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

Hey, everyone. Good morning. Thank you for joining us. My name is Tejas Savant, I cover Life Science Tools and Diagnostics here at Morgan Stanley. Before we begin, I'd like to remind investors that important disclosure information can be found at morganstanley.com/researchdisclosures. Before -- Yes, so it's my pleasure today to have the Chairman, CEO and President of Hologic, Steve MacMillan here on stage with me. Thank you for joining us, Steve.

Thanks for having us, Tejas.

Lots to chat about so let's get right to it. I'll start with the core diagnostics franchise, right? So as you think about the COVID sales unwinding, you've seen strong growth in the non-COVID piece of the portfolio. I think the guide embed something like low double-digit growth this year. How should we think about the sustainability of that growth over the next couple of years for Hologic?

Sure. I think Tejas, if I could take a step higher than that as I think about the bigger question of what's our core growth over the next few years. Because I think everybody is getting into the micro and they're missing what is going on at this company, which is we are so much stronger with leadership brands in great categories across all of our sectors right now and an amazing balance sheet. And somehow, I think because of all the focus on COVID and diagnostics and this and that, the comps have looked funny over the last few years, and I get that, but look at the base performance. And so to that point, this year, as a reminder, we've guided to 5% to 7% long-term top line growth. This year, we're going to be 2x to 3x that level. okay? We're looking into the mid-teens, which is either double the top end or triple the bottom end this year with all three franchises in that range of solid double-digit growth. So Breast Health, surgical and diagnostics. So clearly, as we go into next year, we're going to be indexing off of incredible strength across the board. For diagnostics to your question, what gives us the confidence is that continued number of Panthers that we placed during COVID as the COVID revenue has gone down the customers are, in fact, porting additional assays over on to the base. And that's why what you've seen so far this year, our core molecular business, net of COVID, now with COVID starting to be in the rearview mirror, grew in the first two quarters of the year, 24-ish percent and in the last quarter, north of 12%. So clearly strong, now that's coming down, but as we look to the future, -- it's all of that additional menu and all those additional Panthers, right? We went from 1,700 Panthers 4 years ago globally to over 3,200 Panthers today. Our menu expanded during that time frame. So this business, on the one hand is hard, on the other hand, it's really simple. It's called place more Panthers, add more menu and get your customers to add more and that's exactly what's playing out that gives us great confidence for the diagnostics business going forward here.

Got it. And so on that point, in the past, Steve, you talked about the percent of users utilizing non-COVID assays, I think even earlier than that, you were talking about test of record as well. Some of these leading indicators, how have they trended off late have they held up sort of where they were when you lost to disclose them? And is that what sort of underpins your sort of confidence in the visibility for non-COVID growth for MDx?

Yes, very much. I would also say this is one of these where some of these individual metrics, and I learned this from my great mentor at Stryker years ago, John Brown, he said every complex problem, there is often a simple solution which is usually wrong. And I would tell you, everybody is looking for individual metrics on Panther. I look at one simple one. What is the business growing year-over-year? Because, for example, and I would tell you, we do have over 90% of all the Panthers placed during COVID are running more than one assay. But at the end of the day, there's different metrics people keep wanting to hear. Okay, number of tests run on a Panther. So we could drive that number up to 12 with a bunch of small customers or we could have our largest customers running 2 or 3 continuously, that creates more revenue. So the way we think about it is not -- I don't think about it the way we -- those numbers do, I look at it customer by customer. Because at the end of the day, it will play another metric, revenue per Panther. The easiest way to get revenue per Panther maxed out is just put all of our Panthers and Quest and LabCorp forget the rest of the world. Boy, revenue per Panther looks great. But again, the way we think about it is what's right for each customer. And so in fact, some customers are adding a lot of menu, some customers are adding a little less menu, but it's all about the throughput that we get over time and being able to place more Panthers creates far more stickiness over time. So I think that stickiness and our installed base as a company. I think maybe I underplay things too much, but I think the installed base that we have with panthers, with mammography, with MyoSure controller -- our unbelievable installed base that drives incredible recurring revenue across all of our franchises is something I probably don't do as good enough job to get understood because I think people dialed down into these little metrics and are missing the bigger picture.

