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

Okay. Thank you, everyone. I think we can get started. Kallum Titchmarsh here from the Life Sciences team at Morgan Stanley. Really pleased today to be joined by the team from Hologic. We have Steve MacMillan, Chair, President and CEO; and we have Mike Watts, Corporate VP, Investor Relations. Before we get started, I've been told by the guy at the back that I have to read out these disclosures and they get angry at me. So for important disclosures, please see the Morgan Stanley research disclosure website at www.morganstanley.com/research disclosures. So Steve, Mike, thanks so much for being here.

Maybe just to set the stage, can you talk about how this fiscal year has played out for you so far versus your initial expectations? What are you most proud of? And maybe talk us through some of the challenges you've encountered thus far.

Sure. It's been certainly a more unusual year. And I think if I think back to a year ago at this conference, I think I was signaling that the first half of the year, Breast Health was going to be a little softer. And we sensed that. Now it's turned out to be -- it went even a little deeper. But I think the -- we're seeing that. Now as we also think about our fiscal year, which starts October 1, none of us anticipated when we put together our budget for this year, quite what would happen in terms of the U.S. election, the geopolitical tariffs, PEPFAR, all the international aid. So we sort of had everything come to a head in our first, second quarters of our fiscal year between external events and frankly, our own missed execution. But what I feel great about today is I feel so much better about the trajectory of our Breast Health business and the company today than necessarily a year ago. I think we've dealt with all the challenges. So playing it out at the highest level. Our Breast Health business, as we said, really earlier in the year. The second quarter was going to be kind of a stabilization quarter. Third quarter, would show some progress. And by our fourth fiscal quarter, which I know there were still a lot of questions about, we actually saw ourselves returning to growth, which is the current quarter and feel really, really good about all the changes we've put in place in our Breast Health business and that, that is coming back. And obviously, as that gets back to growth, the implications for the whole company getting back to more traditional levels of growth, feel good about. So we also absorbed some body blows. Our HIV business in Africa had been becoming a big driver of growth. And all of a sudden, with the all international aid cuts and everything else, that took a hit, tariffs, all that stuff. But I'm really proud of the resilience of our organization, the adaptability of our organization and where we stand as we start to exit fiscal '25 and enter '26 that all of the business is in very good shape and strengthening. And I probably leave people with one thought I always say to our teams that sometimes the numbers are better than the business than the underlying foundation. And during times of inflection, the foundation gets better before the numbers become obvious. And I think that's exactly that situation that we're in right now.

Great. A lot to dig into there. So let's start with Molecular Dx, continues to do well, again, minus those HIV testing headwinds you called out. I wanted to zoom out and ask about the growth sustainability for this business. Maybe just talk about your portfolio, where you're seeing the most strength today and what gives you confidence looking forward?

Sure. I think we feel great about our Diagnostics business. It's been just a rock solid engine of growth. Clearly, it played a major role as well in the world during the pandemic, and that gave us some opportunities for huge Panther placements, everything else. But now we're back to kind of the core growth areas of our Diagnostics business. And it's really built off of the foundation of our Panther platform and then the assays that we have from there and really the assays, particularly in the women's health business, where we've had a long time, strong, stable. And then we've added new growth drivers like BV/CV that have become big additional growth drivers to it and a great complement to our cytology business as well. And then really because we placed so many Panthers during COVID, now the real magic that we have is we've got this great installed footprint. And we're expanding our Panther capacity with what we call the Fusion add-on. So that's our sidecar that enables PCR capabilities to be run alongside our TMA capabilities in our Panther. And so what that also does is it dramatically expands the available menu per Panther. So as we've been developing more assays and then expanding the capability of our Panthers to do that, we've got 5 years of runway really just off of the established base of Panthers, adding fusions and the existing menu. And then we've got new menu coming as well because now that we're into PCR technology, it opens up faster development and things like we've got GI panels and HAIs and other things coming here that we've spoken about publicly that they'll be coming into the pipeline here in the coming years also. So I think we just feel great about that business. And then there's the Biotheranostics piece as well. Great tuck-in acquisition we did a few years ago. We've roughly tripled the size of that business over a 4- to 5-year window, feeling really good about that ability as well. So really love where the Diagnostics business is going right now.

