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

We can get started here. Thanks, everyone, for joining us. I'm Patrick Donnelly, the life science diagnostics analyst here at Citi. Happy to have Karleen Oberton with us, CFO of Hologic. We have about 40 minutes.

We can just dive into Q&A. I know we were just chatting kind of coming off RSNA, a big industry conference for you guys, had some real product launches this year, obviously. Maybe we can start there just in terms of what you guys showcased at RSNA, what the initial feedback, I know it's only been a couple of days, but what the initial feedback is and we can maybe dive in a little bit on the Breast Health in the back of that.

Sure. Absolutely. Well, it's great to be here. Thanks for having us, Patrick. Yes. So RSNA, really this year was quite special in that. We launched our next-generation gantry, we call it, Envision. This is a gantry that has improvements focused on, of course, image quality, workflow and patient experience. And so the reception to this and the features that are offered have been exceptional. I think folks are really excited, a lot of great energy at the booth and around this product. I think we're going to do -- the product will be commercially available probably in calendar '26, as we kind of see the market for this next-gen gantry. But I don't envision this to be a 2D to 3D complete market conversion as a lot of the image, especially functionality has been available to customers and backwards compatible, but this will be a nice for the market capital conversion cycle with this unit.

Yes. Yes. And I guess how do you guys manage -- obviously, a lot of times when folks -- when company is going to showcase a new system and then it's not commercially available for a little bit, you risk that kind of pause and people waiting to order that new kind of shiny object. How are you guys thinking about that gantry placement with that looming out to your point, maybe it's calendar '26. What's the right way to think about just the pacing on the gantries as we work on...

If you think about especially larger facilities looking at these types of units, there's usually construction involved and other things that need to be taken into consideration. And so that long -- that lead time really isn't a problem. I think as well, of course, we'll have programs if customers have an urgent need that have trade programs so that they know they have a pathway, if they'd like to have that next generation sometime in the future. So we don't envision it, what I'd call, an air pocket. We might have some softness, but we are really cognizant on really managing a nice launch for this product.

Okay. And I guess with the envision to your point, it's not quite the 2D to 3D, which catalyze this big replacement cycle and multiple years, obviously. Maybe just talk about some of the key enhancements. Was that from customer feedback? And what are people most excited about? What are you guys most excited about with this new product?

Yes. So certainly, patient experience. So if you think about the compression and the time under compression is one of the largest complaints in the women. So we've reduced the compression time. We already have the shortest, but we reduced it even more. And we also have a tilt feature. So capturing the breast, there's a tilt functionality that, one is accommodating for patients with disabilities that can't stand up right, but also it allows us to capture more breast tissue. Capturing more breast tissue obviously leads to a better scan and the possibility of finding more cancers. So that's patient experience, patient outcomes and then workflow. So there's ability for the technician to look at images right on the unit versus kind of going behind the station -- the workstation. So there's a couple of things that we focused on in this next-gen. And again, image quality, there's some software improvements that will be kind of standard functionality in this unit, but that have been available to the market. So again, this cognizant approach of not having a big pent-up demand for this next generation. We've had enhancements along the way backwards compatible to that installed base so that we have more of a smoother transition.

Okay. And then maybe just thinking about '25, obviously, you guys have provided guidance. So on the Breast Health side, maybe just talk about what the right way to think about that business is '24. You kind of came out of the chip headwind, a little bit of elevated growth and people got used to that higher growth and '25 is maybe a little more normal. But maybe just talk about the expectations for '25, given, again, the gantry probably won't impact it. You're coming off the chip kind of boost on the back of '24.

Yes. So certainly, '24 was a great year for breast where we kind of returned to strength. But to your point, I think we think about this division probably on the lower end of the mid-single-digit growth expectation. So think about the largest component of this division from a revenue perspective is actually service. So these are our long-term contracts that are attached to that installed base. And we think about that as a low to mid-single-digit growth opportunity, but consistent, really great, steady profitable, revenue that's kind of the foundation of that business. And then you have the gantry, which is a little more on the flattish to low single-digit grower. And then the real kind of accelerated growth is going to be the interventional business, which has more of a disposable nature to it. We have more of an opportunity to gain market share there as well as invest in Endomagnetics, our recent acquisition that closed is part of that growth strategy.

