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

Good morning. Welcome to day 2 of the Raymond James Institutional Investor Conference. I'm Andrew Cooper. I cover diagnostics here at Raymond James. We're excited to have Hologic joining us this morning, so a company that you've probably heard the name of for COVID. If you hadn't prior, but there's a heck of a lot more to the story. We're going to get into that. I'm joined by CFO, Karleen Oberton, for a fireside chat; as well as Ryan Simon, who heads up the IR efforts. So maybe just to start, if you don't mind, for some folks maybe newer to the story, can you give us a little bit of a quick intro to who Hologic is, what you do, some of the markets you play in, and just sort of an overview in general?

Sure. Absolutely, and thank you, Andrew, for having us today, where it's a pleasure to be here. It's certainly a pleasure to be here in person, first in-person conference in 2 years, so this is really special. But Hologic, a medical device innovative company, uniquely focused in women's health care. We are structured within 3 major divisions, our Breast Health division, our Surgical division and our Diagnostics division, which, as Andrew talked about, is the division that is producing millions of COVID tests around the globe. About 90% of our revenue in 2021 was reoccurring in nature between our service revenue and our disposables revenue. Only 30% of our revenue in 2021 came from outside the U.S., so that is certainly a significant opportunity for us in the future to continue to grow our business outside the U.S. Within the U.S., in each of those divisions, we have clinically differentiated market-leading products, basically products that are the gold standard for care for women's health in the U.S. And that, again, is the opportunity to make those the gold standard outside the U.S. for us as we move forward. I think as a health care company uniquely focused in women's health, from an ESG perspective, our purpose, passion and promise to improve women's health across the globe kind of leads us from -- in those efforts. And given the amount of cash that we've generated because of the COVID revenue, we've been able to amplify our efforts there over the past couple of years. And I'll name 2 significant efforts: one is our Global Women's Health Index, which we partner with Gallup to measure women's health across the globe; and our Project Health Equality, which is focused in closing the gaps and outcomes for women's health, specifically breast cancer and cervical cancer between white women and women of color. And what does that mean is that the incidence of breast cancer and cervical cancer are the same between white women and women of color, but the outcomes, the death rates, are significantly higher for women of color. We want to close that gap.

Great. Perfect intro. And I know we don't want to spend all our time on COVID, but I think it's probably worthwhile to hit on it. So maybe first, just what's the sort of latest and greatest? And one thing I want to ask, because I think it's -- maybe it's a little bit unfair or unanswerable, but there's been a lot of changes in the landscape in terms of OTC availability and things like that. So when you think about that long-term endemic view, what are your latest thoughts on where testing should take place? What modality? And things of that nature?

Yes. So certainly, in the current quarter, what we see is certainly testing coming down significantly. We've seen that, and that's great for society. And that decrease in testing was considered in our guidance for the quarter. So we anticipate this is not different from what we actually saw a year ago that we saw as we came out of that flu season, that testing came down. I think from an endemic point of view, I think molecular diagnostics is the gold standard. When accuracy is important, certainly in the health setting, health care setting, when you're testing, screening populations that are asymptomatic, pooling, molecular diagnostics is what you need to do that. And so I think in an endemic stage, there is definitely a role for molecular diagnostics. And to put it in perspective for us, prior to the pandemic, our largest molecular assay was our chlamydia-gonorrhea assay, which was about $280 million globally, annually. So for us, even if COVID is $100 million, $200 million a year, it's a significant assay, which will drive significant profit and allow us to do things from a capital allocation perspective that really wasn't considered prior to the pandemic.

And just on COVID near term and thinking forward, in terms of ASPs, we've seen them trend down a little. I think part of that is international mix as well. But is there durability at that, call it, $20-ish level for you longer term?

Yes. So we've certainly held at the $20. And I think you're right. In the U.S., it's probably the low 20s on average; OUS, more in the teens. And what we are seeing is that as we renew our international contracts, pricing has come down. I suspect in the U.S. that when the public health emergency ends and the reimbursement at $100 maybe declines, that's when we'll see pricing pressure. And that's not atypical in molecular diagnostics anyways. But I think, to put it in perspective, again, back to that chlamydia-gonorrhea, our largest assay, typical pricing in the U.S. is $8 to $10. So from $20, low $20s, we have a long way to go before we have any significant -- well, a long way to go, and it will still be margin accretive.

Perfect. And maybe thinking a little bit kind of to the longer-term ramifications of what the pandemic's done to the business. You shipped nearly 1,200 instruments in 2 years. The base is, I think, roughly 75% larger than it was before the pandemic. So the big question everybody asks is once this stabilizes, what does the new installation pacing look like? How much of this was pulled forward? And then we'll get into some of the utilization after that.

