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Edited Transcript of HOLX.OQ earnings conference call or presentation 4-Nov-20 9:30pm GMT

·50 min read

Q4 2020 Hologic Inc Earnings Call BEDFORD Nov 5, 2020 (Thomson StreetEvents) -- Edited Transcript of Hologic Inc earnings conference call or presentation Wednesday, November 4, 2020 at 9:30:00pm GMT TEXT version of Transcript ================================================================================ Corporate Participants ================================================================================ * Michael J. Watts Hologic, Inc. - VP of IR & Corporate Communications * Stephen P. MacMillan Hologic, Inc. - Chairman, CEO & President ================================================================================ Conference Call Participants ================================================================================ * Brian David Weinstein William Blair & Company L.L.C., Research Division - Partner & Healthcare Analyst * Chris Lin Cowen and Company, LLC, Research Division - VP of Health Care - Life Science and Diagnostic Tools * Daniel Louis Leonard Wells Fargo Securities, LLC, Research Division - Senior Analyst * Jack Meehan Nephron Research LLC - Research Analyst * Patrick Bernard Donnelly Citigroup Inc. Exchange Research - Research Analyst * Rajbir Singh Denhoy Jefferies LLC, Research Division - MD, Equity Research & Senior Equity Research Analyst * Tycho W. Peterson JPMorgan Chase & Co, Research Division - Senior Analyst * Vijay Muniyappa Kumar Evercore ISI Institutional Equities, Research Division - MD ================================================================================ Presentation -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- Good afternoon, everyone, and welcome to the Hologic's Fourth Quarter Fiscal 2020 Earnings Conference Call. My name is Christie, and I'm your operator for today's call. Today's conference call is being recorded. (Operator Instructions) I would now like to introduce Mike Watts, Vice President, Investor Relations and Corporate Communications, to begin the call. -------------------------------------------------------------------------------- Michael J. Watts, Hologic, Inc. - VP of IR & Corporate Communications [2] -------------------------------------------------------------------------------- Thank you, Christie. Good afternoon, and thanks for joining us for Hologic's Fourth quarter Fiscal 2020 Earnings Call. With me today is Steve MacMillan, the company's Chairman, President and Chief Executive Officer. Karleen Oberton, our Chief Financial Officer, had an accident last week that required surgery, so she is not joining us today. She's resting at home and doing well, but I'll be covering for her in our call today. Please join me in wishing Karleen a speedy recovery. Our fourth quarter press release is available now on the Investors section of our website. We also will post our prepared remarks to our website shortly after we deliver them. Finally, a replay of this call will be archived through November 27. Before we begin, I'd like to inform you that certain statements we make during this call will be forward-looking. These statements involve known and unknown risks and uncertainties that may cause actual results to differ materially from those expressed or implied. Such factors include those referenced in the safe harbor statement that's in our earnings release and in our filings with the SEC. Also during this call, we will be discussing certain non-GAAP financial measures. A reconciliation to GAAP can be found in our earnings release. One of these non-GAAP measures is organic revenue. We define organic revenue as constant currency revenue less the divested Blood Screening and Cynosure businesses as well as the acquired Supersonic Imagine and Acessa businesses. Finally, any percentage changes that we discuss will be on a year-over-year basis and revenue growth rates will be expressed in constant currency unless otherwise noted. Now I'd like to turn the call over to Steve MacMillan, Hologic's CEO. -------------------------------------------------------------------------------- Stephen P. MacMillan, Hologic, Inc. - Chairman, CEO & President [3] -------------------------------------------------------------------------------- Thank you, Mike, and good afternoon, everyone. We're pleased to discuss our financial results for the fourth quarter of fiscal 2020. We capped off a truly unprecedented fiscal year, a year in which we made an enormous impact on public health with remarkable performance on both the top and bottom lines. Since we're marking the end of fiscal 2020, we'll reflect on the full year today. We also want to remind everyone of the steps we took in previous years that enabled us to post such terrific performance and discuss how our current successes will make us an even stronger company going forward. Before we do that, let's provide a quick overview of our financial results for the fourth quarter. Total revenue was $1.347 billion and non-GAAP earnings per share was $2.07. Revenue grew 70.9% organically and EPS more than tripled as higher production volumes in Diagnostics enabled us to leverage our fixed cost base. Both revenue and EPS came in well ahead of our expectations at the beginning of the quarter, as well as the updated guidance we provided in September. The outperformance was driven by unprecedented global demand for our COVID tests on the Panther system and the continued recovery of our other product lines. How did we achieve these results? 5 strategies that we pursued before 2020 put us in a position to seize the opportunities that COVID presented as well as mitigate the risks. While we certainly did not predict the COVID pandemic, we did put in place people, processes and capabilities that enabled us to adapt quickly, make a massive contribution to human health and drive value for customers, employees and shareholders. First, over the last few years, we spent a significant amount of time defining our purpose, passion and promise. As a reminder, our purpose is to enable healthier lives everywhere, every day. Our passion is to become global champions of women's health. And our promise is the science of sure, which is all about providing clinically differentiated, high-performance products that customers and patients can rely on. These principles have inspired our team's incredible efforts over the last several months, especially our many frontline employees who have shown up to work every day since the pandemic began. When the world needs us most, our team rises to the occasion. Second, in Diagnostics, we fueled our Razor/Razorblade business model by placing hundreds of Panthers and strengthening our assay development capabilities to add more tests to our menu. At the end of 2014, we had about 600 Panthers installed worldwide. Over the next 5 years, we tripled that installed base to more than 1,700 at the end of 2019. Similarly, in 2014, we had a grand total of 4 assays approved on the Panther in the United States. But by the end of 2019, we had quadrupled that with 16 tests cleared. As a result, our Molecular Diagnostics business was thriving even before COVID, with growth of 11% globally last year. Clearly, we were well poised to make a difference when COVID emerged. Third, in Breast Health. We diversified our business under the leadership of Pete Valenti. We recently announced that Pete will be retiring in December, and we want to thank him for more than 6 great years of service. Pete was the first Division President I hired at Hologic and he was the mastermind behind our genius 3D mammography strategy. Pete leveraged our leadership position into a more diverse, consistent business that tracks the clinical continuum for breast health care. We acquired Faxitron, Focal and SuperSonic Imagine, grew our service business to be even bigger than our capital franchise and developed innovative new products such as Brevera and artificial intelligence tools. As a result, our Breast Health division has been more insulated during the pandemic than many other businesses that are highly dependent on capital. Fourth, in Surgical, we brought in a new leadership team that quickly transformed the commercial organization with their focus on talent