Yes. And you touched on interventional. I mean that's been putting up some significant numbers. I think it was even mid-teens in the most recent quarter. Can you talk about maybe the drivers in the interventional side? Again, you mentioned Endomag, things like that. But again, that growth has been pretty attractive. So maybe talk through the interventional piece and the right way to expect growth there.

Yes. I think as we said, this is markets that are growing, where we're investing both organically and inorganically in new products, product line extensions that help facilitate that growth. And so we view this as an opportunity not only to kind of grow certain markets, but also attain market share. And Endomagnetics, we're really excited about that. And one of the key for the end of '25 and into '26 is that product in the U.S. has been basically through a distributor, and we're going to drop that into our sales force bags over the course of the year and go direct and really leverage our great commercial expertise.

Okay. And then Endomag, one of the more kind of recent acquisitions, a lot of it, obviously, in Breast Health. What's the right way to think about that piece growth and margins? I think when you bought it, it was $35 million or so in revenue. But how do you think about that business? And what's the fit there? The synergies would be helpful.

Yes. So of course, it fits nicely into that interventional piece of the business. And I think for us, as we've working with that leadership team, we feel like we've really got more than just assets. We've got some real great capabilities and the talent and the leadership in the R&D there. So a really nice pipeline from -- for that business that we've acquired as well. We think about that -- you mentioned the trailing 12 months, we talked about $35 million of revenue at acquisition, and we expect that to continue to grow at above the divisional average, right? So that is going to be growth accretive for the division.

Okay. And then we talked a little bit about some of the chip costs. You guys had the chip shortage and then acquired some at a higher cost. Maybe just talk about where we are in that cycle on the chip cost side, the margin impact, how to think about that kind of wearing down here?

Yes. I would say the most significant outsized where we're securing chips on the gray market, we're kind of at the tail end of that. We've kind of worked those through, as we work through the backlog or the elevated backlog over the course, let's say, 6 quarters or so. I think there is definitely variability within supply chain in total in terms of cost, but I think we're through the tail -- we're at the tail end of kind of exaggerated costs. I think also as we think about the Breast division specifically, I know we've highlighted consolidating 2 of our manufacturing facilities, and we're near the tail end of that where we'll see some benefit as we exit '25.

Okay. And then maybe last one on Breast. The backlog, obviously, was elevated for some time kind of in the pandemic, out of the pandemic. It feels like it's approaching kind of normal now. I mean, are we at normal levels? And what does normal mean in terms of visibility for you guys just in terms of the backlog?

Yes. I think this has always been a business that has backlog. I think we are probably at normalized levels at this point in time. And so I think as we look at each quarter -- we approach each quarter, there's a level of revenue that comes from activating the backlog and there's a level of revenue that's kind of book and ship in the quarter. And I think we're at rates that we have been prior to the pandemic, prior to the supply chain challenges, kind of more normal operating processes.

Yes. Okay. Yes. Maybe we can flip over to the Diagnostics business. Molecular continues to perform well in the most recent quarter and kind of going forward. Maybe just kind of talk through the molecular piece. Obviously, BV, CV/TV has been a big driver. I know you guys have talked a little bit about where we are in the cycle there and the durability. But maybe just talk on the molecular side, high level, how to think about that going forward here in '25.

Sure. So molecular clearly has been, what I'll call, the crown jewel for the organization for the past couple of years, leading the way in the pandemic and delivering COVID tests to address kind of one of the greatest needs of the world at the time and really the opportunity where we've significantly expanded our installed base of Panthers from roughly under -- around 1,700 prior to the pandemic to over 3,300 today. Growth really is now being driven from the utilization of those Panthers and leading the way, as you mentioned, is BV/CV. And to frame that opportunity, we've talked about that BV/CV is like -- is our second largest assay today. Our largest assay is our chlamydia gonorrhea, which is roughly $270 million to $280 million globally. And our third largest assay is HPV, which is roughly $160 million to $170 million globally. So BV/CV is somewhere in that -- in between those 2. And we really see, given the market opportunity that BV/CV will likely be our largest assay in the future. So BV/CV leading the way with growth for molecular, also complemented by our acquisition of Biotheranostics, continues to contribute nicely over $100 million in revenue at this point in time. and growing kind of above the molecular average. It's accretive to the molecular growth rate.

Okay. Yes. Maybe we can kind of touch on Biotheranostics. Maybe just talk about kind of the justification for that acquisition, the right way to think about the growth rate. I know it's a nice kind of piece inside the molecular there. So maybe just the growth and then the margin piece as well on Biotheranostics.