Yes. So certainly, we've placed a tremendous amount of instruments, which really just -- the headline is that is great for our molecular diagnostics business for the long term, absolutely. And we continue to see strong demand. So in Q1 of '22, we placed just under 120 Panther instruments in 1 quarter, and that compares to prior to the pandemic placing annually 225 to 250, so still strong demand. Will we see less demand in '23 and '24? Likely, because we pulled through so many. But again, the breadth of our assay menu, the automation that our Panther brings, that installed base is going to drive accelerated revenue over the longer term.

Okay. Great. And now kind of on that utilization front. I think one of the interesting numbers you gave on the most recent earnings call was 90% of U.S. COVID-19 installations are running something else. So can you give us a flavor maybe for how that trended to get to that 90% when they found kind of the capacity, frankly, to start validating new assays and what the pacing has looked like?

Sure. So we were intentional at the beginning of the pandemic to incentivize our sales force on non-COVID assays, right? So we -- the COVID business was coming to us, no need to commission them on that. So we upped the ante on non-COVID, so that is playing out. And one of the ways we measure that is something called a test to record. So a test to record, the value of a test to record is the estimated 1 year's annual revenue of a newly validated assay on a Panther. So prior to the pandemic, 2019 was our highest level at $20 million; 2020 was $34 million; 2021 was almost $40 million; and likely 2022 will be somewhere in that $30 million to $40 million, so we are seeing that menu expand. I think what's happening, Andrew, is certainly, when we saw kind of about a year ago when the surge was coming down out of the flu season, you start to have labs pick up and start to validate that new assay, which is a process that they need to go through. So I think that's what we're seeing play out there.

And when you think about that group, all those installs, is there any reason structurally they would be any different than the prepandemic base? And by that, I'm trying to get at, we talked about sort of a low to mid-200s level was the average utilization prior. Is there any reason to think that, that group might be a little bit different?

Well, I do think that it structurally has changed a little bit, because you think about the first bolus of Panthers that we placed in this pandemic were to our large reference labs that were running historically our legacy Tigers platform. And so you're going to have eventually when COVID is at a stabilized state, they will port over that legacy women's health onto the Panther. So it's going to change -- that number is going to change. That metric isn't going to be relative anymore really to a prepandemic. But what we're seeing, as I talked about, is the tours picking up that people love the Panther instrument. It's fully automated, random access, the least lab tech time required. So you think about the pressure that the labs and the lab technicians are on, they want the Panther because it's the easiest to use. And you think about moving away from the large reference labs, but to the mid, local labs, the hospital labs, that menu, the 19 assays we have approved, the more they can run on the Panther, the more valuable it is. So certainly, from a utilization, we believe that there'll be good utilization. And certainly, we haven't had anyone asked to return their Panther.

Okay. Perfect. And you mentioned the international mix in the first question there. So one thing we did see in those installs over the last 2 years is a heavier mix to international customers. I guess, first, is that a function of we were less penetrated and there's more opportunity there? Is it, you've done some acquisitions that gave you a little bit more sort of logistical footprint there? What's driving that?

Yes. So certainly, we've been underpenetrated. Historically, Hologic, has been a U.S.-focused company. And over the past couple of years, we have invested in commercial capabilities, and we've seen that actually play out here during the pandemic with the large number of Panthers who pay internationally. I think it's also going back to the footprint of the Panther. The Panther is probably the size of an office copier but a little taller. So really, they don't have the large reference labs, OUS. So that smaller footprint is attractive outside the U.S. Again, the level of automation, the hands off time, the random access and then the menu. And certainly, in Europe, the menu is just about the same as it is in the U.S., so it's just really a significant value proposition for these labs. And I'll just -- can I just add one more thing is that in this time of COVID, we have delivered on our commitments to our customers. And our brand has really been elevated certainly internationally. So when every health minister, government official was asking for demand that we couldn't fulfill, we were honest with them and said we can't fulfill that demand, where others were overcommitting and underdelivering. Inevitably, all of those customers came back to us, and we have delivered on every commitment we have made to our partners, both in the U.S. and OUS, and I think that's really helped.

Great. And thinking about that international base, and you touched on some of this, but just how it's a little bit structurally different, if you could give a little bit more flavor for that. And then when we think about that 90% metric for the U.S., is there any color you can give us for how that's trended? What the international customers have done in terms of ramping up additional assays?