and engagement. This began with Sean Doherty, who was recently promoted to Group President, overseeing Surgical as well as Breast Health. Sean's team also revitalized the division's R&D pipeline, bringing to market new products, including Fluent and the Omni Hysteroscope. As a result, surgical was growing strongly pre-COVID and is recovering faster than expected now. Fifth, in international, we hired experienced senior leaders who pursued an ambitious goal to double revenue over 5 years. In Europe, especially, we moved away from the distributors and strengthened our direct commercial capabilities under the leadership of Jan Verstreken, who was recently promoted to Group President for all our international franchises. Our international business grew 11% on average from 2016 to 2019. And when the pandemic hit, we were in an excellent position to contribute with our testing solutions. Now let's spend a few minutes on the highlights of fiscal 2020. What a year it was, with organic revenue growth of 22% for the year and highly leveraged non-GAAP EPS growth of 64%. In COVID time, when days feel like weeks and weeks feel like months, it's hard to believe that we sold our Cynosure Medical Aesthetics business early in fiscal 2020. The divestiture removed a drag on our growth and profitability as well as an overhang on our stock. And behind the scenes, it helped us refocus on our core businesses, especially overseas, which was critical when the pandemic hit. With the divestiture complete, we started 2020 in good shape. For the first time, all our major divisions and geographies were performing well. Organic growth had been steadily increasing from a trough of about 2% in early 2018 to a solid mid-single digit rate in early 2020. Then COVID-19 changed everything. In the early days of the pandemic, we moved quickly to preserve cash, and brace ourselves against the global macroeconomic shock. At the same time, our Diagnostics R&D team triggered what has become an incredible division-wide response, one that exemplifies our purpose, passion and promise. Working around the clock, they developed our first COVID test for the Panther Fusion system in about 2 months. And as soon as our Fusion assay received its emergency use authorization, we began working on a second test, an Aptima assay for our base Panther system that could run on more instruments and be produced in much larger quantities. Early on, in response to the massive public health need, we set a goal to double our overall molecular diagnostics production capacity from about 20 million to 40 million tests a quarter. A capacity expansion of this magnitude would normally happen over 8 to 10 years, but we set out to make it happen in 6 months. As you can probably tell from our financial results this quarter, we have already exceeded this goal in terms of both size and speed. In the fourth quarter alone, we produced more than 50 million total molecular diagnostics tests. This included about 25 million COVID tests that we provided to customers, an average of roughly 2 million per week. This means that we sold more COVID tests this quarter than we had ever produced of all of our molecular tests in a quarter. While our efforts to increase production volumes have gotten a lot of attention. And deservedly so, we also want to highlight 2 areas that may be somewhat underappreciated. First is the impact we're making internationally. And second is the long-term durability of the COVID revenue opportunity. We're particularly proud of the role we're playing globally, especially in Europe. Whoops. I missed a page, sorry. Early on, in response to the mass -- no, I didn't. Forget it. There we go. We're particularly proud of the role we're playing, especially in Europe. If COVID would have hit 5 years ago, our ability to make an impact would have been minimal as we just didn't have the installed base, relationships or commercial capabilities. But now under Jan's leadership, we are on track to generate more than $1 billion in total European revenue this year. As a major driver of this, the $500 million in committed COVID revenue that started in the fourth quarter is now expected to be over $600 million and extend throughout fiscal 2021. The extension of these contracts reinforces that demand for highly accurate molecular COVID testing is going to remain robust for a while. Infection rates are on the rise, not just in the United States, but globally. And it will take time to manufacture and roll out vaccines broadly, even if they are proven highly protective. Effective vaccines will eventually slow testing demand. But even then, we believe that COVID testing will remain a large market, probably bigger than any other molecular category for years to come. Molecular tests have been the gold standard for infectious disease testing for decades and for good reason. They are more accurate than other testing modalities. And this is especially important when lives and livelihood are at stake. And with our combination of robust chemistry, innovative engineering on Panther and differentiated labeling from FDA, we believe we are the gold standard among molecular tests. The data the FDA recently published, which compared the analytical sensitivity of more than 50 emergency use authorization assays, speaks to this point and underpins the asymptomatic screening claims that we received for our COVID assays this quarter. Sensitivity is especially important when testing people without symptoms, when false negative results could provide a false sense of security and contribute to super spreader events. So as we look forward, what will these accomplishments mean for our future? 2020 was a year in which we significantly strengthened the company for the years ahead. Let me give you some examples. First, we shipped 511 new Panther systems this year, well more than double our run rate over the last 5 years. This increased our global installed base to about 2,250, up almost 30% in just 12 months. We helped our manufacturing partner more than double production and refurbish scores of instruments from our own and other labs. And we still have a waiting list for Panthers. We expect to have another very good year of placements in 2021, which reflects the longevity of COVID testing that our customers anticipate. The combination of our huge Panther installed base at facilities close to the patient, plus our assay sensitivity, have us uniquely positioned to pursue opportunities that will be around for the long term, such as testing before hospital admissions and asymptomatic screening. This is one reason we are moving ahead with further capacity expansion that will include our main plant in San Diego, our facility in Manchester, England, and several of our key suppliers of related consumables. Our goal is to produce at least 75 million total molecular diagnostic tests a quarter, starting roughly a year from now, which would represent more than 3.5x our total capacity pre-COVID. These efforts will be reimbursed in part by the $119 million U.S. government contract that we announced last week, which supports increased COVID production capacity for the domestic market. Clearly, the government also believes that COVID testing is going to persist and that we are making a meaningful difference against the pandemic. Second, the benefits of the new Panther placements will extend far beyond COVID. As we said in our last call, we are targeting Panther placements to customers who want to run our other tests when the pandemic is over. As a result, we are signing up record levels of new business, what we call TORs or tests of record. To be more specific, in fiscal 2020, we signed up non-COVID TORs worth $35 million annually in the United States. This is almost 50% more new business than we had ever done in a single year and helps explain why our non-COVID molecular sales increased slightly in the fourth quarter. In addition, we have another $35 million of non-COVID TORs waiting to go live as soon as we have product available and capacity on Panthers. The biggest contributor to these tours has been the new Aptima vaginosis tests, which reinforces our long-term enthusiasm for these products. Overall, there is no question that additional Panther placements will make our molecular