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

Okay. Great. Welcome, everyone. I'm Puneet Souda, life science tools and diagnostic analyst here at Leerink. And my pleasure to be hosting Karleen Oberton, CFO of Hologic. As Steve says, best CFO in the business. Wonderful to have you here.

Great to be here.

Yes. Thank you. So maybe the folks have questions in the audience, and please raise your hand, and we'll get a mic to you. First question I just sort of wanted to start with was, maybe just to set the stage. I mean Hologic, as Steve has said, the company has been transformed after the pandemic, thanks to the larger Panther installed base that's out there, you continue to deliver ahead of the long-term 5% to 7% growth that you said, 30% plus of margins in the business, strong balance sheet. Mean all of the things that in times like these, the company can value. And just maybe talk to us where do you think Hologic can continue to win and see this type of sort of growth? And what opportunities that excite you the most?

Sure. Sure. So certainly, Puneet, as you said, we really believe that Hologic coming out of the pandemic is bigger, faster, stronger company. And what gives me confidence in that and really what I -- how I view the strength in that is the diversity of the growth, meaning that all of our businesses have growth drivers as we look ahead. They all have organic growth drivers, inorganic opportunities. There is operating efficiency opportunities. And certainly, international still continues to be for all of our divisions growing faster than the U.S. And as we all know, we're going to very much [indiscernible] outside the U.S., and so a great way for us to lean into our purpose and drive our financial results the same. So feel good about where we're at. As you said, the Panther installed base has transformed the molecular diagnostics business, but also in our breast business, we have an incredible installed base of 3D gantries that we continue to kind of leverage that moat, if you will, of technology differentiated products.

Got it. Just following up on that long-term growth, Panther installs well above 3,000. If you look at the 5% to 7% long-term guide, maybe just help us today to sort of understand given the sort of growth that you're seeing, why is that sort of the right number? Just going forward, you have your growth coming from Molecular Dx, you have the breast business in surgical. So just when all these franchises are working out well, is it just sort of more conservatism? Or is there something else in it?

Yes, let me put it in perspective that 5% to 7% we gave back in 2021, and that outlook was through 2025. And as you know, over the past several years, we've grown well above that. So actually that -- maintaining that 5% to 7% is a stronger number than we originally gave that long-term guidance. So I think that's one we're really proud of that of how we've been able to execute consistently and above. But I feel, at this point in time, we're holding at that 5% to 7%. If you think about the divisions, certainly, the franchise Molecular Diagnostics is going to grow above that 7%. But cytology is probably below that, right? And so that's where you get that in the 5% to 7% trending towards the 7%. Surgical, think about closer to the 7%. And again, you've got MyoSure, which outpaced growth but NovaSure has been a little bit of a decliner as that is a legacy product. So getting back into that 5% to 7% when you look at all the franchises together. And then breast, as we continue to recover through the supply chain challenges and work down our backlog, the biggest piece of revenue in that division is actually our service contracts, right? So that's tied to that installed base. So that is going to grow on that lower end of the range. So that's why I think we look -- for the long term, while there is the potential to elevate at this point, given the portfolio, we're comfortable with the 5% to 7%.

Okay. It makes a ton of sense. And I want to touch on sort of gross margin, operating margins sort of ex COVID and 2024 guide is for low, I think 60% gross margin, 30% for op margin. There is still sort of COVID in the numbers. So maybe could you describe once that sort of comes out? And I have a follow-up there, too. And what point COVID itself these numbers get endemic. I know there's very limited amount of COVID. But when does that get endemic? And then if you strip that out, would you still say 60% gross margin, 30% op margin?

Yes. So if we put kind of the margins in perspective prior to the pandemic, gross margin is roughly 61%. Operating margin is about 31.5%. And I see us as we manage through some of the supply chain issues that we've talked about, primarily in the breast business at those levels as we exit 2024. So we see that recovery. We haven't given specific margin detail on COVID, but certainly, it's accretive to the corporate average. But if you look at what we've guided for Q3, that we've said about $5 million to $10 million of COVID revenue, probably de minimis impact at this point in time as we kind of exit the pandemic [indiscernible].

I see. Okay. Got it. Got it. And staying on margins or how should we think about the biggest margin levers across the country? I mean across the company? And what do you see driving the sort of most operating leverage? I mean can we -- the question underlying that is can we get to that mid-30% EBIT margins back again?

