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

Good morning, everyone. Welcome to the live and in-person 2022 Bank of America Healthcare Conference. Thank you. It's great to actually see a room full of semi-smiling faces. So I'm Derik De Bruin, the senior life sciences and diagnostics tools analyst for you that don't know me. And it is a distinct pleasure to kick off this year's conference with a company that certainly was very involved in dealing with the last couple of years. Hologic, and with us Steve MacMillan, Chairman, President and CEO. Steve, thanks for being here. Thanks for coming in, and thanks for all the work that Hologic did during the pandemic.

Thank you. Thanks for having us. Our team appreciates it.

So a few opening remarks. You just reported -- you reported 4Q, I think -- or sorry, your fiscal 2Q on 4/27. And just to sort of set the stage or we can just jump right in. What do you want to do?

Sure. I'd love to if you could give me this the ability to set the stage here and raise this up just a little bit from the quarterly earnings. And that is, for those of you who get Larry Fink's letter to the CEOs, there's a powerful sentence in this year's where he said, "Capitalism has the power to shape society and be a powerful catalyst for change." And frankly, when I read that, I thought he said it better and he said the essence of what Hologic is better than we could ever say it. And that is you can think about our history, no company has done more for women's health, we believe, or been a powerful catalyst for change in women's health through our history of 3.5-plus decades right now When you think about our innovations in breast and cervical cancer screenings and throughout women's health and what we're doing to champion women's health around the world. And so over those decades, we think we've been that catalyst. And then if you look at what we did in the last couple of years, where we completely -- when the world needed COVID testing, and go back to March of 2020, when all you could see on every news program was a shortage of tests. It was us, our R&D teams worked around the clock to end up getting the first COVID test approved at 3 a.m. on a Sunday morning and we were manufacturing it immediately. And then we got our second test approved within a month later. And our teams have gone flat out. And we scaled from producing 7 million tests a month across all of our Diagnostics businesses. So by the time we hit January of 2021, we produced 25 million molecular tests. And if you could have seen our facility in San Diego, where Kevin Thornal, our Division President, and where I was every single day, it was combination construction site and manufacturing site. And I'm so proud of what we have done even more so in the last couple of years to respond and continuing to try to elevate women's health. And I think that to wrap on what could seem like a long-winded opening here, Derik, because you're sitting there saying, I want to get to my quarterly questions. But anyway...

I'm still great in my coffee so knock yourself out.

All right. Get him another latte. I'll leave you with one simple thought. The way we responded in the pandemic has left this company stronger than we have ever been. As I look today, each one of our businesses is stronger than it's ever been with more recurring revenue and more growth drivers. I can go through Surgical, Breast Health and Diagnostics. It fits each 1 of those. Our balance sheet has never been stronger. For those of you who haven't paid a lot of attention, we were 5.5x levered back in 2012 and we're about 0.3 today with a couple of billion dollars of cash on our balance sheet. And the leadership team we have in this company, top to bottom and across domestically, international, has never been stronger. So am I optimistic about our future despite the current environment, yes, I am.

Well, that's actually a fabulous segue into my next question. When we initiated coverage on the company back in 2015, it was roughly 3.5% -- sorry, 3% to 5% organic revenue growth on a good day. But now you're targeting core growth at 5% to 7%. When I talk with investors, there still is a little bit of a skepticism about sort of being able to live with that on a go-forward basis on sustainability. What gives you super confidence to meet and ideally in this world beat that target.