And Mike, maybe one for you. But in the past, you've shared stats on how many customers are using multiple assays. Any updates you can give us there?

Yes. I think it's easy to get a little bit too tied up maybe in those kinds of metrics. I think what really matters in our molecular business is revenue, right? And revenue has been growing in that kind of high single-digit range ex some of the headwinds from HIV that we talked about. But I will tell you, the average pull-through on Panther continues to grow. It's never been higher than it has been in recent quarters. So that's a good sign. And the average customer probably only uses 3 or 4 assays versus a menu of 23, I think, in the United States. So still a lot of headroom to go both in terms of utilization and new assays.

And zooming out here, but the pandemic, we obviously saw a decentralization of some of these testing volumes. Where do you think we stand today in that shift? And where do you think we'll be 5 years from now?

Yes. I think in the long run, I think we still see the broader diagnostics business as being a growth business as they do become more decentralized. And we think we've been very well positioned certainly in both the high throughput labs, but as well as the decentralization out to smaller hospitals, smaller labs, everything else like that. The additional step will be obviously towards the point of care and more acute care that we're not as big a player in. But I think we see that as continuing to grow the market and bring more folks in. So I think we feel really well positioned that, frankly, having the size footprint of our Panther, it was one of the big reasons so many international countries, especially a lot of the European countries, adopted Panther during COVID. because of its small footprint and high throughput. And then they've been adopting our menu subsequent to the COVID business rolling off. So I think we feel really good about where we're going there.

And you called out BV/CV earlier. It's been one of the fastest-growing assays. When you have high growth, you see competitors want to jump in and also get involved there. So how are you feeling about the competitive moat and just the broader space today there?

We feel really good about particularly our BV/CV business and the competitive moat, particularly in the United States from a standpoint of it's run out of the same collection device that we run our other tests and everything else. It's not -- it may look as a stand-alone assay, but it's a composite of a business that we have very strong relationships with all of the key customers. Outside the United States, we actually see competition as probably an opportunity that will help grow the market because we're able -- because of our presence in the United States, we're really able to help create markets. And if you think about BV/CV, we've really helped drive that through our physician sales force, through guidelines, everything else. Outside the U.S., we're still such a small player in areas like that, that having a competitor bringing attention to it will probably be beneficial to help grow the market together with us.

And beyond BV/CV, anything that excites you assay-wise that you're expanding into longer term that you can flag today?

I think it will be more kind of some of the panels. There's probably no one product quite on the horizon of the magnitude of BV/CV and probably the rest are going to be much more like we traditionally have of collections of assays that cumulative over time will be bigger. I'm sure somewhere in the next few years, maybe we discover another thing like a BV/CV, but we don't have any exactly in the horizon like that right now.

Understood. And cytology, I think the business as a whole has been flattish over the last 10 years, factoring in U.S. and OUS. What kind of impact could we expect from Genius? And maybe just touch on how the whole digital shift and AI movement is playing into your BX business?

Sure. I think the sheer fact that cytology has been flat over 10 years relative to, I think, anybody's expectations a decade ago when intervals were expanded, USPSTF, right, that's always been one that people had forecasted going away. I think we've done a wonderful job. And frankly, it's because the science is still there, the co-testing is still very, very important. The biggest barrier, and I remember one of the very first times I went and visited Quest when I came into this role over a decade ago, was really talking about the workflow challenges in cytology. And when you think about the PAP test, up until still today in most PAP tests in the world are still read by a cytologist looking through a microscope at a glass slide, the traditional PAP smear, that's how they're being done. And we always looked at it and said, this is image recognition back in the day, machine learning, AI stuff. But just said, wait a minute, if we digitize these slides and can develop a digital reader to help, that's going to be a game changer from a workflow standpoint. And because of both the technical challenges to do that, the regulatory barriers, the workflow issues, all that stuff, it's taken us a while. But the magic now is we're showing up with a system that is dramatically preferred by our customers. And I think is watching the biggest labs be incredibly excited about what this means. It also opens up the cytology business more outside the U.S. where, frankly, there's not a lot of cytologists. So one of the barriers to adoption traditionally for especially PAP outside the U.S. has also been the lack of cytologists. So we see this as being really helping to unleash. And because it's very integrated also with our collection on our women's health assays, there's kind of a magic there between them. So very excited by what it means, and we're really in the early innings of that rollout. Now is it going to dramatically grow the cytology business? It probably not, but incrementally continues to keep it as a strong business and will open up a few new opportunities.