Yes. So to put that mid-30% in perspective, I think that was -- we still had the blood screening business. So that blood screening business was a highly profitable business that we disposed off in 2017. So -- and given that our margin profile even at that pre-pandemic of 31.5% is very rich, right? I don't see that as our goal to get back to that mid-30s. It's more of how do we continue to accelerate the top line and drive earnings faster than that. So if we stick at that 5% to 7%, we're approaching that low double-digit earnings growth. And so we look at that as not only through the revenue growth, but some op margin expansion, but what can we do below the line including tax rate to drive that earnings growth.

Got it. Got it. And pricing, where should we be assuming of pricing increases this year? And sort of wondering how you're thinking about longer term on price increases now with sort of the supply chain challenges somewhat behind. And talk to us about sort of your ability to offset those costs with further price increases?

Yes. So I think pricing is a bit of a challenge for us as we're already a premium-priced product. Certainly in the breast health business, where we have the most kind of supply chain challenges, really difficult to meaningfully offset those prices. But I think we're at a point now, specifically for breast, where we kind of worked through those higher cost components that we had to procure during the height of the supply chain challenges. But I think we do look at pricing certainly on line extensions when we launch new products. That's where we're going to take some pricing. On our service contracts, again, those long-term contracts when they come up for renewal, they have a real cadence of pricing. So where we can do it, we take advantage of it, but it's not significant. It's more from volume is where we'll get our growth.

Got it. Okay. And let's pivot to Endomagnetics acquisition that you had recently. International best offering. Maybe just tell us about sort of how it's positioned and what is the growth profile? I think that was a big question for us too and investors, like what is the growth profile of Endomagnetics and what -- how should we think about the contribution, both on top line and the margin line?

Yes. So let me first say, we're really excited about that potential acquisition, but that we are still in the regulatory approval process. So I can't say much beyond what we've already talked about. Yes. So Endomagnetics in calendar '23 did about $35 million of revenue. A mix of direct and indirect, a mix of U.S. and OUS, they're actually a U.K.-based company. I would say that we certainly expect the revenue profile to be accretive to our revenue growth. I would also say that obviously, an opportunity for us to leverage our direct sales force in the U.S. with -- again, a U.K.-based company wouldn't have that significant direct presence that we have and the ability to kind of drop that in within our Breast Surgical sales team. So -- and on the bottom line, I think we said we expect it to be slightly dilutive in the near term, but accretive thereafter.

Okay. Okay. Got it. And when you -- again, continuing on the theme of M&A, you've remained fairly opportunistic when it came to sort of deploying cash. You had the ASR. You had some deleveraging. You had some -- I mean, obviously, M&A. A number of deals that have happened over the last 2 years. And maybe just help us understand -- how do you -- how are you weighing these things in the current market environment, M&A versus more capital deployment towards share repurchases?

Yes. I mean our perspective really hasn't changed. We're focused on deploying capital. The priority is going to be M&A as we know, if we can acquire assets that move that revenue growth rate up that's going to create multiple expansion, right? So that's going to be the primary driver. But obviously, we need confidence in that revenue profile. We want to have a point of leverage and expertise that we bring that the asset performs better as part of Hologic that really nice strategic fit. And then value creation. So we need to get it at the right price. So that's -- like Steve said on the last earnings call, we'd love to do an Endomag every quarter. The deal creation just doesn't happen like that. So -- but that is kind of the desire and then certainly, share repurchase. I would say, over the past several years, we've repurchased double our stock versus M&A from a capital deployment, so really believe in ourselves and the opportunity there, and you'll continue to see us to do that share repurchase activity.

Got it. Just continuing on the M&A side, you had -- if I look at the prior deals you had Biotheranostics, Diagenode, Mobidiag, Bolder, now Endomag, maybe help us understand what's -- from your perspective? And obviously, Steve's perspective is important here in terms of how these portfolios are fitting together. But what's the sort of the common thread as you're looking across these acquisitions? And what makes these, as you said, if you could find Endomag -- as Steve said Endomag every quarter, you would acquire it. But what are some other sort of characteristics sort of that you're looking at? And would you say it's -- the focus diagnostics versus surgical Medtech?

Yes. First, I'll say that all of our divisions have business development groups that are all actively looking for assets, cultivating relationships so that we can find those right strategic fit. So there's not a priority per se by division as to where we don't want to deploy capital, they're all pretty active. I would say beyond kind of the financial metrics, obviously, that we're looking at, I think we feel that we're better operators, meaning that we want on-market products where we can -- we're obviously -- hopefully there's already reimbursement or guidelines established that, then we're just leveraging our commercial and operational expertise for that asset.