business markedly stronger over the next several years. Third, our contributions to fight the pandemic internationally has significantly elevated our market positioning, especially in major European countries, including the United Kingdom, Germany and France. We are already seeing the benefits in terms of market access for other products as we compete for tenders. Finally, the strong cash flow that our COVID test is generating is enabling us to further strengthen our balance sheet and accelerate certain growth investments, as Mike will discuss. In addition, we are going on offense in 2 ways. First, we are stepping up our business development activities. In August, for example, we spent approximately $80 million plus future contingent earn-outs to buy Acessa Health. Acessa markets a laparoscopic RF product that is used to treat fibroids that MyoSure can't reach. So it's very complementary to our Surgical business and a nice fit for our sales force. Across our divisions, we have a full funnel of other acquisition targets today and would be surprised if we didn't complete at least another deal or 2 in fiscal 2021. Second, we resumed our share repurchase program, buying back about 1.7 million shares of stock for roughly $100 million in the fourth quarter. For the full year, we repurchased 13 million shares for $654 million, reflecting our confidence in our future. Before turning the call over to Mike, let me conclude by reiterating how proud we are of the Hologic employees who stared adversity in the face during 2020 and made remarkable contributions to the battle against COVID-19. Not only did our team make a huge difference on public health, we positioned Hologic for greater success in the future. Now we'll turn the call over to Mike. -------------------------------------------------------------------------------- Michael J. Watts, Hologic, Inc. - VP of IR & Corporate Communications [4] -------------------------------------------------------------------------------- Thank you, Steve, and good afternoon, everyone. In my remarks today, I'm going to provide an overview of our divisional sales results, walk through our income statement, briefly touch on a few other key financial metrics and finish with our guidance for the first quarter of fiscal 2021. As Steve said, we're thrilled with our fourth quarter results as revenue and EPS significantly exceeded our guidance. Reported revenue of $1.347 billion increased 54%, if you include the divested Cynosure business in the base. Organically, revenue grew 71%, driven by strong sales of our 2 COVID test. Below revenue, the tireless efforts of our operations and supply chain teams to ramp up production of COVID assays boosted our margins, profitability and cash flow as we leveraged unprecedented molecular diagnostic production volumes against our fixed cost base. As a result, EPS of $2.07 in the fourth quarter increased 218%, well ahead of our expectations. And cash flow was extremely strong as well, which I'll discuss in a moment. But before I do that, let me provide some detail on our divisional revenue results. Diagnostics, our largest division, more than tripled in the fourth quarter, driven by Molecular, where sales increased 371%. As Steve mentioned, in response to the unprecedented need for COVID testing, we shipped about 25 million COVID tests to customers in the quarter, generating revenue of $601 million. It's important to note that even if you exclude COVID-19 testing as well as COVID-related ancillaries and equipment, our base molecular business increased in the mid-single digit range. This speaks to the clinical importance of our assays as well as the bright future we see in Molecular, as new products contribute more and more. Rounding out our Diagnostics division, the Cytology & Perinatal businesses declined but trends improved compared to the third quarter. In Breast Health, divisional performance improved a little faster than we expected. Global sales of $289.2 million decreased 16.2%. Excluding $6.2 million of sales from SuperSonic Imagine, sales decreased 18% organically. Demand for many of our capital products was obviously depressed by COVID-19, but as Steve discussed, the increasing diversity of our business cushioned the overall decline as consumables and service essentially return to their pre-COVID levels. For example, our interventional business was basically flat, helped by the relaunch of our Brevera biopsy system late in the quarter, and service revenue, which was larger than capital sales, grew slightly. In Surgical, sales of $100.2 million decreased 12.9%, also better than our internal forecast. Demand for semi-elective procedures continues to be negatively impacted by COVID-19, but trends definitely improved compared to the third quarter, and our customers are reporting a steady increase of new patients, which bodes well for continued recovery. Overall, in terms of geography, domestic sales of $994.9 million increased 52% on a reported basis as strong sales of COVID test more than offset the impact of the Cynosure divestiture and reductions across our other product lines. On an organic basis, U.S. revenue was up 64%. Outside the United States, sales of $352.1 million roughly doubled on a reported basis and grew 95% organically, driven by excellent performance in Europe. Now let's move on to the rest of the P&L for the fourth quarter. Gross margin of 74.2% increased 1,250 basis points, driven by sales of high-margin COVID tests and the divestiture of the lower margin Cynosure business. As a further benefit of the Cynosure sale, total operating expenses of $276.6 million decreased 1% in the fourth quarter, despite growth in core Hologic R&D, the addition of SSI expenses and opportunistic investments we made to bolster future growth. Some examples include marketing campaigns to improve health care equality for underserved communities and to emphasize the importance of preventive screening during the pandemic. We also outsourced some diagnostics R&D work to third parties and accelerated product registration efforts in clinical trials in some of our other international regions. Finally, we had higher compensation expense as accruals for incentive compensation, especially in diagnostics, increased in line with our financial results. Putting all this together, operating margin increased 2,430 basis points to 53.7%, and net margin increased 2,020 basis points to 40.4%, both record highs. As a result, non-GAAP net income finished at $543.7 million and non-GAAP earnings per share were $2.07, well ahead of plan. Before we cover our 2021 first quarter guidance, I'll quickly touch on a few other financial metrics. Driven by demand for our COVID test, cash flow from operations was $442 million in the fourth quarter, a very strong result. For the full year, cash flow from ops was almost $900 million. And even with significant capital spending in Diagnostics to support increased COVID production, free cash flow was $740 million in fiscal 2020. This strong cash flow gives us tremendous financial and strategic flexibility and enabled us to further strengthen our balance sheet in 2 ways: first, we repaid $250 million that we had borrowed on our revolver as a precautionary measure early in the third quarter; second, we refinanced $950 million of senior unsecured notes, lowering our interest rate from 4.375% to 3.25%, which we believe is the lowest ever for a high-yield corporate -- high-yield health care bond, excuse me. And we also pushed out the maturity 4 years to 2029. Overall, we had $701 million of cash at the end of the fourth quarter, and with more than $1.5 billion of EBITDA over the last 12 months, our leverage ratio fell to 1.5. We do expect both EBITDA and free cash flow to grow significantly in fiscal 2021, but as Steve said, we are actively pursuing a number of acquisitions across our divisions to accelerate growth and hope to use our cash flow to complete a couple of deals this year. Finally, ROIC was 18.5% on a trailing 12-month basis, a significant increase of 550 basis points. Before we open the call up for questions, let me discuss our expectations for the first quarter of fiscal 2021. We anticipate that fiscal 2021 will be an excellent year for Hologic overall, but our business environment remains