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

Hey, everyone. Good afternoon. My name is Tejas Savant, and I'm on the Life Sciences team here at Morgan Stanley. Before we begin, for important disclosures, please see the Morgan Stanley research disclosure website at morganstanley.com/researchdisclosures. If you have any questions, do reach out to your sales rep. So it's my pleasure this afternoon to host Hologic. And speaking on behalf of the company, we have Chairman, President and CEO, Steve MacMillan. Thank you, Steve, for joining us today.

Maybe just to set the stage, can you talk about how fiscal '24 has played out so far versus your initial expectations? Beyond the numbers, what do you view as your key accomplishments over the last 12 months or so?

Great. Thanks for having us, Tejas. I think as we think about 2025, we're very pleased the way it's playing out. We -- I remember when Karleen was presenting at our Board meeting just about a year ago presenting the budget, we said, 2025 was going to be a year where we're just going to execute against our goals and show that all 3 of these franchises are indeed bigger and stronger than they were going in. And because of the COVID spike and everything else, so much has gotten kind of mumbled and jumbled. So I'm really proud that we've just executed against what we said and we thought, over time, it's back to the [ cream horizon ] and people will see that. I think beyond the numbers, and I appreciate you asking that, what I'm really excited about is the increase in organizational strength. And I think especially when you look at our international business, and it's been one of those that's been a quiet transformation. But 10 years ago, we were dealers. We had very little presence. And today, around in all the key markets of the world, we have our own people on the ground and our own capabilities for product registration, reimbursement, sales, things that sound simple, but have been built over this last decade. And that's what's generating the above-market growth for all of those franchises, and candidly, the last part of that is also the organizational strength that we now have, I think, for our business development capabilities that I referenced on our last earnings call, we now have leaders with deeper domain knowledge, right? When you go back to when I came into Hologic, kind of blew out a lot of people and brought in great leaders, but they didn't have the deep expertise in the areas. Today, we have leaders with that deep knowledge, business development capabilities with that deep knowledge and a strong balance sheet that I think set us up for a really exciting future.

Got it. Fair enough. So let's start with Molecular Diagnostics, Steve. You noted that your Panther installed base is about 3,300 units now, still growing. But clearly, your strategic focus is now driving utilization on that installed base. So can you talk a little bit about your portfolio? And where are you seeing the most growth in the menu adoption side?

Sure. it's funny I'm preparing because our fiscal year ends at the end of this month. I'm preparing for our sales meeting. And I did a quick look back to remind myself where we were in 2014. And for perspective, in 2014, we had 500 Panthers placed around the world, and we had 4 assays. Today, we have 3,300 Panthers. So right, a sevenfold increase in the decade and over 20 assays. So the magic to Molecular Diagnostics businesses add more instruments, add more menu. And that's exactly what we've been doing. Now in COVID time, it became less of a linear placements and we placed 6 years worth in about 2 years. So now the next chapter is really accelerating that adoption of the assays. And that's exactly what we're seeing and when you -- the biggest metric I keep pointing everybody to is just keep looking at that Molecular Diagnostics number and the reported revenue every quarter and how strong that continues to be. And I think that's what gives us so much excitement and proves, I think, the null hypothesis during COVID was a bunch of these Panthers are being placed. They're all going to come back. They're being just used for COVID. We said, again, only time not talk, only time and results are going to prove that out. And I think we've now had a number of quarters of very strong growth that we feel great about headed forward.

Got it. Let's chat a little bit about just the breadth of the utilization you're seeing. I think you've talked about over 1/3 of your customers are now using 4-plus assays on the Panther, what's driven this increase? And where do you see this number in steady state? And maybe just to frame the answer a little bit, what does the pie chart look like in terms of COVID/respiratory versus STI versus the rest?