Yes. I think what we've seen is we've seen tremendous growth in our molecular business outside the U.S. It's been a strong teens to 20% grower. So again, I think it's back to the footprint. It's back to the menu that we offer that drives an attractive profit profile for our customers. And again, just high level of service to our instruments, our installed base, I think is what drive -- is driving that growth. But certainly, that 90% was a U.S. metric. OUS is probably a little behind, certainly a lot of focus on COVID right now.

Okay. Great. And one of the other big pieces in 2021 or calendar '21, I should say, was, I think, 3 acquisitions in diagnostics: Diagenode, Biotheranostics, Mobidiag, I think we've lapped or are approaching lapping the last of them. So maybe just sitting today, what did you get right in some of the predeal thinking? And what maybe surprised you out of those 3 relative to what you thought at the time?

Yes. So I'll start with Biotheranostics, which we have lapped. That was the first one that we did. And I think the biggest surprise there is that we got a guideline from the NCCN about a year earlier than we thought it would be. So integration is going well there. We're actually -- they're a San Diego-based company. We're actually physically integrating them to our campus in San Diego. So I think that's always great for engagement and our employees, and that's off to a great start, again, with that guideline about a year earlier than we expected. Diagenode, as a company, think about that as an assay development partner that we had worked with historically. So allowing them to bring them in-house allows us to accelerate some of the partnership there. And that's really more on the PCR side and putting assays on our Panther Fusion platform. And then Mobidiag was the largest acquisition that we did. This gets us more, what I would say, acute care closer to the patient. And certainly, integration activities have been underway there. The teams have been back and forth to Finland and San Diego, a lot of in-person activity and really finalizing our U.S. clinical pathway. So right now they're just approved in the EU. And we've done -- we did an EU launch back in the fall, which is going well, and again, probably on the market in the U.S. late '23, early '24.

Great. And that's the one I wanted to dig in on a little bit deeper. So when we look at what was out there and sort of still is out there from a platform perspective, and you were looking at something that maybe is a little higher plex, a little bit more near patient than the traditional Panther, why was Mobidiag the right platform? What were the traits that you really said this is the one that we think makes sense?

Yes. So the box is a unique box instrument where it can do low plex and multiplex with the microarray technology. So it gives lab flexibility to do either 1 on 1 box. And I think, really, what they did was they focused on keeping the COGS on the cartridge low. So that's sometimes that is often in that closer to the patient point of care, the kind of headwind is the cost per test, right, is difficult. So they focused on simplistic cartridge with few parts and simplistic manufacturing to keep the COGS low. And so that was one of the things that made it attractive to us as well as they had no U.S. presence. And so once we get approval in the U.S., we've got a sales force obviously ready to go.

And just, on that last point, in terms of a synergistic offering, if a customer is going to be all in on molecular diagnostics, it seems like they're going to need both types of instruments. So just how do we think about how you might get pulled from one to the other and vice versa?

Yes. It certainly is that our customers could have both instruments, both the Novodiag, which is part of Mobidiag or the Panther instrument. I think, if you think about the hospital setting where you'd have the Novodiag probably as a very sick person coming in, you want quick results, but you could have the Panther in the lab where you don't need that quick results, maybe a couple of hours.

Okay. Great. And we'll move from diagnostics now, but maybe going to GYN and Surgical. Sticking with M&A, Acessa, Bolder, you've done a couple of deals there. I think they're pretty clear in terms of how they fit into the channel. And so maybe taking a step back, you've talked about both as potentially $100-plus million businesses. When we think about the prepandemic, predeal base, a bit over $400 million, why is the right growth rate still 5% to 7% if those are going to grow to $100 million-plus businesses? And we're not talking decades, right, so can that business grow faster? How should we be thinking about that?

Yes. I think, in general, when I think about my surgical business, certainly, it could be when you talk to 5% to 7%, I would expect that to be at the higher end, if, to your point, maybe potentially above. But think about Acessa is actually a new procedure. So there is training that needs to happen for the physician. So it's not a quick uptake, right? There's also payer coverage that we're actively getting to make sure patients are covered. But certainly, Acessa is a great synergistic product with MyoSure. So MyoSure treats small fibroids 0 to 2, and Acessa will treat the 2 to 6, the larger fibroids, so a physician could actually use both products in 1 procedure. And certainly, Bolder, early days launching that, but certainly, that prior to our acquisition just focused on pediatric, and there's about 5x the number of procedures in the GYN setting versus the pediatric. So we think that, again, that could be a good grower. But I think to your point, one of the things that to keep mind of on the growth rate is part of that $400 million prior to those acquisitions with NovaSure. NovaSure is in a market that's actually declining here in the U.S., so that's part of the challenge of why you wouldn't just call that a double-digit grower.