Got it. And co-testing still supported with a Grade A rating, some guideline language supporting self-collection as well. Again, just frame us how you feel about that environment at this point in time.

Yes. The self-collection piece, there's been -- I view this as much more hype than likely reality. And this is one quick caveat. First off, we never take anything lightly. I will also say that I was in the chair as all of these conferences, there was a woman named Elizabeth Holmes that was celebrated at every one of these things and kept saying, I was told we had our head in the sand that our business was going to go away. We said, just keep looking at the science. That easier to say today, but it was very hard to endure that at the time when everybody thought we were nuts. So -- and our business is going to go away. The way we look at the self-collect back to a lot of headlines. First and foremost, a lot of the self-collect science and data is not as strong around the actual specificity and sensitivities. The other realities are some of the self-collects, everybody immediately when they hear self-collect, they assume home collect. A lot of the self-collects and the initial approvals are self-collect in the doctor's office. So there's a distinction there. But then there's also the ability to cervical swab versus the quality of a swab that a woman would get versus the quality of a swab that a physician is going to get and also even the desire to do these at home. There's -- the Netherlands have put in a program trying to really move the whole country to home collect, and they're seeing dramatic unreturn rates. So they're actually seeing a decline in testing. So there's all of these variables where the headlines can sound interesting. And because it's so important to us, we're staying very, very close. But we believe in the long run, there will be a self- or home collect option that probably will drive more -- be incremental because it's people that are not currently getting tests done. And ultimately, what we also look at is, and I watched this during COVID, when every diagnostics company -- all these tiny little start-ups that are $1 billion valuations and thought they had the next big thing, and they were going to replace everything with home testing and all this kind of stuff. There's also still an economic piece to the reimbursement rates and the economics of large-scale testing, where it's much cheaper to still do it in a lot of the big labs versus a lot of the home testing options and everything else where the costs and the reimbursements don't even cover the COGS. So there's all these kind of -- as you peel back the layers, we continue to look at all of these options that are on top of all of them, but we see ultimately probably being more market additive than replacing.

Understood. Let's shift over to Breast Health now. You called out earlier, it's been a bit softer this year. A lot of moving parts. We have new products, replacement cycle dynamics, competition. So just give us a state of union for Breast Health.

Yes. I think where we feel about our Breast Health business, we made a series of organizational changes kind of the end of the calendar year into kind of sort of the December, January time frame. We had done such a job of holding on to our sales team during first COVID where they couldn't access and then we had the chip shortage where we were just trying to kind of go hand to mouth and embrace our customers and put our arms around them. But we sort of stopped learning how to -- we forgot how to sell. And once we got through the chip shortage and started to get back, we weren't quite as close as we thought we were. So we brought in a new sales leader with a very different fire in the belly and performance orientation. And I will tell you, I've been amazed at how quickly that leader has gotten that organization back on track. And on top of it all, he -- it's a guy that joined us from another company. He came in and he basically bifurcated the sales force from capital or into capital and disposables instead of having them together. And I was a little nervous that a new leader coming in, making that kind of a change, you're going to have a further setback. They've hit every number for every month now, every month through this calendar year. They're clearly back on track. And what we're seeing is the disposable businesses and especially Endomag, that acquisition is looking really good for us. The capital business is back on track, and they're just getting it all back from an execution standpoint, doing very well. And then we have the Envision launch coming next year at last. So it's been a little delayed because of the chip shortage, this and that. So we finally have that on the horizon. So as I sit here today, feeling dramatically different about that trajectory of our Breast Health business.

Fantastic. And let's spend some time on Envision for those perhaps newer to the story. Talk us through why is it different and why we should be excited about it.