Yes. I'm more confident than ever. Obviously, we've got a short-term issue in the Breast Health business for the next couple of quarters on the chip shortage. But by the way, the way I actually think about that, just you know from my chair, who's running a company for the long haul, this year, we're in great shape because we had the COVID profits, we have everything else. To me, it's actually setting us up for very good comps going forward. So I think if anything, you may see an accelerated growth rate above that next year, right, because of some of the depressed comps. But I think the way we look at it is, again, every business. So within our Diagnostics business, I think it's hard for people to fully grasp the concept that we've all most doubled our Panther placements in the last 26, 27 months. And I'll give you just -- there was 1 simple visual from our international presentation a couple of weeks ago. And I was looking just at 1 country in Europe, as an example, that in 2019, had 10 Panthers. Today, it has 51 spread across the country. And when you think about what drives success in our Molecular Diagnostics business, it's 2 things -- and actually, I could argue 3. One is Panther placements, two is expanding menu, and the third, actually, which I don't think is fully appreciated is the market development that we do, particularly in the U.S. with our OB/GYN sales force that are driving new products like BV/CV and getting recommendations and getting them into the guidelines and getting reimbursement. So that's the magic of our Diagnostics business. We then dropped in Biotheranostics, which is off to a tremendous start. And for those of you don't see, we just got -- we keep getting good news on that and that one is running very well, and that turns organic in the next quarter. And the quarter we just reported was up roughly 30-ish percent off of the previous year's quarter, but we couldn't count that as organic yet. So you have a great growth rate there. And we have Mobidiag which really gets a smaller unit that will be more for acute care and closer to the smaller labs and even physicians' offices, so we feel great about that trajectory. Our Breast Health business continues to be more recurring revenue. We've diversified that business as well to where the gantries themselves are really under 1/3 -- roughly 1/3 of that total business. And our Surgical business, in addition to NovaSure, MyoSure, we've added Acessa and we've added Bolder. Combined with the fact that we have an international business that now has been putting points on the board for the last 3, 4 years of double-digit base growth, and we feel great about that. So as we look to the next few years, I think it gives us even more confidence in that 5% to 7% with the exception, and we always remind people, it doesn't mean every single quarter, right, and particularly while we deal with the chip shortage. But just keep looking at it over time, we feel really, really good about that.

So a bunch of questions to sort of go off of that. Is there still more room for Panther placements? I mean, you've had a couple of really good quarters. I mean everybody and their mother bought a platform over the last 2 years and I think there's a concern amongst investors that a lot of these platforms are going to get mothballed. A lot of these things are going to sit on the sideline. So have you -- do you have confidence that there will be high utilization for your other test as COVID wanes.

Everybody and their mother. Did you get your mother a Panther.

I did get my mother a Panther. Yes.

Let's just pivot away from that 1 right now and pull Derik away from troubles.

Yes. We're live again folks in case you hadn't picked that up. So I got to tone it back down.

We've -- frankly, we continue to be amazed at how many more Panthers we're placing. For those of you who haven't paid close attention, just in the first 2 quarters of this fiscal year, we've already placed more than was our -- or right around what was our average of about $225 million to $250 million in the previous. So we've just placed 2 more quarters of over $100 million after having placed and just an incredible amount here over the last year. So we're now at about 3,100 Panthers. It's up about 80% over the last 2 years. I know keep getting the question, are they going to get used. Here's the very simple question. First off, they're being used now. But more importantly, what we did around the world is we wouldn't place Panthers just for COVID revenue. We placed them with ongoing commitments that it would have our women's health assays over time. And what keeps happening is just as the folks are ready to start to ramp up our women's health assays, we get another little surge of COVID. And so there's the question of, to you -- your base Diagnostics business, we were hoping for a little more growth. Well, guess what, it's all pending and it's [ Panther ]. And that's what gives us enormous confidence that our Molecular business here is going to grow because we have so many customers with Panthers that want to port it over. But think about what is -- what are the -- some of the biggest advantages of Panther. One is the workflow automation. So I would argue for anybody that has questions about whose boxes are going to prevail over time, go talk to the lab techs, which machines do they want to use. And we don't want to sound arrogant by any stretch because that is not us. But do we sound confident, you talk to the lab techs. We have the random batch access. Our machine has the least work required. And frankly, with our pen caps, that gets totally undervalued where we're not having to bring the tubes in and then pipetting them over. You bring our tubes in, you put it right on the machine. Enormous workflow advantages. And I think the magic for us is, particularly outside the U.S., that ability to place a whole bunch of Panthers where people have now seen them, they're more excited than ever. And all I can say is just watch our Molecular business in the quarters, and dare I say, years ahead. And you can say, yes, well, prove it to us this or that. Look at what our Molecular business was growing internationally prior to COVID, strong double digits for several years. That will continue. And in the meantime, we've also recapitalized the biggest labs in the U.S. over to Panther as well so they can now run our expanded menu on Panther as opposed to the legacy TIGRIS System. So I think we just we feel very good. And yes, there's a lot of boxes out there in places, but go talk to the lab techs and ask them which ones they're going to use instead of listening to any of us up here.