Okay. Helpful. And look, it's a little bit crazy to sit here and think that we're talking about Breast Health third. I don't think we would have done that a couple of years ago. But I think part of that is just that it's -- there's bigger pieces of the pie now than there ever was in terms of other businesses. But as we think about COVID settling out, as we think about some of these things kind of normalizing, the breast business itself, I think the mix has really evolved. So maybe just give us some flavor for how gantries have moved down to less than 1/4 of the segment and what's changed to allow that, and what that does to what you can do with that business.

Yes. So we've certainly, to your point, intentionally diversified that business to what was typically soon to be a capital conversion business, a boom-bust business. We've intentionally diversified, and we've diversified it across what we call the patient continuum of care. So from a breast health perspective, a woman starts with the mammogram, the initial screening. If there's something suspicious, she goes on to diagnostics, and potentially a biopsy. So that's our interventional business. And then if something is confirmed to be cancerous, then she goes into surgery, and that's our breast conserving surgery business. So those are the kind of the components of our Breast Health and how we've diversified, and both of the interventional and the surgical are more recurring in nature. So that was part of our intention in diversifying is how do we get away from such a capital-intensive business. And I think what's lost sometimes in our breast business, the biggest piece of revenue, over 30%, is from service. Our service contract revenue, which is tied to that installed base of gantries, and it's pretty sticky. We have a high attach rate for that service revenue and, again, reoccurring in nature.

Okay. Perfect. And on the gantry business, you talked about a $200 million headwind for this fiscal year from chip shortages. So everyone is dealing with it. You're far from alone in the space or in any space that needs chips, but as you've shifted some of that limited supply towards services and repairs instead of necessarily new customers, has there been an impact on the competitive landscape and what you've been able to accomplish in the near term?

Yes. So certainly, we're not alone. So our customers are -- competitors are facing this issue as well. And I think, Andrew, what's important to note, absent a supply chain issue, our competitors were quoting 5 to 7 months delivery on gantries, which we are much shorter on our turnaround time. So we don't view this as a competitive disadvantage. And in fact, what we've seen is once we kind of put out there publicly this challenge that we're having, we've seen an acceleration of bookings of orders that customers want to get in line to get their gantry because they know we have the best product out there. And I think what we've also done, we've allocated chips both to service and kind of an eye to there could be competitive orders that we want to fulfill on. So it was both that we factored into that $200 million headwind. And I think what is frustrating is our chips are, because they gather the image and they move the image, we're competing with gaming companies for chips, right? And so it's hard to believe that we're not getting a higher allocation, and we're doing everything that we can to make our case to the supply chain to get a higher allocation. But so far, we haven't been successful, so that $200 million looks real. But we are getting smaller wins on remanufacturing. So working with our field to get boards back from service replacements to remanufacture those to supply the service side. But it's in the millions, not hundreds of millions that we're making that -- those wins on. So working through it in, again, trying to plead our case to get higher allocation.

I think at the time of earnings, you said you were somewhere around 1/5 of what you actually wanted was what you were getting in terms of allocations. Is that holding pretty steady at that level then?

Yes. And actually, we're meeting with supply chain folks on a regular basis, and they actually told us they don't have insight to when they will leave allocation. So it's real, and it hasn't changed.

And it kind of leads nicely into the next piece I wanted to cover, which was just the timing of what that means, right? So if tomorrow, you wake up and they say, "Hey, we can give you 100% of your allocation," how long does that need to translate into actually having the gantries and being able to get them into the field?

Yes. Unfortunately, that translates into probably at least a quarter before we actually get the materials because that allocation is from large chip manufacturers. And then it goes to the 2 or 3 more hands before it actually gets to us. So it's definitely -- again, if they told us today, we probably wouldn't see that raw material until May, July.

And a handful of other areas of the business still need chips as well, maybe not competing with the gaming chips. But what other areas should we be looking out for? And is it not as bad in those areas when we think about kind of the size of the impact?

Yes. I would say in the rest of the business, it's mostly cost that everyone is seeing from freight and commodities. But definitely, so far, this chip issue has really been isolated to our Breast Health business.

Okay. Great. And maybe moving to M&A and capital deployment in general. I think you've clearly put a good chunk of cash to work with all the acquisitions we've talked about already, but balance sheet still looks pretty healthy, still more cash coming in. So maybe just give us the high level, remind us of the priorities. And then on M&A, has there been a shift in valuations in the landscape, given what we've seen, at least in the public markets? What does it look like, most recently?