Yes. So Biotheranostics was our kind of stepping into the specialty lab services. And I would view it as at the time we bought -- made this investment, this was a space we've been considering. And I think we didn't do like acquisitions right away. We wanted to learn, make sure we understood the specialty lab business. I think we're at a point where we have those learnings. We understand the space. We have the lab now as part of our San Diego facilities and some efficiencies as part of that and really working on, what I'd say, customer-facing interaction, how do we make it as easy as possible for the customer to order and kind of SG&A efficiency so pleased with that acquisition, like I said, about $100 million of revenue at this point in time. I would say from a market penetration perspective, it's still kind of early days. I think there's still runway to go to continue to drive revenue in that space.

Yes. And I think one of the questions we get is when you look at molecular, you kind of had obviously, the COVID times and BV/CV came out, Biotheranostics. Is there more in the hopper that can -- obviously, BV/CV, I think, surprised everyone, probably yourselves included with how big and how quickly it kind of ramped. When you think about the pipeline, are there more assays that could look like that? How do you guys just keep the growth going in terms of as some of those -- they're not mature yet, but as they approach that, the right way to think about just what's coming behind.

Yes. Well, kudos to Jen Schneider, our Division President and her commercial team and really having a well-thought-out strategy on BV/CV, which in the early days, was really converting the market from what was an inefficient lab-developed test to an IVD test on our high-throughput Panther. So very well thought out and planned commercial execution on that rollout and great performance, as you've mentioned. I think as I framed before, we still believe there's runway in BVCV to go. We do have other assays that are under development. I think on our corporate website, we'll talk about GI assay as well as hospital-acquired infections. I view those as more incremental versus a BV/CV like opportunity. So continues to be development opportunities there. I would also say that the BV/CV opportunity to this point has been substantially U.S., very little internationally. So that could create an opportunity in the future as well.

Yes. Okay. And then Panther, you mentioned a little bit on the utilization. What's the right way to think about it? There were times where people looked at kind of the pull-through number and then COVID obviously clouded a lot of that. I know you guys have talked about, I think over half the Panthers are running 2 or more assays, 1/3 are running 4 or more assays. Are those the metrics you guys are looking at? What's the right way to frame that for folks just in terms of thinking about. Now that COVID is hopefully behind us, you think about just what the run rate is on some of these Panthers.

Yes. I think those metrics were given in a time where there was a concern that the Panthers weren't being utilized in that they were placed for COVID only, and they were being mothballed and sent back to us. And so those metrics were given to provide assurance, if you will, that these are actually being utilized. There's very few Panthers that were placed for COVID only, I think less than 10%. And so what I would say is we haven't updated those metrics, but they continue to move in the right direction, right, continue to improve. And really, it's about utilization as well as kind of people asking me, why aren't you placing more Panthers, right? Well, the fact of the matter is we are continuing to place Panthers, not at the rate prior to the pandemic, which is expected, but the utilization continues to grow, and we see that with the growth rates of the molecular business.

Okay. And in terms of placements on the Panther side, obviously, to your point, the installed base really exploded during COVID. It's kind of settled down now in terms of placements. What's the right way to think about just the cadence on that front? And then secondarily, coming off the new gantry, we do get questions, is there a Panther refresh coming at some point? Is that something you guys talk about? And what's the right way to think about just kind of that flagship instrument for you guys?

Yes. Interesting question. I think we view Panther, and I think many lab leaders would view Panther, as a leading instrument, right? The best automation, high throughput, best workflow for the lab techs. And it's really -- the labs don't want to rip and replace their lab equipment. And this is really -- it's at this point a really integral part of their workflow. And we've done innovation on Panther on things like Panther Scalable Solutions. So how do we address Panthers with larger labs? How do we link Panther Link system. We link Panther so that you can manage the workflow from a centralized spot. Panther Fusion. So this adds a sidecar that allows PCR capabilities and really allows access to the full menu of our 20-plus assays. So -- and think about it's a reagent rental. So we don't sell the Panthers, we place them. So they're being kind of refreshed, as it's needed by each individual lab, right? If they need a new Panther, we're giving them one. But there has been innovation, and I don't think we're seeing cries for a new Panther. I mean it's been best-in-class and it continues to lead the way for us.