And so when you use that example of the European country went from 10 to 51, were those just additions that labs were not doing molecular before in new greenfield sites? Or was it displacement of other platforms?

Both. I'd say some displacement and some growth. In virtually all cases, there were labs running some level of activity, but they're also ramping up. And I think part of the magic as well for what we've seen in COVID time around the world, and it's really been part of the model of our Panthers, are the ability to decentralize. When everybody talks about point of care, there's a different decentralized model, which is what we've been executing and it's why the United States government was so pleased with our response. We were the only one with high throughput molecular testing in all 50 states because we're not only in the large reference labs, but we're in the hospitals. And so when you go back to those -- that acute period of May, June of 2020 when people were saying it was taking 8 days to turn around a molecular test. And we ended up -- literally, we were working with Dr. Burks and the team day by day managing the allocation out to all 50 states where they needed it most because we could do that. And we played a massive role in getting those 8-day wait times down to 1 or 2 days by a lot of the hospitals and the regional labs, and frankly, even the main -- the biggest labs in the country operating a little more decentralized. So it became less planes, trains and automobiles, where so much of the time was spent transport -- when people were getting tested in California and it's being shipped to New Jersey to test and all of that, those were eating up a lot of the time our decentralized model. And that's what we've seen a lot in Europe as well, where instead of to -- take Spain, said everybody sending them to Madrid and central labs there. You know what, there's a lot of hospitals around the country that now are in the testing business and we think will stay.

So along those lines, but I mean, if you think more about point of care and home testing, I mean, obviously, there's a lot of companies that are out there trying to sort of break into the at-home market.

A whole bunch that wanted to sell to us last year for massive multiples of where they are today.

I mean that's not going to turn around anytime soon. And -- but I mean, we do get this question a lot, right, on the whole point of care. I mean you've got companies like Danaher placing 40,000 Cepheid machines out there right now. I mean that's a big number, right, like that? So how do you sort of think about that? And I guess, can you sort of segue that and just sort of like how does Mobidiag sort of fit into that picture because that's obviously a new market opportunity for you as well.

Yes. Yes. Clearly, you got to give Danaher credit and what they've done with the Cepheid acquisition. I think they've done a super job. We believe there will still be opportunity for Mobidiag both in the U.S. and internationally over time. I think the bigger way to think about the market because I've watched -- we looked at all of the IPOs, you can trust me, we look at everything in the point-of-care space, all the companies. And if we added up the total both TAMs and market shares of all those little diagnostic companies that popped up in COVID time, they were all going to be the next great savior. And there are still a lot of elements going through the chain. We can be hearing, okay, sexually transmitted infections, it's all going to shift to the dock. Great until you start to look at the economics of the situation, which is a lot of the -- first off, a lot of the testing in STIs and everything else is actually still asymptomatic. It's standard screening. So that's different [indiscernible]. The other piece is, frankly, the cost of the test that we sell versus when you start to get into doing these in the doctor's offices, it becomes a completely different game from an economic standpoint. So follow the money flow, and I think we still feel very good. So we continue to look at tons of assets, as you can imagine. We have been patient and I think feel very good about the position we're in.

And also, I mean, certainly, when you think about the difference between a respiratory infection, I mean you're not doing a nasopharyngeal swab for chlamydia and gonorrhea, let's hope not. We're not between that. So -- but it is -- it does present challenges along those lines. So actually I want to go back and just sort of ask a question that popped up on the quarter. I think a lot of investors are surprised that the quarter saw a bigger headwind to patient [ vision ] utilization than some of the other med tech companies that were out there. Can you just give us a bit of color on why you seem to take a bigger hit than some of your peers?

