23, early '24 approval in the U.S., which we're -- again, we're excited about. I think from an operating expense perspective, certainly, we've talked about the acquisitions in '22 of probably about $0.10 dilutive, and that's before Bolder, that's another couple of pennies. But certainly, that's well focused on R&D, especially Mobidiag, again, for that U.S. approval and believe as we make progress through '22 into '23, then we'll drive more accretion from those acquisitions. So integration is on track. We feel good about the acquisitions. And again, some dilution here in the short term, but they'll be contributing to earnings when we get into '23 and beyond.

Got it. And I'll sneak one more quick one in before we have to wrap up. How should we think about how the rising level of international revenues affects gross margins and operating margins?

Yes. So certainly, gross margins and operating margins are dilutive to the corporate average, the OUS margins. But some of that, it's certainly on the operating margin, has been intentional. We've intentionally invested in our commercial capabilities to drive that revenue performance that Steve talked about. But certainly, as we move forward, that could be -- that will be an area of leverage for us. As those revenues continue to grow, we won't have to invest at that same level. But overall, I think we're just really pleased at the revenue performance internationally.

Great. Well, we're bumping into the end of our time here. So well, I guess we'll leave it at that. Thank you, and have a great rest of the conference.

Thank you, Casey.

Thank you.