Yes. Well, certainly, let me talk about we've also, beyond M&A, we've continued to invest organically in R&D and marketing efforts and ESG efforts as well. So it's not just the M&A. And we've been able to really invest in the company a way such that we are definitely stronger post the pandemic than prior to the pandemic. I think from an M&A perspective, really hasn't changed. It's focused on deploying our free cash flow. As you talked about, the balance sheet is in great shape. We're probably a little under leveraged right now at less than 1. I think in a normalized state, probably 2 to 3x levered is what we're comfortable with. So I think we'll continue to see us deploy our free cash flow on tuck-in M&A and tuck-in, meaning close adjacency. We bring a point of leverage, a point of expertise, not a fourth leg of the stool, but could see things in that Mobidiag closer to $1 billion-plus size given the level of cash that we have. And I think, of course, we'll continue to do share repurchase at a minimum to manage dilution.

Okay. And I think we've talked in the past about how your M&A process is really sort of segment driven. You've done a lot. You've been very busy. So from an integration perspective and a capacity perspective, not necessarily on the dollars and cents side, but just the bandwidth side, is there anything we should be thinking about from that angle?

Yes. Well, I would say that certainly, the number of diagnostics deals we did last year, I would say that the diagnostics team is heavily involved in integration and probably a little less bandwidth. But certainly, Breast Health and Surgical all have business development teams that are actively out there looking for assets. I think you asked before on valuations. I would suspect that some of the deals that we didn't get done may come back around as people reset expectations and valuations. I think it takes a little while from where the public markets are to get rolled back into the private markets once people have that higher price tag. Sometimes it's a mental challenge to get them lower, but I think it will eventually happen.

Okay. Great. And so if we think about the sort of pipeline, it's still broad across all of the segments. Is there any one where, "Hey, this is where we think there's potentially a gap or an adjacency that's most exciting to us?"

I don't think there's a gap. I think Mobidiag probably filled that -- the biggest gap that we thought we had in that closer to the patient testing. I think Surgical is our smallest division with our largest sales force. So that's always one like what can we get else can we get into that the bag of that sales force. But I think, again, each division has business development teams that are out there identifying assets, cultivating relationships. So it's not a -- we haven't earmarked dollars for a certain division. Everyone who brings forth a good deal will get a shot at it.

Okay. And one that -- I don't ask a lot of companies or I don't ask very frequently, but you mentioned ESG. I think, clearly, it's becoming a more important thing in general and for Hologic as well. You have done a lot, you talked about the women's health index, some other pieces. Maybe taking a step back after a lot of progress on that front, what's the piece you're most proud of? And what's the area where you look and say, "Hey, we could be better in blank?"

Yes. So certainly, this ESG movement is something that's very authentic to us. As a women's health care company, you think about, as I talked about earlier, having the gold standard of care. We're the ones that are out there kind of getting guidelines for women to get these screenings, detection. We're the ones out there getting payer coverage, payer coverage. So we're doing -- we've always done a lot for women's health care. And again, this pandemic and the COVID revenues has allowed us to put kind of more money against those efforts. I think the Global Women's Health Index is something that people don't really appreciate yet. And that's going to be huge. We have that data by country, by territory, and we can go into a health ministry and say, "This is the health of your women and girls in your country." And inevitably, everyone can do better. So I think, over time, as we continue to do that survey and get that data and kind of open doors and to talk to women, talk to health ministries, health officials about the screening programs that they should have for women's health, I think that's going to be a game changer, for sure. Can we do more? Certainly, we can always do more, and we'll find ways to do that. And certainly, we have a lot of passionate employees thinking about things that we can do, and we'll continue to focus on what we could do to make a difference.

I don't mean to turn the ESG question into a business question, but I'm going to anyways off of something you said. So how powerful has that Global Women's Health Index been when you go to a customer and say, an international customer and can say, "look, you rank below all these countries that you probably feel like you should be above."

Yes. We try not to publicly shame people, but it's more about kind of educating and making them aware. Because if you think about cervical cancer screening, breast cancer screening, we know the earlier that you find that cancer, the better outcome for the patient and the lower cost for the health care system. I mean that's what we're trying to make people aware of and that it's not just the cost of the gantry, it's not just the cost of a thin prep pap test, it's the overall health care system costs. So -- and I think fundamentally, I personally believe that when the woman is healthy, and that's healthy, both physically and financially, the family is healthy and the community is healthy. That's ultimately what we're trying to do to make a difference.

Great. Well, we're right around the end of time, so we'll stop there. Appreciate it, and we'll head down to Amarante 2 for the breakout session.

Thank you.

Thanks.