Got it. You've highlighted strength in BV/CV TV off late. How big could that sort of class of assays be for the molecular diagnostics franchise in steady state? And over what sort of time frame do you envision getting there?

Yes, I'm not going to give a number because the biggest thing I've learned -- I'm going to have my tenth anniversary at Hologic this December. And if I look back over time, the single biggest mistake I've made is probably not appreciating how much growth there was in all of our core businesses, right? I'll give you the analogy. When I got here, MyoSure was a $70-ish million business. Dream was, "Wow, could it get to $100 million, $150 million, Could it get as big as NovaSure?" It's 10 years later, still a growth engine, now hundreds of millions, it's dwarfed to NovaSure, and it still has incredible runway. So I think in every business, what we've seen is these things over time because what's also under[indiscernible] , we help create markets. And so because of our incredible knowledge and the physician base, around the OB/GYN, BV/CV is one of these organically developed products that we saw the insight from knowing the key opinion leaders. It is growing tremendously. And could it be our largest assay ever someday, quite possibly. So I hate to put a number on it because I almost think that is self-limiting. Suffice it to say, it is well accretive to growth probably this year and probably for the next five years.

Got it. Are there any potential adjacencies in terms of menu expansion that you are looking at? And do you see those being something you pursue organically or something that you could sort of acquire?

Sure. We're always looking to expand. I mean, 8 years ago, we had 4 assays approved on Panther. Now we're north of 20. And it's a matter of continuing to build that out, certainly in respiratory, as we start to get into that space, there's opportunities in GI and other areas. And I think our -- where we've evolved as a company, and again, we probably haven't articulated it quite as well is I think a really good combination of organic and inorganic innovation. So a number of our smaller assays were developed by Diagenode, and we acquired Diagenode, -- so now it's part of our internal R&D team. BV/CV was all our internal. And so what we've got is this, I think that magical combination that took us years to develop of both organic and inorganic expansions across really in that formula applying across all 3 of our businesses.

Got it. More of a near-term question here, Steve, COVID testing demand, I mean, obviously, is normalizing over, I suppose, over the medium term here. But there has been a spike in cases over the last few weeks with the new variant. Are you seeing any indications that, that could lead to some near-term upside for you? And then with potentially a pretty strong flu season here given what's happened in Australia in the Southern Hemisphere. Do you anticipate any sort of like mix shift towards your 4 and 1 sort of offering later this year?

The only thing I know about the last 4 years is even predicting out a month on COVID has been very difficult. And so I'm not going to go down that path. What we have done is we have proven our ability to respond and be ready if the market takes off. So we'll see where it goes, clearly, it would be upside, but we don't plan for it.

Got it. Cytology, Perinatal -- I mean, an area of unusual focus for investors over the last a couple of months here. Maybe just to set the stage, can you confirm that most of the revenue in that segment comes from ThinPrep and how much of that is U.S. versus OUS?

Yes, it's probably 60-ish percent U.S. the part that's in that line. And then the perinatal is probably 10-ish percent of that line. I would tell you this focus because we can tell everybody is calling around on it. The focus on the USPSTF guidelines is way overblown. Now I always want to be careful not to think I have my head in the sand. But at the end of the day, the Pap test has been one of the single greatest tests ever implemented for women's health that since its implementation cervical cancer has gone from the #1 or #2 killer out of the top 10 because when you get cervical cancer early, an HPV alone does not capture all of it. So when you get cervical cancer early, it's highly treatable and it's one of the great tests. And the medical community knows that. So regardless of what the USPSTF, hope -- we're hoping they come to their senses. By the way, if they don't now, they'll revise them somewhere down the road. I'm convinced based on the the science. But even if they go that way, the medical community is not going to walk away from one of the great tests. And it's always hard, but you got to understand, I've now been doing this long enough. Going back to my Stryker days, and Zimmer was the new Biomet. Zimmer was held up and great, and I think Stryker did okay both during my time and over the next decade, right? My early years here, I said on these stages and was continually told, I have my head in the sand because we are about to be disrupted from this unbelievably brilliant person Elizabeth Holmes, right? So I have seen a lot come and go. And at the end of the day, I'm astounded at the number of questions that are coming in on USPSTF for something that will have a de minimis impact on our business because the science is on our side. And the medical practice is on our side.