I see. Okay. And I know historically, on the diagnostics side, you focus more on the platform, but then Biotheranostics was a slight departure from that. Is the focus is still -- help me understand. I mean obviously, there is a number of companies that are out there, number of them in sort of the early diagnostic growth central lab space that are not so profitable and whatnot. As you look at that sort of landscape, is the focus continuing to be on sort of the platform and enabling the customer or taking more on the -- something that you can bring in and bring to the central lab?

Yes. I would say that from a diagnostics perspective, let me just touch on Biotheranostics. I would say we're still kind of in a learning mode there in operating a lab and how do we create leverage. Certainly, a lot of runway with that asset still very low penetration. So we're kind of how do we build the penetration of that product while we operate a lab efficiently and drive more profitable growth. So I think that over time, there might be an opportunity to add more there. But again, I would say we're still in the learning mode with that asset. I think with the rest of molecular diagnostics, I think closer to the patient is something that we continue to evaluate in that portfolio. But I think it certainly workflow, what can we do for our customers, you see those large central lab customers, how can we partner with them, it's always a focus.

Got it. Okay. And when you think about the appetite, there being sort of the number of deals, but when we think about sort of the larger deals out there. What's sort of holding you back from that? Is it more the valuation, just given the market makeup? Or is it more fit? Maybe just walk us through that.

It's probably a little bit of all of the above. If we talk about looking for assets. So certainly, in diagnostics, we could find a lot of assets at the right value, but they're significantly dilutive, right? And so when you look at the -- looking at assets that have all market products that are not going to be dilutive, there's that premium there, right? So we have to -- or they're going to command a significant premium that raises the confidence level that it has to be an absolute right strategic fit in that, we have the best [indiscernible] for that product.

Got it. Yes. And just remind me, what is the ideal leverage ratio that you're targeting here? And at what level you're comfortable levering up to?

Yes. I think prior to the pandemic, we were about 2.5x levered. I think 2% to 3% range is probably where we're comfortable.

Okay. Got it. I want to switch gears, and this question comes up to us from investors. I mean we had the USPSTF guidelines on, one is cervical cancer and one is breast cancer, but cervical cancer being sort of more important [indiscernible]. I mean we were expecting some updates on that by now. Any thoughts from your end in terms of potential timing when this could emerge, anything sort of gating that? And how do you think about the USPSTF cervical primary versus co-testing if it was to come out either way?

Yes. So let me take that in a couple of buckets. From a timing perspective, unfortunately, USPSTF is a little bit of a black box. We have no real indication as to when we would expect a draft guideline. So anything that comes out on cervical cancer would be draft and to put it in perspective, it took almost a year from the breast cancer draft guidelines to the final to come out. And then that, we saw the USPSTF kind of recognized that earlier screening for women is better, right? So we saw them step back from 50 to 40. But that is -- that was the common practice already, right? So the theme here is that physician practice, which is based on science and the best health care for women is probably what will dominate versus what the USPSTF guidelines say. So the second step -- point I'll make is that the current guidelines for cervical cancer screening, give co-testing, and HPV primary, the same rating. And that's been since 2018. We're only 1% to 2% of physicians to practice HPV primary, right? So physicians know that co-testing is the best science that HPV primary misses one in 5 cancers. HPV primarily leads to more [indiscernible] for women. So -- and we also are seeing in the United States right now, the rate of cervical cancer in younger women increasing. So [indiscernible] personally for the USPSTF to step back on screening seems illogical. And there's been no new scientific data to support a change in guidelines. Having said that, as I mentioned earlier, it's a black box, so there could be a change. But we believe that any change, again, no near-term impact because it would come out with draft 9 months to a year to get final. And then I think it's going to be a long term for physicians to actually change practice. And again, the USPSTF is regards to the Affordable Care Act and Medicare [indiscernible] Medicaid. Most of the women getting tested are in commercial insurance, right? So just because the USPSTF changes guidelines doesn't mean that the commercial payers will change what they pay for. So I think in worst case guidelines go against co-testing, it's a leaky bucket over a long period of time for us. But again, for the health of women in this country and to hopefully reverse what we saw -- what we're seeing in increases in the rate of cervical cancer if the guidelines don't change.