Yes, it's actually pretty simple. Women's health tends to take the biggest hit in these spikes. So if you actually look at the quarters and it's why we report quarterly, and I pay attention to quarters. We're building this company for the long haul. But if you actually look at our surgical business over the last few years, it's probably been slightly choppier because when we go back into minor lockdowns or minor concerns, frankly, a lot of the women are staying home or women have invariably been putting their own health on the back-burner. And I think the truth is, a year ago, we probably saw a little bit of a catch-up in some of those procedures. We were indexing against a bit of that. And then as things spiked in Jan, Feb, that came back. Are the cardiovascular procedures and hips and knees and a lot of that stuff is going to kind of continue. Ours may have a little bit of choppiness in that, but nothing that we are concerned about going forward. And we know that business will continue to come through. So I think it was a far bigger reaction to people plotting the quarterly numbers than any fundamental issue in our business. Stay tuned for the coming quarters here on our Surgical business. But I do think women's health, and as part of the piece about the big concern I have as a champion of women's health is women's health has taken a step back in this pandemic and around the world. And we started the Hologic Global Women's Health Index a couple of years ago and it happened that we did our first -- we interviewed 120,000 people in 122 countries around the world. It's the first quantitative study of women's health ever. It includes mental health, physical health, all kinds of different things. And I always thought, okay, 2020, it had to be the first year we started it, that's going to be the low watermark. Well, we're just getting the early results from 2021, which we'll be sharing in Davos in a couple of weeks, and frankly, still very concerning. Lack of progress, and in some cases, particularly on the mental health side, taking further steps back. So I think what we've got to do is ultimately continue to get women's health elevated around the world.

So following off that, so then what's sort of about -- are there other platform expansions or other sort of like conditions that would do from either an organic/inorganic perspective that you could sort of continue to expand your women's health franchise?

Yes. First off, I think the best part we're in right now is all 3 of our core businesses, we feel like are very healthy with good combinations of both organic and inorganic pipelines coming through. That gives us the ability to be patient and smart as we look. And as you will remember, and I still remember being with Bob Hopkins at a dinner out here in February of '09, right, I'm one of the few CEOs that's been around long enough through ups and downs and everything else. And having the strong balance sheet right now, we think, puts us in a very good position that we think there's going to be opportunities ahead and being patient to continue to build out and smartly expand our portfolio. But when your core businesses are performing, it takes that pressure off as well to going and doing a deal for the sake of doing a deal.

So before we open up for questions, I'd be yelled at if I didn't ask the margin question. There's a lot of concern about it, as COVID rolls off, what's the underlying base margin? What's the margin expansion opportunity going forward. So like how do you sort of see the underlying base margins of the business progressing from here?

Yes. I think if we go back to kind of just sort of post the Cynosure -- or yes, post the Cynosure divestiture and pre-COVID, that was probably a second quarter of FY '20 -- 2021 or '20, whatever it was, '20. Our operating margins -- or gross margins were low 60s, 61, 62; and op margin right around 30-ish. And I think that those are certainly the op margin has always been very healthy. I think being in that range is a reasonable thing. Are we going to expand those margins in the current environment? Not likely, right? But over time, are there opportunities? But as our international business continues to grow and everything else. But I think those are reasonable. I think there's a lot of funky stuff right now. And I know people are fast-forwarding to our guidance for the balance of the year and the fourth quarter number is that the ongoing run rate, it's not. We've been making big investments this year. Our year is already in great shape. Again, we run for the long haul, we don't run for the quarters. And I would also point out that I think we've had a history of doing okay here. But I think that's kind of a rough way to think about it.

And that sort of then segues into how much pricing are you able to take right now? Is there any pushback? And sort of like how you -- sort of like what sort of the inflationary pressures that you are seeing?

Yes. I think it's an interesting time where I can't look at anybody in the eyes and say, we're going to completely be able to take price to offset the short-term inflationary pressures, right? Would love to say that. Are there other efficiencies we can find and those kind of things, yes. Now the interesting part that I don't think people are fully thinking through, what will be interesting is if we do go into a recessionary environment, as I think through things, the chip shortage -- and frankly, as people are starting to shift more towards services and starting to travel again and do this kind of stuff instead of purchasing goods, I'm actually hopeful that the chip shortage for those of us that need chips might start to shift and not be as bad for as long if people start to actually get out and travel again and aren't buying as many things that need chips. So -- and ultimately, as new foundries come online and everything else, 3 to 4 years from now, there'll probably be a very good cost position on some of those. So -- and I just -- my gut tells me we're watching even just open positions and people coming after our people. I feel like things are starting to turn that will slow down both some of the inflationary pressures on wages and costs. But still, as things bleed through the P&L over the next 12 months, yes, it's -- there's going to be some pressure there as we go through. But again, looking out over the longer haul, I feel that we'll work through those.