very fluid due to the pandemic. Therefore, we are only providing a single quarter of guidance today. In the first quarter of fiscal 2021, we expect excellent financial results again, even a little better than last quarter despite the slowdown we usually see around the holidays. We forecast total revenue in the range of $1.35 to $1.425 billion. This represents organic revenue growth of roughly 71% to 81%. Including Cynosure in the prior year period, our guidance corresponds to reported growth of 59% to 68% and constant currency growth of 57% to 65%. On the bottom line, we expect EPS of $2.10 to $2.25 in the first quarter. This implies unprecedented growth rates of between 244% and 269%, significantly outpacing revenue. This first quarter guidance is based on a tax rate of 22.75% and diluted shares outstanding of approximately 263 million for the quarter. Now let's turn to our divisional expectations. We forecast that diagnostics revenue in the first quarter could triple or more compared to the prior year period. Underpinning this, we expect that demand for our 2 COVID assays will continue to exceed supply this quarter. As Steve said, we are further expanding production capacity for our molecular test, but most of this capacity will come online later in 2021. Based on this timing, we forecast COVID assay sales to increase slightly in the first quarter compared to the fourth, commensurate with a small sequential increase in production. We also expect that our combination test for COVID and flu, which we submitted for an EUA last week, will be available later this quarter. We anticipate sales in both Breast and Skeletal Health and Surgical to be down again in the first quarter, although with slightly better percentage declines than in the fourth quarter. In Breast and Skeletal Health, let me remind you that first quarter sales often decline sequentially in absolute dollars compared to the fourth quarter due to seasonality around the holidays. And in Surgical, we believe our customers are much better prepared than they were in the spring to manage through local increases in COVID prevalence. So while we do expect trends to continue improving, we will keep a close eye on whether increasing COVID cases have a negative effect on elective procedures. As you update your forecast, let me remind you that macro uncertainty remains higher than normal due to the pandemic. While our visibility has improved compared to several months ago, we would still encourage you to model at the middle of our ranges, which incorporate both potential upsides and downsides. Before we open the call for questions, let me wrap up by saying that Hologic's financial performance in the fourth quarter was tremendous. I have no doubt that our efforts this year have significantly strengthened the company for the long term. We continue to make a huge impact on human health globally and have positioned ourselves to deliver an exceptional fiscal 2021 as we continue to battle a virus that isn't going away anytime soon. With that, I will ask the operator to open the call up for questions. (Operator Instructions) Operator, we are ready for the first question. ================================================================================ Questions and Answers -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- (Operator Instructions) First, we'll go to Vijay Kumar from Evercore ISI. -------------------------------------------------------------------------------- Vijay Muniyappa Kumar, Evercore ISI Institutional Equities, Research Division - MD [2] -------------------------------------------------------------------------------- Steve, congrats on this obvious strength here, and good to be back on the call here. I guess maybe on the -- I guess, the comments you made on M&A, Steve. If I just step back, there's $1 billion of COVID revenues we weren't expecting a year ago. It's likely to be at least at 1.5 plus of incremental revenues coming in over the next 12 months. And these revenues are dropping down at pretty high margins, 65%, 70%. That's a lot of free cash. When you think about redeploying those -- the proceeds, I think you mentioned 1 or 2 deals in the near term. Could you maybe talk about perhaps the focus, what areas are you looking at? Are these going to be growth-focused acquisitions, perhaps on the size of the transaction? -------------------------------------------------------------------------------- Stephen P. MacMillan, Hologic, Inc. - Chairman, CEO & President [3] -------------------------------------------------------------------------------- Sure, Vijay. I think what's great is we've really gotten back to our division-led business development strategy. So we've got each division out there. That way, they know the adjacencies, the ability to bridge out. I would say, if you go forward, we're clearly looking at some ways to broaden our diagnostics platform, both product-wise as well as geographically. So that team has been very active on the business development front. In addition, obviously, to all the production capability and everything else. But we're looking across the board. Surgical continues to look at some additional things, and Breast Health is looking at some things as well. But I think Diagnostics is probably more likely to be where we see it. I do think we've kind of set up the rough principle of staying within the constraints of our annual cash flow. And I think that continues to be exactly what we're thinking about. We're looking at some things that might be a little bit bigger than we were looking at pre-COVID, but nothing beyond -- certainly beyond the annual cash flow or anything like that. -------------------------------------------------------------------------------- Vijay Muniyappa Kumar, Evercore ISI Institutional Equities, Research Division - MD [4] -------------------------------------------------------------------------------- Understood. And then, Mike, maybe one on, I guess, the label expansion here to asymptomatic. Is this now an indication perhaps, given the asymptomatic label, that we could see testing strength to stand beyond the next 6 months? As you look at back half of next fiscal, perhaps once we have a vaccine, could you maybe just address what happens to testing post vaccines and perhaps the durability of testing in the context of your asymptomatic labeling? -------------------------------------------------------------------------------- Stephen P. MacMillan, Hologic, Inc. - Chairman, CEO & President [5] -------------------------------------------------------------------------------- Vijay, I'm glad you picked up on that, which is we believe this asymptomatic approval is an enormous win for us over the long haul. And let's face it, with what the world has gone through here, even post vaccine, there is going to be probably some pretty strong ongoing needs by governments around the world to want to monitor their health -- their populations, and just track on an ongoing basis, just to see relative incidence or any kind of recurrences. And frankly, it's the asymptomatic people who are the key there. And that's the on-label indication. It's hard for us to probably fully underscore how strong we think the demand will be for that for years to come. And you still play out the timing of vaccines. By the way, let alone mutations and other things, we believe, and we've been in close contacts with most of the major governments around the world. All of the key labs, the health experts, we believe an ongoing screening program where you're going to want to use the most sensitive tools out there, including, frankly, hospitals are going to want to continue to test patients coming in. What is the best way? Everybody's going to go in for a hip, a knee, a cardiac, any other procedure, we think at least for the next couple of years is probably going to be tested. And again, with our global installed base now in excess of 2,200 and continuing to grow on Panthers, we think this is going to be a big, big enduring market for us. Is it going to be exactly what it is today? Likely not. But there's -- we believe, and we've made the bet that there's a longer tail. If you look, by the way, just one other data point, the contract we got from the U.S. government last week, if you