Hologic, Inc.

Good afternoon and welcome to Hologic's third quarter fiscal 2020 earnings conference call. My name is Cody and I'm your operator for today's call. Today's conference call is being recorded. All lines have been placed on mute. I would now like to introduce Mike Watts, Vice President, Investor Relations and Corporate Communications to begin the call. Please go ahead, sir.

Thank you, Cody. Good afternoon and thanks for joining us for Hologic's third quarter fiscal 2020 earnings call. With me today are Steve MacMillan, the company's chairman, president, and CEO, and Karleen Oberton, our chief financial officer. Steve and Karleen both have some prepared remarks today, then we'll have a question and answer session. Our third quarter press release is available now on the investor 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 August 21st. 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 that are referenced in our Safe Harbor Statement that's included 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. As a reminder, we're defining organic revenue as concurrency revenue, less the divested blood screening and sinusure businesses, as well as the acquired supersonic imagined business. 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, Vologic's CEO.

Thank you, Mike, and good afternoon, everyone. We're pleased to discuss our financial results for the third quarter of fiscal 2020. Our results were very strong and reflect the value of our unique set of businesses in a time of great economic uncertainty. To begin, these last several months have been the most challenging, tumultuous, and unpredictable time of my career, but also the most exhilarating and ultimately gratifying There's still a lot of history to be written regarding this pandemic and things can change very quickly in COVID time, but we're very pleased with the significant contributions Hologic has made to human health thus far and excited about our ability to do even more. I am just so proud of our team who are working day and night with customers, regulators, suppliers, elected officials, and others to to address the most pressing problem facing the world today. In the last couple of years we've talked a lot about social responsibility and Hologic's corporate purpose to enable healthier lives everywhere, every day. It is this purpose that inspired our people to do more than seemed possible in the third quarter of fiscal 2020. Never before have we lived into our mission more completely or touched more human lives than during the COVID-19 pandemic. Indeed, our results flow from the positive impact we're making on human health. Karleen will cover the details, but let's start by saying that while the quarter began with great uncertainty and painful decisions to preserve cash flow, it ended with results that were better than we ever envisioned. We posted total revenue of $822.9 million and earnings per share of 75 cents. Revenue grew 8.1% organically and EPS increased 19%. These growth rates, our best organic performance in a very long time, significantly beat our expectations at the start of the quarter. Outperformance was driven by unprecedented demand for our COVID tests on the Panther system, as well as the quicker than expected strengthening of our surgical division. In addition, COVID testing surged late in the quarter, so our results also far exceeded the update we provided via the 8K in June. We'll now highlight three primary points related to COVID. Then Karleen will cover the rest of the business. First, our manufacturing and supply chain team did an amazing job in the quarter to ramp up production of our COVID assays, helping more labs and doctors deliver diagnostic insights when and where they are needed. Second, we believe our diagnostic response to COVID will have short, medium, and long-term benefits for the company as a whole. And third, the strengthening of our international franchises over the years is enabling us to make a big difference in the COVID fight today, which in turn will further accelerate our international business going forward. Let's start with manufacturing and supply chain, an area that doesn't get a lot of attention on the typical earnings call. That's unfortunate Thank you for joining us. Thank you for joining us. and more than 20 times the number of tests performed in March. In total, more than 52 million COVID tests have been performed in the United States. For perspective, this is about 50% more than any other G7 countries combined. Never before has a molecular diagnostic test been scaled up to these volumes this fast. In fact, the amount of COVID testing being done today is about seven times greater than the next most common molecular diagnostic test. Our industry and its employees have a lot to be proud of, and we are striving to do more. In Hologic's case, as soon as we launched our first COVID assay in March, a PCR test that runs on Panther Fusion, we were overwhelmed. Thank you for joining us today. Pre-COVID, we produced about 20 million molecular diagnostic tests a quarter, with the vast majority of this comprising TMA assays for infectious diseases like chlamydia, HPV, and HIV. Since the pandemic reduced demand for these tests, we were able to redirect human and technological capacity to produce our Aptima COVID assay. In essence, we merged the supply chains for our COVID tests and our legacy products to increase COVID production capacity. Second, we set out to double our molecular diagnostics manufacturing capacity by the fall to 40 million tests or more per quarter as we move into fiscal 21. We essentially established a goal to achieve our 10-year expansion plan in about six months. And third, we began working with our partner, Stratech, to roughly double production of our Panther instruments. Based on these actions, in our earnings call three months ago, we shared our goal to produce at