Sure. I would tell you the -- we've always gotten the question, well, the next thing, the 2D to 3D conversion was huge. And we've always said, look, the next big innovation won't be as big as 2D to 3D, I said it will be more like incremental to substantial. I will tell you, having seen the product now in action and talking to some of the early users that have been using it, obviously, just to get early user experience, I'm more excited about what it's bringing to the market than what I previously thought. And that is the biggest aspect, obviously, it's got better imaging. It's got faster scan time, all the stuff you would expect of Hologic to stay a step ahead of everybody else. But this tilt feature that we have with it is dramatically changing not only the patient experience, but the tech operating experience. And in simple terms, all mammograms historically, the woman has to stand up right. It's incredibly uncomfortable on multiple fronts, one from having the breast squished, but more importantly, also having to have their shoulders back and putting yourself into a machine, it's a very uncomfortable experience. We've always thought one of the biggest things we can do in terms of image -- not just image quality is make the experience better. So people want to make sure they go and have their annual mammograms. So by just tilting the arm where the person can lean into the machine, which I thought this seems like a nice feature. What we're hearing from the patients who've experienced is it just -- it's dramatically more comfortable as the chest wall goes up against the machine. What we're also seeing from the tech, the ability to get the placement accurate and get a great image the first time without a whole bunch of fidgeting and everything else is also dramatically better. And that's the piece I hadn't fully -- I heard our teams talk about it, but we kind of downplay. But in the real world, that's exactly how it's playing out. So the benefit is the mammogram is going much quicker for the patient. We're getting a better image, better capture. The other part is that in a lot of cases, the realities of these are, as you've put a woman into this uncomfortable position, you go back, you press the button, you do the scan, you come back, they look at it. It's like, oh, I didn't quite get a great image. We're seeing much better image capture, so they're not even having to do immediate redos either, which then so the throughput and everything, so the excitement from the techs who are doing these things. And then there's all kinds of other features that we're putting in from an AI standpoint of prior authorizations, knowing how much we compress the breast from -- for that patient, the previous time and all the prior. So there's a whole bunch of software that's making it so much also better for the technologists. And then, of course, just for the radiologist, it's a clear -- even a clearer image with less tissue and other stuff around it. So I think it's going to be a bigger deal than even what I said still not going to be the transformative nature of 2D to 3D, but I think much more in that substantial innovation range.

And given that and given the improvements we're going to see, you may have customers that potentially delay until the new one comes out. Is that something you're considering?

Yes, a little bit, but I think we're in pretty good shape right now. Part of what our current team is doing is they're really focusing on -- there's still several thousand gantries just in the United States that are still 2D, the old ones that these are the slow folks who have not moved over that we can convert into our existing 3D over the coming months until the Envision really becomes available later next year. So I think we now have a good line of sight, and then we'll be able to take preorders and get that off to a good start as well later next year.

And what's the ceiling for the new commercial structure? How efficient could these reps become? And you said you're already seeing quite meaningful benefits thus far.

Yes. I think we just feel really good that the team is in place now, they're closer to their customers, closer to really understanding both the capital plans and then for our disposable folks, case coverage, those kinds of things. So I feel like that execution, you just -- you're going to see that more just in the quarters that come as the numbers improve. It will be a lot because of really execution and then further market penetration and development next year.

Okay. Exciting. We focused a lot on the U.S., but I want to touch on OUS as well. You have 85% share in 3D in the U.S. Talk to us about the OUS opportunity. Any numbers you can maybe give us around where you stand today and where you potentially want to be in the longer term?

Yes, we're still way underdeveloped. I would say 2 things. The mammography market is still significantly underdeveloped internationally as are we. So if 85-ish percent here, we're, call it, 1/3 of the market ballpark, it's hard to get full data internationally. So a big opportunity. But the bigger opportunities are, to a large degree, many countries, I mean, the U.K. really being a shining example on the positive side of having a great screening program. Australia has a great screening program and leveraging 3D to much of the rest of the world, there still aren't necessarily great screening programs in place. A lot of times, mammographies are still default if somebody thinks they have something or whatever else. There's still a lot of 2D in the screening program and 3D is reserved as a diagnostic opportunity once they think they've got something. So I think still there's over the next decade, and a lot of it is still about policy and getting further adoptions and guidelines to help create and keep building that market. So a lot of -- a long way to go for us still and a lot of runway. And what I'm proud of for our international business, we've got a leader in place there for about 8 years now. He's done an amazing job with the team that we have, generally delivering accretive growth rates to the whole company. And I think we continue to see that as far as the eye can see, our strat plan has the international business continue to grow a little faster. They faced a few more headwinds this year with the PEPFAR stuff and tariffs and retaliations in China and some of those things, but the underlying fundamentals for our international business continue to be really strong.