Sure. A lot to unpack there. Let me have some fun with you and poke at the steady state. I don't think there is a steady state. So they will never -- to me, you're either growing or you're dead. So we don't think in terms of -- now where can this go? In the long run, the perfect world is every Panther runs every assay, so that would be the ultimate goal. The likely -- that's never going to happen because, for example, you might have a customer that has 10 Panthers, and they have such specialty items for some of them, they would just use one Panther maybe for a few of the assays and the other 8 or 9 for the high volumes or this or that. But I think what we continue to feel is we're still in the early to mid-innings. I think a broad message across so much of what we have whether it's our international growth or even our menu adoption is we're still in the earlier to mid-innings. And by the way, we're going to be bringing even more menu in the years ahead. So I think we see that opportunity continuing to grow. To your pie chart question, I think the -- I don't think about it exactly that way as much as thinking about each business continuing to grow. But I think the women's health portfolio will continue to be the bulk, I think, of that for many years to come because we also continue to bring new assays like BV/CV to that. So I think that's always going to be the cornerstone of our business. But then as we've added virals, as we've gotten into respiratory, and respiratory is still a little newer for us in terms of bigger volume and obviously, COVID and everything else, we'll see where that goes. And obviously, it's more variable than the core STIs, we love that just predictability, durability and then we'll be getting into other assays. We've talked about GI, HAI, so other areas over time.

Got it. So just double-clicking on the BV, CV, TV opportunity, right? I think it's north of $100 million in annual revenue at this stage. I think you also said it was your second largest assay now globally. How large could this opportunity be for Hologic over time, and what does the slope of that growth look like? I mean, is there anything you need to do to further sort of penetrate or commercialize in this opportunity?

Yes. I think this is another one. I actually don't want to put a number on it because we're really creating and building a market. And I go back to probably the single biggest mistake I might have made when I came to Hologic is I never realized how big the existing businesses could be. I never imagine MyoSure would become a multi-hundred million dollar business. You asked me -- my goal was make it as big as NovaSure someday. So I'm going to refrain from them. But having said that, it's clearly 100-ish million north. And I would say, still in the earlier to mid-innings. So we still see enormous potential ahead of that. And it's largely just a U.S. assay, we're assessing whether there's opportunities internationally or not. But even in the United States, tremendous runway ahead of us, i.e. I would call it, years of growth that would be accretive to the company.

Got it. Fair enough. On the COVID side of things, I think the '24 outlook call for about $70 million in COVID sales, about $105 million in related and ancillary items or so. With COVID down in endemic stage, how are you thinking about a reasonable run rate here probably not a number you want to stick your neck out on, especially when you initially guide for next year. So walk us through just the thought process.

Yes. I think we've got to assume that COVID per se just continues to go on and eventually almost goes away. It's already lasted -- we said early on, it's going to last longer than I think people think, be bigger, and ultimately, that's played out. But I think over time, particularly in our channels, right, the main lab channels, kudos to those who are in the near patient and all that. I mean, obviously, our friends at Danaher are doing an amazing job with that business. But for our business, we see it very much tickling or trending down. Our initial guide for next year will probably call for very little, and it just continues to decline. The flip side is it has given us a presence into respiratory, so our 4-plex and other things. And again, harder to predict flu seasons, we're really good at understanding these -- the core businesses, these ones that are a little more volatile again, those would be things we wouldn't necessarily guide to, but we'll be ready to respond.

Got it. I want to ask you on Biotheranostics. It's been an accretive growth driver of your diagnostics business. I think it grew I -- think it was north of 30%. Can you just remind us how big is that business today? And given the guideline support and data on the BCI test, how big could that assay be 3 years out for you? Are there any other key milestones coming up that could unlock broader adoption there?

Sure. I think we're incredibly pleased with this acquisition, and I view it as one of those -- it was a one step remove, but close to the core, but it got us into the CLIA lab business, but in an area that we're very strong in, which is breast cancer, and it's really a recurrence test. We've more than doubled or really almost tripled the business in the last few years, feeling very good about that trajectory. And again, it's one of those we think there's still a lot of mileage ahead that in the true incidence of women who are using the test or physicians writing the test, there's still a huge opportunity to grow that business going forward. And that's what we're focused on. So we've consolidated the lab now into our San Diego facility. So operationally, very excited by having that on site and then commercially bringing our magic, which is the sales force, the reimbursement, the payer coverage, all those things that we do very well and really then leveraging our core strengths.