Yes. Okay. And then maybe on the cervical cancer screening part, it's hard to not at least mention U.S. [ CCF ]. Maybe this time next year, we can stop talking about it. But I guess what's the right way to think about timing? Again, it's probably been 18 months since this first came up. So I'm sure you guys are tired of talking about it as well. But just any sense on timing? And then maybe just talk through the scenario of outcomes and what it could mean to you guys?

Yes. The timing is a black box. We really don't have an update. We wish we did, but it's just -- it's not an organization that really provides public information on their processes. So -- and that's fine. I think for us, as we think about it, there's been no new scientific data we see the rates of cervical cancer increasing among young women in the U.S., which is ridiculous. It shouldn't be happening. There will be no reason to take away a screening methodology for cervical cancer, right? And we believe beyond that, the co-testing is the best to find most cancers, especially in young women at early stages. And that's really how we've -- over the past 35 years, over -- the Pap test have eradicated cervical cancer. And again, to see increasing rates is really disappointing. So again, that's our position. Even if the guidelines come out with some sort of change or modification, we believe it is not a light switch event. The draft guidelines will come out and then it takes about a year before they're finalized. And again, the guidelines really relate to Medicare, Medicaid and not commercial private insurance, which is the majority of what is our revenue is generated from. So we view it in this kind of worst-case scenario as a leaky bucket that we're ready to manage.

Okay. We'll keep an eye on that. And then I guess maybe looking at the surgical piece. I guess it would be -- I think it impacted Breast Health and Surgical, but the IV shortage -- saline bag shortage, maybe just talk about what you guys saw as 4Q happened. And then the right way to think about just what this headwind means, what that progression 1Q, 2Q looks like, would be helpful.

I think what we saw is we saw health care facilities either cancel elective procedures or prioritize elective procedures. And so think about our procedures are highly -- in Surgical, highly elective. And even from a financial perspective, probably less money for the hospital organization, so deprioritization of those types of procedures. Good news is we've heard from Baxter that they think by the end of the calendar year, they'll be back up and running at least 90% capacity, which is great news. We just don't know how that's going to work back through the supply chain, right? So we could see a recovery here at the end of the quarter or that recovery really could spill into Q2. I think the unique thing for us that we're monitoring is what we see is our fiscal Q1 is usually our strongest surgical quarter, right, because deductibles. People have utilized their deductibles, and so they're scheduling these elective type procedures. So if a woman's procedure is canceled and she can't get it rescheduled before her deductible resets, does she do it anyways in the beginning of the year? Or does she wait to her deductible is worked down later in the calendar year. So that's something we'll just have to monitor.

Okay. And I guess as you guys have gotten more information to your point, how it plays out in the actual real world, we'll see. But is it -- the guide that you guys gave, you feel, obviously, 1Q was -- I'm sure you kind of appropriately layered in that headwind. Is it 2Q -- it could linger a little more? What's the right way to just think about relative to the way you guys frame things and what you're hearing now?

Yes. I think it's -- certainly within Q1, I think we've captured that headwind in the guide. I think for the full year, it should be within that range. But again, it's something, Patrick, we're still monitoring.

Yes. Okay. And I guess in terms of that impact, I mean, what does that mean? We've gone through, obviously, the semi chips, now you have the IV. What does that mean on the margin side? Is it -- obviously, it hits the growth, pushes it out to your point, we'll see when the recapture is. But what does that mean on the margin side as well for you guys?

Yes, I think it's captured. I think as we've talked about in our guide and improving margin over the course of the year, I think it's captured in that we could have -- we're going to likely have lower margins in the first half of '25 for a number of reasons. This being one of them and thinking that the surgical products that are most impacted by the IV shortage are our most profitable products that we have.

Yes. Okay. Yes. And maybe sticking in kind of the GYN area. You talked about NovaSure as well. You had some weakness there. Maybe just talk about what's -- what the demand environment there looks like. And then the right way to think about just growth opportunities in that segment going forward?

Yes. So I think growth has been led in our Surgical division by MyoSure and Fluent Management. And actually, this is one of these great stories where when we acquired MyoSure, we never thought it would be -- have the potential that it actually has delivered at this point and be bigger than NovaSure and it is quite bigger than NovaSure. But to your specific question on NovaSure, it has been in the U.S. a market that, that isn't growing and is, in fact, declining, and we're seeing that in NovaSure in the U.S. Conversely, though, we're seeing it grow nicely outside the U.S. And so this has been part of our kind of intentionality and investment in commercial capabilities outside the U.S. market access, market development where we're getting NovaSure reimbursement in key markets, and we're seeing that grow outside the U.S. It's not completely offsetting the declines in the U.S., but it's really nice to offset.