Fantastic. And Endomag exceeding expectations thus far, I think, $20 million revenue contribution in Q3. Talk to us about the value proposition of this and how we should be thinking about the ramp here across the midterm?

Yes. I think we're feeling really good about it. It's a Cambridge U.K.-based company with a couple of products, but really helping the surgeon -- we can implant a little marker so that the breast surgeon knows exactly where to go in, exactly where a lesion might be. And it's wireless and there's some magical technology, very quick to use. And what we love is it's our breast care continuum where we're finding the cancers and then we're going in and identifying them and being able to treat them. So that magic. And it's a disposable, it's recurring revenue, real breakthrough product that we're seeing. I think there were -- there's a little confusion, I think, frankly, earlier in the year on the quarters because the -- first, our first calendar quarter, we were transitioning from a distributor. It was distributor-led in the U.S., and we were taking it direct. And so revenue in that Jan to March quarter looked like it took a little step back from the previous quarter. It was classic. The distributor kind of sold a bunch in. We had to deal with that cleanup in the first quarter and our first calendar quarter. The third quarter or second calendar quarter was the first clean quarter we had where we're now selling it in the U.S. And I think that's starting to be on that trajectory. So between that and the international opportunity, feeling really good that, that's going to be an accretive driver to our growth and our margins going forward.

Sticking with acquisitions, but moving on to the surgical side. Gynesonics was completed in Jan this year. How is the integration progressing so far?

We're very pleased with how that integration is going as well. And it gives us basically across the fibroid continuum, really gives us the options that we can offer any doctor can go the whole gamut from very small fibroids to large fibroids. This is an RF technology for larger fibroids. We're very excited by it. It's also off to a really nice start. And it allows our reps to really be able to speak to the full continuum and have effectively a menu of options. So what's best for any individual patient. Instead of just force fitting one product that we might have in our bag, we really have a range of options to offer depending on the size of the fibroid, where the fibroid is embedded, you can go laparoscopically, you can go in through the uterus. So we've got different ways to go and feeling really, really good about where that will go as well.

What's market awareness like for these minimally invasive fibroid treatment options?

It's great you're asking that. I would say market awareness in general for a lot of our surgical intervention businesses is still very low, that this is one of the areas that I still get incensed about that women that have heavy menstrual bleeding, quite often, it is downplayed by physicians when quite often it is often triggered by fibroids or other things, but it's amazing how many times it's triggered by fibroids. And how quickly doctors will just say, deal with it. And so part of what we see are huge opportunities to raise patient awareness and not necessarily broad-scale pharmaceutical kind of DTC, but more targeted interventions to raise the awareness as we're raising the awareness of the physicians that there's more options out there. But women, it's generally documented, are going almost 7 years longer than having an intervention than they should. And then in a lot of cases, too, doctors then go, frankly, all the way to a hysterectomy instead of dealing with taking out fibroids or whatever else. So -- and I always look at it, if it's men, we're not quick to rip out organs. With women, we take different approaches. So this is one that I think we see huge opportunities, both domestically and our surgical business has been growing really strong outside the U.S., just our core products of MyoSure and NovaSure, but ultimately, opportunities there for Gynesonics as well.

Yes. Outside of Gynesonics, how would you say the rest of the portfolio has been performing in the U.S.?