look at it, they're asking for us to be providing 13 million tests per quarter by -- yes, per month, really 6 quarters now, by the first quarter of 2022. So again, governments are increasingly planning to want to have major capacity well beyond even just this coming cold and flu season. -------------------------------------------------------------------------------- Operator [6] -------------------------------------------------------------------------------- And next, we'll go to Tycho Peterson from JPMorgan. -------------------------------------------------------------------------------- Tycho W. Peterson, JPMorgan Chase & Co, Research Division - Senior Analyst [7] -------------------------------------------------------------------------------- I'll start with one for Mike. And Mike, nice job wearing the CFO hat, hope all is well with Karleen. But I want to ask on operating margins, the 24, 30 basis points of margin expansion. The real question is how sustainable is that? And if we do the run rate on the EPS guide for the year, that gets you to kind of $9 at the high end, is that the right way to think about it? Or is there some reinvestment that we need to think about over the course of the year? -------------------------------------------------------------------------------- Michael J. Watts, Hologic, Inc. - VP of IR & Corporate Communications [8] -------------------------------------------------------------------------------- Yes. Sure, Tycho. So operating margins, obviously, were very strong in the quarter based on the COVID revenue and just higher revenue overall. We did guide for revenue to be a little bit higher sequentially in Q1 versus Q4. Margins, gross and operating should be about the same, maybe a little bit better based on the higher revenue. So we should be looking at another strong quarter of EPS in Q1. I think that corresponds to the guidance we gave at the bottom line, which was a little bit ahead. I think we guided $2.10 to $2.25 for EPS. So that should all be pretty consistent. Certainly, I would be cautious about kind of taking that level and just annualizing it. I think that, as Steve said, we feel very strongly that we're going to get very healthy demand at least through the March quarter, right, as flu kind of hopefully goes away around that time. I think, from that point forward, you're likely to see overall COVID revenues start to decline on a sequential basis, but I think it's going to be pretty gradual. Steve talked about some of the drivers of long-term demand. So I think that maybe we peak in our March quarter, maybe we peak in the June quarter, but things will likely decline on a sequential basis from there, and that will have an effect on EPS as well. -------------------------------------------------------------------------------- Tycho W. Peterson, JPMorgan Chase & Co, Research Division - Senior Analyst [9] -------------------------------------------------------------------------------- Okay. That's helpful. And then for Steve, a couple of quick hits on the testing side. You've been pretty negative on the pooling front. I'm just curious if you think as we head into next year, pooling starts to pick up. And then on the government contract, is that a one-off in your view? Or could there be other kind of chunky government contracts like that to support scale up? And then lastly, I'm just wondering if you could comment on the non-COVID testing volumes, up mid-single digit, was certainly better than we've been expecting. So I'm curious about the sustainability of that. -------------------------------------------------------------------------------- Stephen P. MacMillan, Hologic, Inc. - Chairman, CEO & President [10] -------------------------------------------------------------------------------- I think Tycho just set a world record for the one follow-up that was 3 or 4. So let me make sure I try to get all of those, Tycho. On the pooling, we think eventually, that will start to kick in. And again, if you look at the way we're poised and because of the extreme sensitivity of our test, we feel like we're poised no matter where this goes. And by being able to offer to customers, if it ends up going into a pooling world, we are there for them. And certainly, years in the future, we wouldn't be at all surprised if there's still some level of ongoing testing that probably would use pooling certainly more. I don't -- we don't see much interest, frankly. And given the still, the very high incidences, don't see that being as much right now. What were the other parts of the... -------------------------------------------------------------------------------- Tycho W. Peterson, JPMorgan Chase & Co, Research Division - Senior Analyst [11] -------------------------------------------------------------------------------- Government contract, is that a one-off? Or could there be other... -------------------------------------------------------------------------------- Stephen P. MacMillan, Hologic, Inc. - Chairman, CEO & President [12] -------------------------------------------------------------------------------- Yes. Thank you. On the government contract side, I think this largely covers the bulk of the expansion that we had both planned and then did encourage us to even go that much higher on where we're going, to we're getting to that $75 million a quarter number. -------------------------------------------------------------------------------- Michael J. Watts, Hologic, Inc. - VP of IR & Corporate Communications [13] -------------------------------------------------------------------------------- And I think, Tycho, the last question was related to diagnostics volumes, non-COVID. And I think there, we were encouraged in the quarter by growth in the base. HPV had a good quarter. Trichomonas had a good quarter. Continue to get good traction with our HIV viral load product, particularly in Africa. Doing a good job there. And I think we called out in our script, a lot of good interest around our vaginosis panel, which is BV CV TV, which is contributing to the growth as well. So it was nice to see -- even if you back out all the COVID stuff, which obviously was huge, the underlying business grow as well in the quarter. -------------------------------------------------------------------------------- Operator [14] -------------------------------------------------------------------------------- And next, we'll go to Patrick Donnelly from Citi. -------------------------------------------------------------------------------- Patrick Bernard Donnelly, Citigroup Inc. Exchange Research - Research Analyst [15] -------------------------------------------------------------------------------- Great. Steve, maybe 1 for you just -- maybe just one on the capacity side. Certainly appreciate it's going to take some time to expand that. Can you just talk through, I guess, the key hurdles you need to get through for that? And any potential for a larger increase, even this quarter? I mean, similar last quarter, I know you said you had some things had to break through to get the capacity going in fiscal 4Q. You did that. Maybe just talk through how this trends over the next couple of quarters and any potential again to pull that capacity expansion forward on the COVID set? -------------------------------------------------------------------------------- Stephen P. MacMillan, Hologic, Inc. - Chairman, CEO & President [16] -------------------------------------------------------------------------------- Yes. I think, in the way to probably think about capacity is, is it's not a steady linear. It comes as pieces of equipment and suppliers can come in. So we were able to get a few -- we had a bunch of stuff ordered early in the year. A number of that came through. Now it's sort of making the investments for the future, Patrick, that, for example, this quarter, next quarter, not much additional capacity coming online, including things like multi-tube units and pipette tips and all the ancillary consumables where we are giving additional investment to our suppliers, to put in new machines, but they've got to now order those machines. We're sort of in the next wave of placing the orders where they won't be coming online for another 6 or 9 months-ish. And therefore, it's much more