Yes. And Surgical, obviously, is another area you guys have had some smaller acquisitions. Maybe just talk about some of those and what the right way to think about the integration and size on that is?

Yes. So in Surgical, we did 2 acquisitions. We did the Accesa, which is a way to treat larger fibroids and fibroids that are kind of on the outside of the uterus and then Bolder, which is more of what we call specialty surgery and vessel sealing. So kind of complementary to the current portfolio. What I would say is that smaller base for those with nice assets that we like, complementary, but accretive on the growth rate to the overall division.

Yes. Okay. And then on the margin side, I mean, that's been a focus with you guys for a long time through COVID. Everyone was kind of trying to figure out this -- the landing spot for margins. You guys did provide the '25 guidance recently. Maybe just talk about the right way to think about that margin. Everyone was kind of pegging to that 31.5% landing spot. This '25 is going to be a bit lower than that. Maybe just talk about the moving pieces and the right way to think about the cadence, as we work our way through '25 on that front.

Well, let me frame this discussion in that operating margins on the low 30s are peer-leading margins, and they're excellent. And we gave the 31.5% as a data point -- a reference point for folks when at a time we were generating outsized operating margins of where the base business could likely land. And so I think instead of being a reference point, it's become, unfortunately, an anchor. And I think our guide was trying to be a little more general in the fact that just because our margins might be low 31.5% for '25, does not mean they are bad margins. They are actually peer-leading excellent margins. So we try to be a little more general in saying that gross margins in the 60s, low 60s, 30s for operating margin with improvement over the course of the year. That was all meant to be directional. I think to get a little more specific in '25, I think what you will see because of the headwinds we've talked about from the IV shortage, from the stop ship on skeletal, from a softer respiratory season, those things both play out within Q1 and Q2 that we will have lower operating margins Q1, Q2 with a step-up in Q3 and Q4.

Okay. And is it -- it seems like it's starting maybe at 30-ish and exiting, is it towards 31? What's the right way to just think about -- I think it was 50 to 100 bps from the start to the end of the year. Maybe just talk about the right way to think about just that build throughout the year and the exit rate.

Yes. So I guess I was trying to articulate that. I would assume that we're roughly flattish Q1, Q2, and that uptick happens in Q3, and it looks the same in Q4.

Okay. And then on the margin side from here, right, you talked about some of the headwinds, whether it's the IV shortage, stop ship. How do you think about just the margin profile for Hologic going forward? What are the expansion opportunities, to your point, very good margins as is. Is this -- since you're already industry-leading, there's not too much expansion opportunity. Is there still room to go? How do you think about that?

Yes. So we think about it -- we talk about earnings, right? So if we're growing revenue mid-single digit, we are -- our goal is to drive earnings faster than that so that gets you to high single digit, low double digit likely, right? And so we're going to use the whole P&L to do that, not just operating margin. So we're going to continue on share repurchase. We're going to continue to work on our tax rate to drive earnings. And so what you'll see, Patrick, is that our growth, like if you look back at the past 10 years and if you look forward, directionally, tractionally will be up into the right, but each year might be a little different, right? And -- but -- so you might have each year different margin expansion depending on what the revenue is doing. So I think we're, again, focused on earnings growth, and we'll work with the margin appropriately. And to kind of give more clarity to that or more color or context to that, if you look at what our growth drivers are from a revenue perspective, it's international, it's new products, it's acquired products. Those are all likely at the onset can have lower operating margins, right? And so we're always working that base business to essentially fund those dilutive revenue growth drivers. But over time, they improve and drive to the corporate average.

Sure. No, that's helpful. And you touched on the stop ship. Maybe we can just hit on that as well. That's impacted the last quarter kind of into 1Q. I think there was some hope there's the snapback, which doesn't seem realistic. But maybe talk through what happened and the right way to think about, again, the go forward. It doesn't seem like, again, that business just comes roaring back, but what's the right way to think about that?