In the U.S., NovaSure has been in long-term decline. We'll probably continue to be down a little bit ever since really the Affordable Care Act came in and made IUDs an alternative. That's really become more first line and NovaSure has taken a slight step back. So it's been kind of hold on. MyoSure continues to be a very nice grower for us. And the key is to minimize the declines on NovaSure and keep that closer to flat. And then the gains in MyoSure continue to show through. I think we took our eye off the NovaSure ball a little bit also earlier in the year, got that back together and Surgical is back on track as well. Fantastic.

Okay. 5 minutes left. So let's hit on some financials. On track to finish the year around 30% operating margins. Understandably, a lot of margin headwinds from tariffs or there are margin headwinds. So how should we be thinking about potential progression from here? And how do you frame up guide for next year in light of a lot of moving pieces?

Yes, sure and moving pieces by the day. Obviously, we will guide officially in November when we report. But I think a high level to think about it is we're feeling good, and we intimated on our last call from a sales growth standpoint, getting back to better growth. Our margins are already very healthy. We are absorbing much more tariff impact for next year, but I think we'll find savings elsewhere. So probably wouldn't expect a lot of margin -- gross margin expansion next year that we would have had without tariffs. The tariffs will probably eat up some of that expansion, but we're already best-in-class in that low 30% operating margin, probably in that range still next year, not needing to take a step back despite the tariff pieces. So I think feeling pretty good about that.

Good. And you mentioned the top line. I think soft guided mid-single digits for next year. Just give us some of the puts and takes around that number.

Yes. I think the biggest piece, right, Diagnostics will continue to be a nice grower. And finally, we'll get the rest of the COVID revenue kind of behind us. I think our comparisons, we realize for people not close to the story, it's been so lumpy over the last few years with COVID and then this and the chip shortage and this and that. I kind of look forward to next year being -- and really this year, sort of except for the geopolitical stuff being a cleaner year. I think you see that Breast Health moves from a decliner to a positive. That becomes the big positive. And Surgical probably accelerates a little bit from where it's been. So I think it sets up for a pretty nice story for us next year.

Great. And balance sheet obviously remains pretty strong. How are we thinking about capital allocation from here?

We continue to, frankly, be able to do both acquisitions and buybacks. We continue to prioritize the acquisitions. I think we've gotten a lot better over the last few years as you look at the Biotheranostics, as you look at Endomag, Gynesonics, these ones, even bolder, these things delivering far better as our teams got a lot tighter. So I think the more that we can ultimately accelerate that top line growth without taking on any undue risk, that still is a big focal point while we're also still able to offset dilution and do other buybacks given the strength of the balance sheet.

Fantastic. So 2 minutes left, and I'll ask this to each of you. What's something you wish investors ask you more frequently or something that you think we should be paying more attention to?

Mike, I'll let you start...

Sure, sure. Look, I think a couple of things. One, Hologic is an indispensable part of women's health care in the world, right? And whether you look at our Breast Health business with mammography screening or diagnostics or surgical, really cool products that have created and built markets and today maintain very high market shares, which leads to very strong cash flow generation and a really, really fortress balance sheet. So I think that's one piece that's been a constant over the years. I think in the near term, obviously, some challenges that we've talked about in Breast Health that we needed to kind of reset expectations and execute against the path that we laid out at the time. And I think 2 quarters in, we've done that, and the business has responded. The stock has begun to respond. And I think to the extent that we continue to execute on those goals, the stock will continue to work its way up. And as we talked about, we feel good about being able to do that.

Great.

Yes, it's funny. We got so much credit during COVID for helping to save the world and coming to thing. The interesting part I find that's been true almost through, I think, the entire existence that I've been here, we haven't been able to shake is because of our 3 different businesses, I think we tend to oftentimes trade down to the problem du jour and whether it's USPSTF guidelines or the Breast Health business. And if you would just look at the performance over time of the total, instead of chasing a headline where I think some people get the benefit of the doubt. We sort of, I think, a lot of times are the opposite, and we continue to want to prove that differently. And I think ultimately, it's getting all the businesses performing. But even when they're performing, sometimes you have those goofy headlines out there. So I think we keep making a difference in the world and keep growing the business and things take care of themselves over time.

Perfect. I think that takes us to time. Steve, Mike, thank you so much.

Thank you, Kallum.

Thanks, Kallum. Thanks for having us. Thank you