incremental here in the immediate quarters, but we are continuing to position ourselves for further out. Hopefully, that helps. But it kind of goes up in sort of straight line. It's more of a stair step, I guess, than a linear progression. -------------------------------------------------------------------------------- Patrick Bernard Donnelly, Citigroup Inc. Exchange Research - Research Analyst [17] -------------------------------------------------------------------------------- Yes. Makes sense. And then maybe one on Breast Health. Certainly held up better-than-anticipated on our end. Can you just talk through the key pieces of performance there? And then the outlook heading into even calendar '21, you always seem to have a pretty good handle on hospital CapEx and spending outlook. Maybe just your two cents there would be great. -------------------------------------------------------------------------------- Stephen P. MacMillan, Hologic, Inc. - Chairman, CEO & President [18] -------------------------------------------------------------------------------- Yes. I think the great part, when you think about our Breast Health business today is we probably think about it as 3 chunks. You've got the capital of the core mammography. We've got the service piece, which has become so much bigger. And then a much bigger disposable business that Pete and the team really have built out. So it's -- instead of a one-legged pony of gantries. And then it's also much more international. So if I play it out overall, service is holding up pretty well. The disposable businesses, including the Brevera launch now looking good. And frankly, a lot of the European countries didn't dip down quite as much initially. We don't have as much service business over there, but we've got those businesses. So then you come back to the core capital piece. And I think our teams, particularly in the U.S., are feeling fairly encouraged and even frankly, around the world, we're getting -- even into some new countries, we've had -- reach out to us recently. I mean -- so I'll go there and then come back. The fascinating part is, the more we're having discussions about COVID revenue with a lot of countries around the world, they're becoming much more aware of Hologic overall. And so we've actually been selling some gantries into some countries. So it's going to help the Breast Health business over time, this and that. Back to the piece in the U.S., I think our teams are cautiously optimistic that they feel like they're back having good discussions. Our order patterns are getting a little healthier. And so I think we're still suggesting we'll be down a bit this quarter, but probably down less this quarter than we were just in the, they called, 16%-ish down this past quarter. So I think overall, and as we look to '21, we're probably anticipating each quarter just gets gradually better, as hospitals and particularly the focus on women's health. It's not lost on us, by the way, and we're kind of encouraged that the new Senate and House will have more women than they've ever had. And what's been fascinating through the course of this year, too. We've got to know a lot more of the governors, Kevin Thornal's on a first-name basis with probably half the governors in this country and everybody else. So we've got relationships that will continue to, I think, help us, even on women's health issues and wanting to make sure people are getting back to mammography screenings and cervical cancer screenings. -------------------------------------------------------------------------------- Operator [19] -------------------------------------------------------------------------------- And next, we'll go to Dan Leonard from Wells Fargo. -------------------------------------------------------------------------------- Daniel Louis Leonard, Wells Fargo Securities, LLC, Research Division - Senior Analyst [20] -------------------------------------------------------------------------------- So on Molecular, given that capacity now seems pretty static at that $50 million test level, how are you managing the trade-offs between serving COVID demand and your core molecular demand now that, that's coming back? And what are you assuming in your Q4 guide? Or Q1 or December quarter. -------------------------------------------------------------------------------- Stephen P. MacMillan, Hologic, Inc. - Chairman, CEO & President [21] -------------------------------------------------------------------------------- Yes. Our fiscal year always kind of gets a little screwy there. Dan, we are doing everything we can to make sure that we do produce all of our women's health -- all of our core assays. There were a couple of weeks here or there where just components because it's a shared supply chain that we ran into a couple of back orders on certain products. But overall, right now, our guiding philosophy for all of this is, we take care of our core business and then we add COVID on top. So I think we feel pretty good with the $50-ish million that we're at right now, that we can deliver. Certainly, if you figure, we were in the $20 million to $21 million a quarter of non-COVID stuff back 2 or 3 quarters ago, we can handle some growth on that core and then still have that $25-ish million of COVID volume to do. So I think we're assuming this quarter is just marginally above what we did this last quarter on molecular. -------------------------------------------------------------------------------- Daniel Louis Leonard, Wells Fargo Securities, LLC, Research Division - Senior Analyst [22] -------------------------------------------------------------------------------- Okay. And then just secondly on the share repo. It seems like you were pretty opportunistic on the repo in the fourth quarter. How are you thinking about it in the first quarter and beyond? I mean, if you expect there could be continued market volatility, do you take a more opportunistic approach towards repurchasing shares or more methodical? -------------------------------------------------------------------------------- Stephen P. MacMillan, Hologic, Inc. - Chairman, CEO & President [23] -------------------------------------------------------------------------------- Sure. Great one, Dan. I -- we have the ongoing debate about being more methodical versus opportunistic, and we probably end up a little bit in between. I think with the cash we're going to be generating, our first priority is still going to be judicious acquisitions. But I think with the cash we're generating and as we continue to look at our own stock, having confidence that acquiring a company that we know a lot about, i.e., ourselves, is also not a bad deal. So it will probably be a bit of both methodical and opportunistic going forward. -------------------------------------------------------------------------------- Operator [24] -------------------------------------------------------------------------------- And next, we'll go to Chris Lin from Cowen. -------------------------------------------------------------------------------- Chris Lin, Cowen and Company, LLC, Research Division - VP of Health Care - Life Science and Diagnostic Tools [25] -------------------------------------------------------------------------------- I hope Karleen is doing well. -------------------------------------------------------------------------------- Stephen P. MacMillan, Hologic, Inc. - Chairman, CEO & President [26] -------------------------------------------------------------------------------- She's listening in. She's going to be sending us a grade, probably. Telling us not to mess it up. -------------------------------------------------------------------------------- Chris Lin, Cowen and Company, LLC, Research Division - VP of Health Care - Life Science and Diagnostic Tools [27] -------------------------------------------------------------------------------- Well, I think Mike is filling in pretty well. Anyway, can you just -- can you talk about how many Panthers do you expect to ship in 2021? Is it possible for you to ship another 500 or so? Or should we think about a figure that's south of this level, but north of a typical 200 to 250 run rate? -------------------------------------------------------------------------------- Stephen