Got it. Switching to cytology. I think you've called out strength in international markets there in recent quarters. What's the key sort of like growth driver OUS? And given the expectations for cytology to be flat to modest growth. Have you had to rethink given the strength you're seeing in OUS?

I think we're incredibly excited OUS, and it's really 2 things that come to fruition there. One is the launch of Genius, our digital diagnostic platform, which we're just bringing to the United States that we think is a true game changer in terms of pattern recognition using AI instead of every cytologist needing to be looking through a microscope at images, everything else. So that's going well. The bigger issue internationally, and this is kind of what speaks to so many of our franchises and why we're so excited about our growth rate going forward is we're still in the early innings of developing the cytology business internationally. And one of the big barriers has been the number of cytologists. So by launching the Genius AI that is far superior from a workflow standpoint doesn't require nearly the man hours on cytology, that opens that up. The flip side is there's offsetting pressures with HPV primary, those various discussions. So the way we've looked at our cytology business, when I arrived 10, 11 years ago, people thought it was going to go away because intervals were expanded. We've effectively maintained it all through that and including in the United States. So I think we still view it overall as a roughly flattish business. Still a little bit of a modest decline in the U.S. over time, but a little growth outside the U.S. would be nice to grow it, would love to, I wouldn't set that expectation necessarily. But I would tell you this, I think if you look at our strat plans for 5, 10 years ago, our cytology business today is far bigger than what would have been anticipated, so was our Molecular business.

Got it. I'm now going to ask you on USPSTF timelines. But if the USPSTF moves in the direction of HPV primary, then is Aptima ready to go as a first-line screening test without ThinPrep, or are there any trials that need to be designed to establish claims and reimbursement for stand-alone use?

Yes. Let's come at it this way. We are going to always fight for the right science and the best science for women. And frankly, in a world where a lot of rights keep being pulled away from women, we're not going to just blindly go along for simplicity reasons, with a direction that somebody might go just as when the USPSTF went to raising the bar on mammography from 40 to 50, when 26% of all women are diagnosed in their 40s, that was the wrong thing, and we got them to change it over time. We are always going to fight for the right science. We also know how to get products approved. We always have other plans in place and able to respond to market needs as appropriate. But we will continue to fight for what we think is absolutely right for women. And I think even if the guidelines came out as they did in 2018, removing it, it got put back in. We're also very convinced the patient groups, everything else, we don't see co-testing going away almost in any scenario. And we also have had a lot of discussions with the -- even the payers who know that it's important and valuable. So -- and frankly, a tiny cost in the grand scheme. So we still feel very good about the franchise.

Got it. Switching to Breast Health. I think you guys are working on the next-gen gantry with an update potentially at the upcoming RSNA meeting in December. Do you anticipate any sort of air pocket as customers hold off on purchasing the older gantry until the new unit becomes available?

Yes. I would never say an air pocket. We do not anticipate an air pocket, might there be a modest slowdown in growth while some transition over. You could see a little bit of that for a couple of quarters, very typical -- that's why nothing is linear in our business, right? There's always little ups and downs, but nothing like an air pocket. I think the ways to think about it are we are very excited about our next-gen gantry. The pragmatic reality is it -- it's probably not as transformative as 3D was, but it's a significant improvement and brings all kinds of great new workflow features, patient features, all kinds of great advantages. It will likely be more adopted by the early adopters, and the people who are still buying our existing gantry are typically later stage. They were not the early adopters. So they're going to keep going with their upgrades. And that's why you would not see an air pocket. But you might -- the growth rate could slow for a couple of quarters as you get ready for it.

Got it. And is there going to be a soft launch before broader rollout, Steve? Or is it sort of more seamless and you don't need a soft launch as such?

Yes, it will be somewhere in between. I think probably what I would do to anchor expectations is, I assume, it's a later '25 event that will then really provide, I think, much bigger growth in, '26, '27, '28. It's going to be part of the magic of teeing up that longer-term growth rate.