And just -- as I want to go back to something you just mentioned that. Does the experience with tests like PSA and what happened in terms of the evolution in USPSTF guidelines make them sort of more averse to a drastic change in your view when it comes to revisiting the Co-testing situation?

The USPSTF is such a black box. And I would tell you, Kevin Conroy has been great. We talked literally 3 or 4 years ago, this thing had started to bubble up and they've done such obviously an amazing job. So we had connected actually years back with he and his medical team so we've been in touch with them. The USPSTF, it's -- they keep things very close to the vest. But at the end of the day, by the way, they had gone and revised the breast cancer guidelines, if you recall, almost 15 years ago, they said women should wait for their mammogram until 50 and then that was revisited and changed again last year. I think they should be cautious because the biggest problem with a lot of what they do is they're not looking at the most recent data, right? When they made all the decisions on 3D mammography, they kept calling an investigational 7 or 8 years after it was on the market when it was 70% of the market, they're still calling it investigational when it's actually standard of care. So they should be cautious given generally, I think, where they're looking, and you're making big recommendations. Right?

Can you share a little bit of color on just your internal mitigation plans in terms of what the USPSTF decides. And in case there is a meaningful shift in guidelines. How do you see sort of navigating that situation?

We see navigating it the way we always do, which is focus on what is the best science. And we will continue to be advocating for Co-testing, which is if you think about it today, call it, 99% of all the cervical cancer screening in the U.S. is either Co-testing or Pap test. So we feel pretty good about being able to maintain that a lot. And I would tell you, think about it simply, and I'm sure if it went against theoretically against us headline at the end of the day, if anybody is going to change their models over the next few years, you'd be nuts.

That's good to hear. And that sort of would translate to the market?

Remember, I'm conservative, okay?

And you feel that way about the margin impact as well between sort of the Thinprep versus Aptima HPV sort of product line?

Yes. We feel great, we're bringing the best science. And I always believe the best science prevails. Our motto is the science of sure. And we're about improving lives everywhere, every day. And there is zero doubt in my mind that I know what my daughters and wife there's no way I'm going to just a primary screen when Pap + HPV absolutely captures more. If you ask most doctors, what are they going to do for their lives or daughters, they're going to stick with the pro test, so that usually prevails.

Got it. Switching to breast health, Steve, you've seen encouraging trends on chip supply and gantry availability. Can you just give some color on the backlog there? How should we be thinking about the sequential cadence of improvement in placements over the next 12 months or so?

Yes. I think we've -- I have the luxury of sitting here knowing that probably fiscal '24 is in great shape for Breast Health because of the backlog and our supply. And by the way, we're continuing to get orders. So it's probably been never more confident well before we announce our guidance for the next year of what the trajectory of that business will be next year.

Got it. What about some of the macro sort of headwinds here? You've talked about this being a relatively small ticket item. Are you seeing any sort of shift in terms of delays, cancellations or just hesitancy around placing orders or not really?

All I know is we've gotten some of our bigger orders over the last few months that we've ever received. I would also tell you that our cancellation rate is at all time lows. I think there is a need and a desire for our products and feel great. And if you play the macro card, I think the other piece that I feel really, really good about that I don't think is fully appreciated yet is how little of our business is exposed to China. Because I think that's still the much bigger macro issue that people don't want to quite acknowledge. And I think it's going to affect people more in '24 than is, I think everybody is focused right now on what's the short-term impact on China. I think there is a structural shift going on in China. And I feel really good that only about 2% of our entire business is exposed to China. [ That being said ], macro issues, I think that's a much bigger one.

Interesting. So since you brought up China, how much of the structural reset, Steve, in your mind, comes from a push towards local sourcing. There's also a lot of chatter around this anticorruption crackdown in the region. Just walk us through what sort of leads you to that conclusion that this is not a temporary sort of headwind, and then perhaps growth might reset lower there.