P. MacMillan, Hologic, Inc. - Chairman, CEO & President [28] -------------------------------------------------------------------------------- Chris, you have just answered your own question. I think probably somewhere between the typical 250 and the 500. I don't know that we'd get full 500, just given that was a massive influx of orders, but I think it will be well north of the 250. So not totally sure, but I'd probably feel comfortable splitting the difference. At this point, probably in that north of a 350-ish number, probably, call it, 350 to 400 is probably a reasonable place to be. And I would say if demand continues to persist, then it might be able to go a little bit north of that. But even with where we are, if we do another 350 to 400 this year, that will have been almost a 50% increase in 2 years of our entire global installed base. And I do think that's the big part that is not fully appreciated. -------------------------------------------------------------------------------- Chris Lin, Cowen and Company, LLC, Research Division - VP of Health Care - Life Science and Diagnostic Tools [29] -------------------------------------------------------------------------------- Understood. And for a somewhat -- well, unrelated follow-up, can I just go back to your prior question on M&A? So Diagnostics is clearly your -- one of your strongest franchises, and you have an extensive foothold in many laboratories with Panther systems. So I was hoping you could elaborate a bit more on why there isn't too much M&A focus in this segment. -------------------------------------------------------------------------------- Stephen P. MacMillan, Hologic, Inc. - Chairman, CEO & President [30] -------------------------------------------------------------------------------- I think as we see -- we've got a great commercial presence, certainly in labs and in the hospitals around the world. So I think, obviously, continuing to add menu and continue to add Panthers is great. But the -- ultimately, I think what we're starting to look at is, hey, look, we can build a stronger diagnostics platform that may have some other technologies. And I don't want to get much more specific because that could lead to speculation or specifics. But I think with Kevin Thornal, who has a nice business development background from his Stryker days, now leading the Diagnostics division, and it's been amazing what he has done, obviously, just from an operational standpoint, what you wouldn't see is he's also been very busy on the business development front as well. And we've actually walked away from some deals based on valuation even over the last few months since he's been here. So he's completely changed the flow of ideas that's coming forth to us. And therefore, I think we'll probably make some things happen, but we're going to remain disciplined. We're not going to get silly just because we have more money flowing in. -------------------------------------------------------------------------------- Operator [31] -------------------------------------------------------------------------------- And next, we'll go to Jack Meehan from Nephron Research. -------------------------------------------------------------------------------- Jack Meehan, Nephron Research LLC - Research Analyst [32] -------------------------------------------------------------------------------- Steve, hey. So Steve, it would be great, maybe just to start to get your thoughts on combo COVID and flu testing. Do you think the market could shift meaningfully as we had in -- further in the flu season from COVID only? And what would be the implications for Hologic from a financial perspective? -------------------------------------------------------------------------------- Stephen P. MacMillan, Hologic, Inc. - Chairman, CEO & President [33] -------------------------------------------------------------------------------- Sure. We're continuing to be in very close touch with our customers and everything else. And obviously, we expect to be launching in this quarter the combo test. I think the much bigger concern right now continues to be COVID itself. And when you look certainly at the Southern Hemisphere, where there's been very little flu season, if you think about all the mitigation measures in the U.S. of social distancing and mask-wearing and everything else, I think there are a lot of experts that will think we may have a very mild flu season. And the most important thing, frankly, right now, that the bigger concern continues to be flu -- I'm sorry, continues to be COVID. But I think we'll see bits above. And we're basically preparing in our supply chain to be able to toggle as to whichever our customers will want. But there's -- it's funny, as we've just been out caucusing them, there's still been a relentless focus really on just the COVID assay at this point in time. -------------------------------------------------------------------------------- Jack Meehan, Nephron Research LLC - Research Analyst [34] -------------------------------------------------------------------------------- Great. And can you just talk a little bit more around how pricing is trending? It seems like from the stats you threw out about revenue and volume, it was pretty stable in the quarter, but do you view that as durable? And would pricing change if you -- with the COVID combo tests? -------------------------------------------------------------------------------- Stephen P. MacMillan, Hologic, Inc. - Chairman, CEO & President [35] -------------------------------------------------------------------------------- Sure. I think we're seeing relatively very stable pricing actually globally right now on COVID. And certainly, the combo would be likely priced higher. I don't want to get into specifics, depending on reimbursement or everything else, but at this point in time, pricing has remained very steady. I think that will continue to track a little bit whatever happens to reimbursement in the future and this and that. I think over the long run, we would be wise. We certainly plan that there would be some degradation in pricing over time. But feel very good about the nearer term of how it's holding up. We also -- and you were on top of it, but the reimbursement change that came down in the U.S. recently of lowering the base price from $100 down to $75, but providing the $25 upcharge if the patient can get the results returned within 48 hours, is very beneficial to us given, our footprint of around the country. So I think, again, our ability to help labs and help hospitals return the results quickly plays to our strength as well. -------------------------------------------------------------------------------- Michael J. Watts, Hologic, Inc. - VP of IR & Corporate Communications [36] -------------------------------------------------------------------------------- And that also contributes to the continued demand for more Panthers, more boxes as well. -------------------------------------------------------------------------------- Stephen P. MacMillan, Hologic, Inc. - Chairman, CEO & President [37] -------------------------------------------------------------------------------- Yes. -------------------------------------------------------------------------------- Michael J. Watts, Hologic, Inc. - VP of IR & Corporate Communications [38] -------------------------------------------------------------------------------- Operator, I think we have time for maybe 1 or 2 more questions. -------------------------------------------------------------------------------- Operator [39] -------------------------------------------------------------------------------- Okay. Next, we'll go to Brian Weinstein from William Blair. -------------------------------------------------------------------------------- Brian David Weinstein, William Blair & Company L.L.C., Research Division - Partner & Healthcare Analyst [40] -------------------------------------------------------------------------------- Okay. So to ask a political question, I guess. I mean, we've seen a lot of funding for testing under the Trump administration. So we know what that looks like. But if we do see a Biden administration takeover in January, what do you think that means for testing in general, for funding, for