Got it. So the chip shortage has presented challenges for the gantry side of things, but the supply chain has now improved with expectations. I think Karleen mentioned year-over-year growth in gantry replacements this year. Given that the gantry side of the Breast Health segment typically grows in that mid-single-digit-ish range even in a normalized environment. Given the bolus that you've had this year, the tougher comps, how are you thinking about next year's growth on the instrument side of the portfolio? I mean, are we essentially looking at sort of flattish placements on the gantry side?

Yes, I think you'd be softer right before the launch. But overall, I think well within the range of what we've done historically of our expectation for the Breast Health business.

And does that sort of like flow through to the overall Breast Health segment growth as well for next year?

Yes. I think the way -- what makes us excited about our Breast Health business over time is we actually keep shifting to more and more recurring revenue. And if I go back a decade, our Breast Health business was very heavily gantry focused. What we've quietly built is a lot more recurring revenue, first, in service, where our service revenue alone today is larger than our capital business. And then alongside that, also now and effectively is bigger, on the verge of bigger is the interventional side, which is Brevera and then all the recurring revenue of biopsy needles, the markers, and this is where Endomag, our latest acquisition, also fits into that. So as we follow what we call the patient-care continuum and that is following the patient across, we're able to create so much more of that recurring revenue. And that's what I think provides that nice growth as well as get helps on the margin side, the recurring revenue, the stable and avoids those peaks and troughs that used to exist in our Breast Health business.

Got it. Talk to me about the OUS opportunity for 3D mammo. I think in the U.S., you've talked about north of 80% share at this point, but OUS is still a large opportunity. Can you just describe the competitive landscape and the drivers that you can point to that will help you penetrate OUS better?

It's really working on guidelines for the most part. It's really market development that we continue to do, which is, to a large degree, a lot of the single-payer systems of the world have still been holding 3D back as a diagnostic tool as opposed to a screening tool. So instead of doing mass screening and realizing things, they're waiting until something has shown up and then have more niched it. But we're seeing -- we're opening up pockets over time, particularly as we generate more and more of the economic data that also demonstrates catching more cancers earlier is actually a great win for a single payer system because it costs a lot less to treat an early-stage cancer than it does a late-stage cancer. But those have been -- those are the kind of capabilities and skill sets we've been building up over time that I think, again, is never going to be evident in any given year, but I think it's what gives the 3D market still enormous growth opportunities over time. But it's stepwise, it's brick by brick.

Got it. On the service revenue component, Steve, which you just mentioned, how high could that attach rate go? I think you guys were already in that 80% plus [ zipcode ] rate?

Yes. I think marginally higher, is kind of what we go for. And I think we continue to feel just great about that service business. The other positive is as we've shifted from dealer-based businesses internationally. What we've been able to do is not only -- in the past, we basically captured just the direct cost of the gantries that the dealers would pay and then the dealers ran the service business. We have picked up the service business in the countries where we're now direct, which also gives us both the service revenue, it also means our customers are interacting with Hologic folks, and that further cements that relationship so that when the new gantries come up for renewal, we've got a deeper relationship. So the service piece is both an offensive and a defensive strengthening of the organization.

Got it. And as you think about interventionally, the other piece of the non-hardware portion of Breast Health, Brevera has been really coming through for you guys as is [ to Mark ]. And now you've got the Endomag sort of acquisition as well. How are you thinking about the growth factors there? Which one of these is the most needle moving for you?

I think it's almost like so much of our business. No one of them is going to be massively moving the needle, but each of them together just keep growing and piling on top of each other, so that as you stack these things up, you keep getting a bigger business. It's -- as we bring the Endomag product to more physicians, they adopt and then they get comfortable and that business grows. And that's on top of the 2 markets, it's on top of Brevera. So again, you don't see these massive catalysts, but that's actually okay in terms of it just keeps generating more and more users over time and particularly in this recurring revenue model, starts to work better and better. And the other part is those tend to be a little bit better margin. As you know, we've already got best-in-class operating margins. Each of these things also help that as we will occasionally have things that might not be as accretive upfront and allowing us to keep being positive there.

Got it. So switching to surgical MyoSure influence have both been key drivers for that business. Can you just talk about demand trends there? And how the competitive landscape for removal of uterine polyps and fibroids has evolved? And what is your estimate for market penetration today?