It's really simple, right? I mean I've been doing business in China for 30-plus years, right? I took the Stryker board to China in 2006. So I've spent so much time in China through my years. It is a different place today, and this is not a short-term issue. This is a shift towards wanting the local companies to get much bigger and stronger. And the value-based pricing, the local-based procurement, the crackdowns, all of these things to be together are an inexorable force that is being driven really from the top in China. And so I personally am amused by watching a lot of people saying, we're taking down our '23 guidance but '24 is intact. I could be completely wrong, and I'm saying this publicly, so you can come back and -- but I tend to stand by what I've said if people think '24 in China is going to be fine, I'm clearly the outlier. It's a very different place. And even last week's actions towards Apple is that just a first step. I mean, if a company like Apple, who's done an amazing job building the relationships at the highest level. But at the end of the day, they're going to want Huawei to do well. So I just -- I think there's more going on there and within health care, it's a strategic imperative for the country. They want to make their local companies stronger. But we're obviously playing there, we've got our optionality, but I think it's going to be a bigger headwind. It's also why I feel really good about our long-term 5% to 7%. I think our revenue growth over the next few years in that range is going to stand out even more than is obvious to people today.

Got it. Going back to the Breast Health business, can you talk a little bit about the service revenue component there? What is the attach rate to systems look like? And how high do you see this going over time?

Yes. Our attach rate is very strong and continues to get even a little bit better over time because of the quality of our service. And as you see, I think the other underappreciated part, I know you know it well, is our service revenue is larger than our gantry volume. And I think part of the fundamental transformation that's happened through the years at Hologic is we've gone from a very heavily capital-dependent company, to even our Breast Health division is not even that capital dependent anymore because we've got 3 legs of growth within Breast Health now. We have the gantries. We have service which is even larger and brings that steady recurring revenue. What it also importantly brings is the customer loyalty. There is not enough focus on what's happening in the customer. But because of the incredible rep relationships and how we take care of the hospitals with our gantries, when they're ready for another gantry, they know us and they know our equipment, and it makes it an easier sale for the next time. And then we've built out really the interventional business which is much more recurring revenue as well. So the magic just of Breast Health alone and then for the company is this dramatic shift that's really occurred from a heavy capital exposed business to very, very heavy on recurring revenue.

Got it. Switching to GYN Surg, how have month-over-month trends look? I mean, are you still sort of grappling with hospital staffing shortages there?

Month over a month, you're killing me. We're going to start to report weekly data. I'm sorry, continue on...

Just walk us through the strength there. I mean, and other than sort of tough comps next year, is there anything else in that portfolio to be thinking about, right? So to your point on a long runway for MyoSure, you've got the complementary tailwinds from Fluent, Acessa, Bolder, et cetera. How is that sort of coming together as you look to next year?

Yes. So think about our Surgical business this year is going to be a solid double-digit grower right, feeling great about this business. By the way, this is a good margin business, great products, makes a big difference for the world. And it's the microcosm of what's happening within our company which is organic innovation. So MyoSure, even NovaSure, we brought some new life to NovaSure and Fluent the fluid management system. So all of those are organically developed, then we acquired Acessa and Bolder. So we've added in these products that are growing at better than the company average. So you've got this magic within our surgical business of both organic, inorganic revenue growth for a business that many people thought was old, tired, mature and never could have imagined how big MyoSure could get and MyoSure still got growth ahead of it. So we feel great about that business right now. And it's one that, I think, again, because of the ups and downs in COVID its comps were dramatically affected because to your exact point, hospital staffing shortages as hospitals shut down to shift towards COVID, our surgical business would be down, then you get a huge pop one quarter against a goofy comp, then it comes down a little bit the next quarter, people think wait it's slowing. No, it was going against a really weak kind. I think it's just all those weird comps, it's where I love to get COVID completely in the rearview mirror because I think even the strength of a business like our surgical business that has looked a little lumpier. When you peel through it, it's just this incredible force getting stronger and stronger from both organic and organic innovation. And the years that we've been investing to start to get some of those products registered internationally is also kicking in, and we're starting to see that now really start to grow internationally as well, it's small but in the early innings, and seeing some real success there. So just feel great about our surgical business. And it's that window into kind of specialty surgical other areas for additional possible acquisitions because the other way, we sit today where what I love is we could acquire in either the diagnostic space or kind of the medtech surgical space. And multiples are different, opportunities are different, so it gives us the ability to kind of go either way.