reimbursement or even anything with the FDA? I'm just curious if you have thoughts on kind of his broader COVID-19 strategy that he's outlined? -------------------------------------------------------------------------------- Stephen P. MacMillan, Hologic, Inc. - Chairman, CEO & President [41] -------------------------------------------------------------------------------- Yes, I think it's hard to believe that it wouldn't be neutral to positive, and more likely potentially more testing. So I think the bigger risk would have been Republicans maybe wanting to cut back. So I think -- but I also think there's such an inexorable force of the consumer and frankly, state and local governments and companies and everybody that will also continue to drive this. But I would consider Biden to be a net positive for us. -------------------------------------------------------------------------------- Brian David Weinstein, William Blair & Company L.L.C., Research Division - Partner & Healthcare Analyst [42] -------------------------------------------------------------------------------- Got it. And then in today's weekly FDA Town hall, there was some discussion from one of your employees about getting some language changed for testing to kind of expand beyond just saying a PCR to molecular to kind of cover your technology as well. Is that something that is causing any kind of a headwind day in the market? FDA clearly seem to be amenable to changing it, it sounded like on the call, but is that anything that you guys have seen as being problematic in any way? -------------------------------------------------------------------------------- Michael J. Watts, Hologic, Inc. - VP of IR & Corporate Communications [43] -------------------------------------------------------------------------------- Yes, Brian, it's Mike. I mean, I think if you look at our sales performance, the answer would be no. Clearly, PCR is a little bit like -- it's become a little bit of a term like Kleenex or something, to be synonymous with paper tissues and such. And that's fine. Obviously, we use a different technology that's been competing against PCR for decades called TMA. And it really hasn't had an effect. I mean, look at the uptake of the products, and TMA has been used -- has been leading the gonorrhea market for decades, HPV, et cetera. I think the specific issue that came up was related to travel between states and what would qualify for a test or whatever. But I think that's fairly inconsequential. I think we'll get that stuff resolved. Operator, maybe 1 more quick one? -------------------------------------------------------------------------------- Operator [44] -------------------------------------------------------------------------------- Okay. Next, we'll go to Raj Denhoy from Jefferies. -------------------------------------------------------------------------------- Rajbir Singh Denhoy, Jefferies LLC, Research Division - MD, Equity Research & Senior Equity Research Analyst [45] -------------------------------------------------------------------------------- Steve, Mike, everybody around me as well. Mike, maybe actually, Steve, I should ask you this question. So prior to COVID, your average Panther was doing something on order of $240,000, $250,000. It's now well over $1 million, maybe close to $1.5 million. When we start to think about the sustainability of this business, right, I think what people are trying to figure out is where that goes. You've given us some detail on your thoughts there, but maybe to put a finer point on it, a year from now, what do you think your average Panther is going to be generating in terms of revenue? -------------------------------------------------------------------------------- Stephen P. MacMillan, Hologic, Inc. - Chairman, CEO & President [46] -------------------------------------------------------------------------------- Yes. I think, Raj, as you well know, it was kind of increasing in a high single-digit, almost double-digit rate per Panther. Exactly where it will be will be so dependent a year from now as to how much COVID testing, what's the COVID pricing. But clearly, it just continues to go up. And with our broader menu, you have 16 approved test and actually now with the 2 additional COVID ones, we're 18, just more and more to be able to put through. I probably don't want to -- it'd be premature to try to give you an absolute number as to where that will be. But I think we just feel great that there'll be more volumes of more tests and more Panthers. And so collectively, just driving higher. -------------------------------------------------------------------------------- Michael J. Watts, Hologic, Inc. - VP of IR & Corporate Communications [47] -------------------------------------------------------------------------------- Yes. Maybe to add to that, Raj, just for a second. I mean, to put a fine point on it. We mentioned in the script, this concept of TORs, which is one thing that we look at a lot internally. We signed in this past year, TOR is representing more than $35 million of year 1 revenue. To give you a sense, I mean, that's more than 50% more than we've ever done in a year before. And in addition to that, there's another 35 million of TORs kind of waiting in the wings for when we have capacity on the Panthers, as well as product availability. So a lot of good excitement around some of our new tests in particular, and I think that's going to contribute to continued steady growth in that pull through. -------------------------------------------------------------------------------- Rajbir Singh Denhoy, Jefferies LLC, Research Division - MD, Equity Research & Senior Equity Research Analyst [48] -------------------------------------------------------------------------------- Helpful. And maybe just lastly, Steve, one quick one. Just your updated thoughts maybe on rapid or point-of-care tests. Any updated thoughts on your desire to get into that business or your views on that, that segment of Diagnostics? -------------------------------------------------------------------------------- Stephen P. MacMillan, Hologic, Inc. - Chairman, CEO & President [49] -------------------------------------------------------------------------------- Yes. Great question, Raj. We are really -- we've got an incredible group of scientists in this company that -- and from the very outset, myself, Kevin, you kind of challenge different ways of thinking and looking at all of these different things. And we are staying very close to our core of really having the best products. When you think about what we do in 3D mammography, what we have with NovaSure, MyoSure, what we've always had in our molecular portfolio, really wanting to make sure that we have the best products with the best of labels. And candidly, there's a lot of point-of-care stuff right now that I would say is being used off-label, particularly being used for screening, when it's not supposed to be. And over time, I think right now, there's a little bit of a Wild West component, where people are just making money, selling tests, getting them out there and saying, hey, run a bunch, whether they're accurate or not. If you test enough, it will work. I think over time, the cream always rises to the top. And there will, like in any market, things will settle out. And I think as things settle out, the superior products with the best labels, testing the right people in the right way at the right time will prevail. And I think we feel really good about that. We've looked at -- we've had -- you can imagine, through distribution agreements, we've had a lot of opportunities to, frankly, even drive more short-term revenue by offering other products through our incredible sales channels and really are staying away from it because we want to make sure that we don't do anything to dilute our long-term brand equity, and want to stay really close to the science. So thank you for asking that. -------------------------------------------------------------------------------- Operator [50] -------------------------------------------------------------------------------- And thank you. That is all the time we have for questions today. This now concludes Hologic's fourth quarter fiscal 2020 earnings conference call. Have a good evening.