Yes. I think we still see opportunity -- so MyoSure has just been an amazing franchise for us for over a decade now growing, as I mentioned earlier, well beyond anything we would have ever imagined. And the reality is there's still a lot of women with fibroids oftentimes still sometimes under-diagnosed, especially women of color. And where a lot of times, physicians still are more dismissive of extreme menstrual bleeding that might be triggered by a fibroid and they still don't always look at it. So we're getting better and better at having people diagnose more properly and then that opens up the opportunity to keep growing that MyoSure business. The Fluent -- fluid management system going alongside it has also been dynamite and the other part is MyoSure is one of these very much in the earlier innings internationally. And we're starting to see some really nice uptake. If you look at our surgical numbers internationally over the last few quarters. A lot of that is MyoSure starting to get rolling internationally. So again, early innings of a growth, a new growth driver, which would be MyoSure internationally.

Got it. And then on NovaSure, I mean, you've got -- you saw some benefit there from the V5 product line extension. But as you lap the pricing benefit, are there any other sort of strategic initiatives you have underway to sustain growth, just given that endometrial ablation is not really a growth sort of market and you've got IUD use as well.

You're right. It's not a growth market, but it is still a market that has more need than is being filled, right? There are still too many doctors who are really quick to rip out of women's organs, right? If this was men, we wouldn't be doing the number of hysterectomies, trust me. But just because somebody's got abnormal bleeding, we go oftentimes right to hysterectomy when a simple NovaSure procedure can apply. So there is still a fundamental both consumer and physician educational story. Part of it is also an economic story that some of the hospitals make more money on a hysterectomy than they do on a NovaSure procedure. So easier to just do a more extreme procedure. But I think as we continue to educate the broader population, there are still some opportunities probably won't be a growth driver. And NovaSure, clearly, that whole category has been in long-term decline, especially as you mentioned, with IUDs coming in as an alternative, but there are other options. So we continue to see the opportunities to better educate.

Got it. Switching to Skeletal, it doesn't get a lot of attention, except when it does.

Somewhere it does. It doesn't make a lot of money either.

As we think about those supply chain issues, I think you called for resolution sometime in the fiscal first quarter of '25. So what's your visibility into this issue being resolved? And is it likely to be in that November, December sort of time frame? Or could it even be sooner than that?

Yes. We had an issue with our skeletal product, very much noncore business, although it was the foundation that the company started on that a supplier issue and change. So we're on a ship hold right now. I would -- we have pretty good visibility that it will be back within that next quarter, probably at the tail end of that quarter, but I think for planning purposes, assume it's later into the quarter.

Fair enough. And then, Steve, are those sales, you've called out the impact. I think it was $15 million or so in the fourth quarter.

Last quarter, yes.

Yes. Are those sales essentially lost? Or could you recoup them at some point over fiscal '25?

Some would be lost, things that are tenders or some of that stuff. I think many we would hope to recoup over the course of the year.

Got it.

I wouldn't assume any huge upside. I think it's getting it back in the flow.

Fair enough. I want to switch to the financials. Your long-term outlook calls for 5% to 7% organic ex-COVID growth. But that is a bit sort of long in the tooth at this point. I think it was in 2021. I believe you mentioned...

What does that make me?

You're still a spring checker, are you. I believe you mentioned it was supposed to carry through to '25, right? So should we be expecting a new LRP next year? And separately, in light of the Breast Health gantry comps and the skeletal issue that we talked about here, how are you thinking about sort of framing '25 in the context of the LRP?