So I have to ask the other obvious question right now, a lot of interest. I mean you've got a big focus on international business, impact from China and anything there. And so two questions, like any impact from the lockdowns? And then there are the questions about competition in that market as they sort of build up their industries and such is like our -- are you seeing sort of like any competition, tender pricing, anything about market.

Yes, we always see competition -- here's where I feel really good about always being patient. We are very underdeveloped in China, okay? And I've been that way through my career because I spent a lot of time in China all through the 2000 to 2010 period, enormously. I took a Board of Directors over there. I spent a lot of time. It was very, very clear to me when everybody was racing over there with all these promises and forming JVs and everything else, they had a very clear intent that someday they're going to put the lockdowns, not the COVID lockdown. They're going to put the screws to the U.S. companies. So we have been very cautious and less than 3% of our business is in China. We've had the same discussions over time on Russia. Our team had pitched us on let's -- we should really get into Russia and expand there. So if you look -- frankly, what do you have in us as a company right now, tiny exposure to China, tiny exposure to Russia. I feel pretty good about that as we sit here. And frankly, the same on our supply chain, which is we still produce all of our mammography machines around the world in the United States. Most of our Molecular Diagnostics business is produced in the United States and then in the U.K., increasingly in some of the Western European countries through the acquisitions. And a lot of our Surgical business is in Costa Rica. So our supply chain, we've also been slow to gravitate to Asia and particularly China. I think that's going to work out okay for us over the next 5 to 10 years.

Great. Any questions from the audience? So I guess that as we're sort of like coming up on the end of this, you know my standard closing question, which is what's underappreciated about Hologic? What's misunderstood?

Yes. I think what's underappreciated is the incumbent's advantage. And that is, if you look both in mammography because we're getting a little bit of the questions of, hey, wait a minute with the chip shortage, frankly, all we're doing is lengthening our delivery times, which is eminently manageable. But people that are using Hologic mammography machines if they even have to wait another 3 months for something that they're planning to do next year anyway, it's not a big deal. The other piece is on Panther. And for everybody concerned about what's going to happen, are these things going to end up mothballed? Certain machines will end up mothballed. But once you have -- got assays on Panthers, and I think even to change assays, if you're running our Aptima HPV and somebody else has an HPV product, you've got to qualify the machine. There's a lot of labor involved literally in changing every single assay. It takes -- it's one reason we haven't gotten as much of our base business now from all the new COVID, they haven't had a chance to come up for air to qualify Panthers for even a lot of our STI business. And we know that's just waiting to happen. So there is an incumbency advantage in these that 3,100 Panthers is an enormous advantage, that 10,000 3D mammography systems, these things I think, give us more staying power and more ability to keep building on that than is at all fully appreciated.

And with that, if there's no questions from the audience -- there is indeed a question.

I'd go as far as to say, concerned about an air pocket on the other end. I don't have the concern. We may see the -- frankly, I'm astounded that we're continuing to place in the last 2 quarters that we've continued to place over 100 Panthers. I never would have predicted that at this stage, frankly. And I think what it's really showing is more and more people -- what COVID gave us the opportunity to do is actually get more awareness about Panther around the world and even in hospitals and labs that hadn't embraced it. So what we're seeing that -- now are we going to continue with this level of placements, no, I don't exactly know. Our 23 and 24 are probably going to be below the historical norm. If I'm a betting person, I'd probably say yes. But the magic is we have so much pent-up volume that will come through that I don't think you'll see it in the business because we're not dependent on those because we've got placed so many in the last few years that haven't even ramped up. So I would say we could have a couple of years of below average placements. And mark my words, you're still going to see really strong, if not stronger, Molecular Diagnostics growth that we had pre-pandemic. Does that help frame it?

Great. With that, thank you for everybody. Thank you, Steve.

Thank you. Thanks for that question.