Yes. Well, let's again put the business in perspective, this is our smallest business, our least profitable business. Think about the product specifically impacted is about $5 million a month, so really not terribly significant. So what happened was we discovered we had, through supply chain, a supplier acquired a component from a supplier that ended up not being compliant, right, with certain specifications of the product. Based on that noncompliance, the units in the field are still operational with the notice, but we needed to remedy the noncompliance before we could ship new products. That remedy is we have -- we know what we need to do. It's just iterative than we thought it would be to get it where it's compliant to ship. We believe that we will be shipping in Q1, but probably a little later than the quarter than we had hoped. I would also say that this product isn't as differentiated as our other products. So to the extent the customer did have a demand, did have a capital budget, they want to expand, they would likely could go to a competitor to get an equivalent product. So that's why I don't think we'll see this snapback or this -- we won't have an outsized skeletal quarter.

Yes. Okay. And I guess kind of putting that all together, I mean, the guidance for the year was, I think, 1.7% to 3% on the organic side. A lot of moving pieces between the IV and stop ship early. Can you just talk about -- we talked about margins already, but just the growth the right way to think about the progression as the year goes -- actually, we have the 1Q guide, but how to think about just that growth progression for the year?

Yes. So if you look at the full year kind of the midpoint, excluding COVID, it's about 4%. And we've talked about -- certainly, we've given our Q1 guide is more -- in the midpoint is more in the 2%. I think, again, we're seeing Q1 and Q2 similar. And so therefore, as those 2 have the headwinds that we talked about and then we see an acceleration in growth, obviously, to get to the 4% in Q3 and Q4 and view those 2 as looking as similar. I think it's the confidence in the back half really is resolving those headwinds, both the skeletal stop ship, the IV fluid issue and really that respiratory headwind is really concentrated in the first half of the year as well as we look to the back half of the year, we'll start to see that organic contribution from Endomag, the recent acquisition.

Yes. And you mentioned the respiratory piece, maybe we can just flag the COVID side. Maybe just remind us where -- what the COVID number is last year, this year? And then are we at kind of this endemic phase where it should be hanging around these levels going forward?

Yes. I think the COVID -- pure COVID stand-alone was obviously less than $100 million in 2024. We've guided to something less than $50 million in 2025. So I think we're kind of at that pandemic stage and likely may even continue to decline from here, as we've seen the market clearly shift to at-home antigen testing, folks are really comfortable with. And then to the extent people are showing up in respiratory distress at an ER, at the doctor's facility, that's closer to the patient. That market has really gained some traction. So I think we are at the kind of tail end of that COVID revenue.

Yes. Okay. And you touched on international a few times. Obviously, that comes up a lot with you guys. It's been a big opportunity for a while. Maybe just talk about what segments are appropriate to think about as the biggest opportunities on the international side. Again, you guys are underpenetrated certainly. So where do you see the opportunities? And how should we think about just where those are over the next couple of years versus longer term?

Yes. So let me frame that we are clearly under-indexed. About 25% of our revenue comes from outside the U.S. at this point. I would say that historically was a lack of focus from the Hologic perspective. We historically, about 10 years prior, had managed it basically through a series of dealers, distributors. We've moved to commercial investment, starting probably about 7 years ago with some leadership in commercial capabilities and really starting to go direct in key markets, primarily with our Breast Health business. And what we've seen is now with that go direct that with our market access, market development capabilities, those businesses have performing much better, right, under our leadership. And now we have, what I'd say is, country leadership, driving country programs across the entire portfolio. And really, what I would say is one of the latest benefits of that focused investment and commercial strategy has been the surgical business that has been growing strong double digits for several years now, as the team focused on reimbursement guidelines for those products, and we're seeing really nice uptake. So I would say this opportunity across the entire portfolio outside the U.S. and would expect that the international business will continue to grow faster than the U.S. for several years to come.

Okay. And obviously, again, the international piece just brings into question some of the more recent changes, obviously, here in the U.S., you have the election. I mean you guys seem pretty low in terms of the risks and changes from the election. But anything to call out -- obviously, we get asked a lot about tariffs and China and things like that. Again, you guys don't have a ton of exposure there, but anything to flag on that?

Yes. I think from a tariff perspective, about 2% of our revenue comes from China. So pretty minimal exposure. From a supply chain perspective, probably about 1% of product sourcing is from China. I think our -- any exposure, really meaningful exposure would be Costa Rica, where we manufacture the majority of our surgical and our breast disposable products. But at this point, that really hasn't been a concern or a headline from a tariff perspective. What I would say is our trade folks are certainly monitoring the situation and what comes out of the administration and we'll be ready to respond. But at this point, even from an administrative change from health care policy budgets, I don't think we would have any unique exposure. Any exposure we would have would be along the lines of our peers.