Yes. I think to take the first part, we did put that out through the 2025 time period. I feel great. Our CAGR is going to be well above that over that time period. Last year, we were 15.6% and everybody is like should you raise the number. It's like time out. Now we're going off a much bigger base, and just give us time. We're going to have quarters that are going to be above it, we're going to have quarters that are going to be below it. But over time, feel very good about that. And there's no doubt through that time period, we will have well delivered that, if not a little bit above it. Beyond that, I don't want to fully say other than the way I think about where I'd like to get back to is we want to be a double-digit earnings growth company, right? That's what I've done through my whole career. And I think if you can deliver that, that's a good goal. So that will take different forms in different years, but I think we've got the balance sheet. Obviously, if we're at the higher end of the growth rate, if you're a high single-digit grower, it gets really easy. In the mid-single digit, you can still do it with operational strength, a little bit of balance sheet, even share repurchases for that. You can -- we'll have the flexibility, I think, to consistently deliver that and would rather focus kind of into that range, then what I've watched with the 5% to 7% is any number you give, people start to get so focused on it and it starts to become every franchise, every quarter should be within it. And if something grows 4.8, what's going on, right? So I don't love that level of specificity to be candid. It was designed to remind people. We are now a faster grower -- in the middle of COVID, people didn't know where we were, trust us, we're going to come out a faster-growing company. It's exactly what we are, and we feel very good about continuing on that path going forward.

Okay. Switching to margins. You're on track to finish this fiscal year around 30%, 31% operating margin for the full year. How are you thinking about room for potential margin expansion from your [indiscernible], you're really sort of leading the pack versus your peers? But then you've got some margin headwinds such as the COVID runoff. And of course, faster growth on the international side of the business, a bunch of tuck-ins as well in the portfolio. Is there room longer term to get north of that 31.5%, which you often sort of pointed people to as a near-term target, if you will, for the margin line?

Yes. Again, I love the -- when Karleen first mentioned the 31.5%, it was to give a rough context and we chose a quarter at which point because it was during COVID time, where are you going to be and dah, dah, dah, we said, hey, in that range. And then it becomes form the number that 31.4% would be a failure and 31.6% would be above, right? So it's -- we're not that good. Here's how I think about it. And I go back to everything we've said over time. Oh my god, there's a star in the back of the room; hey, Pete. But the way I think about it over time is we have some things that will be a little bit dilutive to both operating and gross margin. And then we've got ongoing efficiencies that improve that. But back to thinking about being more of a double-digit EPS grower it's going to probably be driven a little more top line than necessarily, we don't have this massive margin gain in the middle of the P&L. We do still on the underneath in terms of the tax rate, and then we have the cash deployment for share repurchases. So I think what I have generally said all through it is, hey, because we're best-in-class on operating and good on gross margins as well, but great on operating margins, expect it more to be from top line growth and below-the-line stuff. And I think that's generally how it will still play out. It's -- we will -- in all likelihood, you get some leverage through time. That number, I don't think is going to be going down, but we also never want to under-invest right? I've watched too many businesses, you try to improve everything too much, you might be cutting R&D projects. It could actually be accelerating the top line. And so we want to continue to find that magical space of great operating margins still investing for the future, not driving it off a cliff.

Got it. Last question, are tuck-in still the right framework for you and is a more transformative deal essentially off the table? And what can you say to assure investors that M&A, particularly of the more sizable type is something that you have the ability to execute well on.

Yes. I think we've dramatically improved our abilities to execute on M&A. When I think about a number of the deals that are coming through to fruition right now, in Surgical, both Bolder and Accesa, in Breast Health, the SOMATEX deal, very good. We're very excited about the early days here on Endomag in diagnostics, both Biotheranostics Diagenode. And while Mobi is delayed, we love the potential of that product. And frankly, that will come in at a time when maybe growth could be slight -- hopefully will never slow in the core business, but a few years out, that will be there. So I think it's back to that domain expertise that I talked about earlier. We've got the team in place, I think, to be looking at really good deals and making these deals come to fruition. So we have the ability to look a little bit bigger. If we went bigger, call it, north of $1 billion, that would need to come with more EBITDA, a lot of good stuff, not be an early-stage science project. I think what we have realized -- what we're great at is buying more products we can drop into our existing sales bag. And we are really good at executing that kind of stuff. And I think we're seeing, candidly, starting to see a few more things call it, in that Endomag-ish range, which was a $300-ish million deal, brought 30, 40-ish of revenue. I think we're seeing a few more things in that range that feel really good about going forward. So -- and I think we've got the team and we're cultivating a lot of those ideas now.

Got it, this is just great, great place to leave it at. So thank you so much, Steve. We appreciate you joining us today.

Thanks, Tejas. Appreciate it. Thank you.