Got it. So that's actually a great segue to the question I have for you on capital allocation, right? So one of the benefits of COVID has been great sort of free cash flow, you've got north of $2.8 billion on the balance sheet. You've talked about sort of being open to larger deals. To me, it felt like you walked that back a little bit on the last earnings call where you said it's not necessarily about the size, it's more about fit, perfectly reasonable. But as you think through the lens of the deal pipeline today in terms of larger versus smaller deals, where do you see the greatest opportunities? And also, what are the red lines for you? I mean is it sort of you would never go after a pre-profitability asset? Or you would perhaps never look at an asset that's more a technology that's yet to really make a dent commercially.

Yes. I think we have shifted to probably less bets on the early technology side. And our candid assessment of ourselves is we are great operators, right? When we acquire things that are approved, and even if they're early on the market and then we put them through our sales and commercial channel, we do great. Acessa, Bolder, Biotheranostics, drop these things in, we work our magic, boom. And so I think we're more focused on commercial stage assets at this stage. And we would go larger if it's a viable business, making good money. The red lines are we're not going to go into something hugely dilutive. We had all kinds of questions about liquid biopsy, and I still think at some point, liquid biopsy is going to get to a point where it can make money. We've set that out for a long time, and we'll probably continue to set it out until it's making money. We recognize you drop in a big money-losing proposition into a profitable company, not a good model for success as we might know. But -- so at the end of the day, I think the other big piece the messaging that I would send to you is the greatest ability to be patient is when your core business is operating very, very well. And so let's just say that we're in a position today that we can be remarkably patient because of our fundamental feelings towards our base business and candidly, now that we raised that guidance to a 5% to 7% top line, we have an incredibly great margin structure. It takes the window and narrows the filter down a fair amount so that you don't completely compromise. We're not going to buy something that's growing slower and less profitable. So at the end of the day, there are fewer and fewer assets that really do make our screen. One of the assets that's made our screen is you've looked at is actually ourselves that the biggest acquisition we've done over the last, really, 3 years, has been buying back our own shares something we know about, we believe in a lot. So that continues to be a part of it. We'd love to find some great assets on the outside. But we're being patient. And I still believe that the market will give us the opportunities. I'm incredibly proud of so many things we passed on at their peak and I thank a lot of companies because their stock prices got way elevated. I was talking to somebody recently and said then they make bad decisions because they're trying to keep their stock price up. And they bought companies at the height of the 21-ish bubble, we've looked at so many of those that went public that are down 90%. And they're still not worth buying. I mean, literally. And we had everybody -- banker and Board members pitching us to buy their -- they were absolutely valued at x. Now they're x-minus 90%, and they still don't make our filter. So -- but we know there will be some things there, but we've got a great shopping list across really both medtech and diagnostics. So we'll be patient and see where it goes.

Got it. last minute here, Steve, what is the most underappreciated aspect of the Hologic story today? Where do you see Hologic as a company 3 to 5 years out?

Yes. I see us -- I think the underappreciated part is, I think I went overboard during COVID of tempering the expectations because we didn't want our stock to race through the world. I think, if anything, I'm guilty of having undersold us a little bit because if I look at our track record and our outlook for the next 3 to 5 years, our franchises all look good. We're making a bigger difference in the world for women's health. We are the advocate for women's health, just things like sponsoring the Women's Tennis Association has been fascinating watching the impact that's having around the world. They are an amazing organization in [simpatico] with us. We're making a bigger difference for women's health around the world and carrying that message and we're being incredibly financially successful. So when you strip out all the little metrics this and that, look at the top and bottom line and where it's headed, I think that's actually the easy part that's missed. And I think -- and I get it because of COVID and all the weird stuff for the last few years and the comps are goofy. But I think if you look at our outlook today and take a business with the number of leadership brands, the core growth rate, the profitability, the cash flow and the balance sheet, I thank them, It's a pretty good place, and it's why I'm here.

Got it. Well, that's a great place to leave it at. Thank you so much for your time, Steve. Appreciate it.

Great. Thank you, Tejas.