Okay. And then in the last 5 minutes here, maybe just the M&A side, that's been an evolving story for you guys. You kind of mentioned some of the deals. What's the right way to think about just the pace of deals, the capital allocation strategy here? It feels like you guys want to get into some growthier stuff and you're willing to maybe take, to your point, a little lower margin that can build. But what is the right way to think about the M&A targets, both size-wise and then similarly, that profile?

Yes. Let me start with capital allocation. So our capital allocation strategy has been to deploy our free cash flow. If you look at our balance sheet, our credit facility, best-in-class terms, so we really have that ability to deploy the cash flow. The leading priority would be M&A, right? We want to acquire growth accretive assets as we look -- as we know, accelerating our growth rate is -- drives valuation in our space so looking at growth accretive assets and doing share repurchase. So given the free cash flow, given the cash flow we've generated during the pandemic, it's an end. We were able to do both. In regards to M&A targets, I think in one of our last earnings call, we highlighted Endomag that closed in Q4 and the fact that we'd love to do one of those a quarter. Unfortunately, transactions aren't that linear. But I think what we've seen is over the past couple of years, valuation expectations were probably a little unrealistic. And I think we've seen that adjust a little more in the private market where IPO markets, SPAC market is just no longer available and money is no longer free. So we're starting to see a little more shake loose. And so I would say that we're focused on acquisitions in all of our divisions. So closed Endomagnetics in Breast Health, announced Gynesonics in Surgical. And I would say the pipeline is active in DX as well as the other divisions. And I think we're also making more cognizant approach to M&A and that we brought in a leader of corporate development and strategy so that we're able to look even in between the divisions, the tweeners, we'll call them, that really make the right sense for us to own. So a lot of activity. I think the size is that tuck-in adjacent like you've seen us do more recently.

Yes. And to your point, I agree obviously, growth drives the multiples in the industry. How do you balance going after growth with taking on minor dilution? Is it a willingness for some dilution year 1 with the ability to scale margins from there? How do you guys balance that piece?

Yes. I think we -- first, we lead with confidence in the revenue, right? We need to make sure we have confidence in the revenue that we'll achieve that, the deal model in that regard. I think our appetite for dilution is a short window. And I think we're also looking at ROIC. We want to make sure we're achieving a double-digit ROIC within a reasonable period of time. So we're looking at all of those. And then there's also -- do we look to assets that maybe are only growing 6% or 5% but have strong earnings, right? So we're looking at both ends of the spectrum.

Yes. And then to your point, share repurchases are also an important part of the capital allocation strategy. You guys announced the $250 million, I think it was on the last quarterly call. Maybe just a pacing there and then as well how to think about the cadence of share repos just going forward, where that fits in the strategy?

Yes. So certainly, we said that from a share repurchase perspective at a minimum, we want to manage dilution and that roughly is the ASR that we announced on our last earnings call. And then from there, we've been kind of opportunistic. And I think we've probably been more opportunistic over the last couple of years as I talked about deals, valuations not being aligned to what made sense for us in our financial targets in excess of cash balance as well. In seeing opportunities are disconnects on our valuation where we've been more aggressive. So I think you'll continue to see that. Ideally, we see more to deploy on the M&A side than we've seen in the past than share repurchase, but you'll see both continuing.

Okay. Yes, quick question. I just have a minute left. So yes. There's a mic there if you want.

Just on [ SAs ] for Panther, what could be some new ones you could add and obviously make it more attractive for labs, et cetera. for usage. I was thinking TV, for example, would that be something that you're working on or any other sort of major highly recurring?

Yes. What we've talked about or publicly disclosed is that we are working on GI assay as well as hospital-acquired infections. I know that there is others that we haven't publicly disclosed that the team is working on. But I think beyond new assays, we still have plenty of run rate with our existing portfolio of over 20 assays. Patrick highlighted that we've disclosed publicly that probably only 1/3 of our customers run 4 or more assays. So that gives us a lot of room to continue just with the utilization to drive growth.

[indiscernible] capital allocation. Is there any appetite for transformational acquisition to make Hologic much bigger?

Yes, that's really not on the radar at this point in time. I think -- we think there's plenty of opportunity with tuck-in close adjacencies. I think we -- in being reflective of what we're good at, we're good at commercially available products that we utilize our commercial strength to drive growth.

Okay. All right, Karleen, we'll leave it there. Thank you so much.

Okay. Great. Thank you.