least a million COVID tests a week, on average, starting in late May. Thank you for joining us. This enabled us to ship almost 13 million COVID tests to customers, including an extra production lot, leading to sales of $324 million. Based on data from the COVID tracking project, we estimate that we provided one fourth to one third of the test results delivered in the United States during the quarter. How did we get there? Through a combination of ingenuity, investment, and brute force. In terms of ingenuity, we validated the use of one of our specimen transfer tubes, one that is typically used with our thin prep pap tests for COVID testing. This helped total kit capacity catch up to our underlying production of reagents and enabled us to ship millions of additional tests. and we validated a new sample collection and loading method that reduces the use of penetrable caps, a short-term constraint that we discussed last quarter. In terms of investment, we currently expect to spend over $50 million in capital to expand COVID production with about $14 million of that spent through the third quarter. Some of this is being used to install new high-speed filling lines and we are also investing in new custom machinery to produce more penetrable caps. As announced this week, this effort is also being supported by HHS and DOD. In terms of brute force, we are producing 24-7 at our facility in San Diego. Employees from areas like IS and finance were trained to work on the packaging lines While we hire over 150 new operations employees here, more than a 50% increase, we also expanded capabilities at our diagnostics plant in Manchester, United Kingdom, which began producing COVID tests at the end of June. Overall, these actions have provided the capacity to produce at least 1.5 million COVID tests per week, on average. And there is the potential to do more if we are able to work through some remaining supply chain constraints on certain instrument components. The second point is that our diagnostic response to COVID will have short, medium, and long-term benefits for Hologic as a whole. In the short term, the benefits are obvious. Over the next several quarters, COVID testing will help drive strong overall corporate growth even before the base business fully recovers. In the medium term, we expect that the record number of Panther and Panther Fusion instruments that we are placing now will turbocharge our razor razor blade business model and dramatically increase pull through of other assays. These include our new women's health tests, our quantitative virology products, and our respiratory mini panels. To illustrate this, over the last several years, we have placed an average of 228 new Panther systems globally per year. In the third quarter alone, we placed 208 systems. 208. That was made possible by a significant expansion of production capacity at Stratech, and even by refurbishing more than 50 Panthers from our own research labs. At the end of June, our installed base stood at more than 2,000 systems, with almost 45% of these Thank you for joining us. to access our full menu of 16 FDA-authorized tests on Panther rather than the four that are cleared on Tigris. The other 40% of systems either displaced a competitor or enabled a new customer to begin testing. And some of these new customers are specifically targeting nascent growth opportunities such as home sample collections. One way we measure new customer adoption internally, as well as incentivize our sales force, is by tracking what we call tours, or tests of record, and the contracted year one revenue associated with them. A tour is achieved when a customer goes live with a new assay on our system. In 2020, even as COVID is driving tremendous interest in Panther, Thank you so much for joining us. We have seen over and over again that as customers come to know and love the system, they adopt additional tests that drive even more pull-through, and we would expect the same dynamic to play out here. This will drive growth in the long term, even as multiple COVID vaccines are hopefully commercialized. While everyone at Hologic is rooting for successful vaccine development, It's important to note that the strength and duration of immunity still have to be established, and consumer surveys indicate that many people may choose not to be vaccinated. For these reasons, we also forecast there will be a long-term market for COVID testing on a global basis. Just as testing coexists with vaccines today for pathogens such as HPV Hepatitis B, and influenza. The third point we want to make is that the strengthening of our international franchises over the years is enabling us to make a big difference in the fight against COVID today, which in turn will reshape our international businesses going forward. Let us give you a little more color on that. Over the last three years, International sales have been a major growth driver for the company with our base businesses growing at a low double digit CAGR organically. Within this, molecular diagnostics has been leading the charge with growth rates often exceeding 20%. Underpinning this growth, we have invested methodically in our leadership and commercial infrastructure. We also divested signature which enabled our leaders to focus on the businesses they know best. For example, in our European region specifically, we had an installed base of about 220 Panthers in 2016 just before our regional president, Jan Verstreken, joined the company. By the end of the third quarter, however, that number had doubled. By leveraging this installed base, Our team has signed contracts in about a dozen countries that secure about $500 million of COVID testing revenue over the next four quarters, with opportunities to grow this further. The largest contract is with the UK Department of Health. which is worth nearly $190 million. While the vast majority of our COVID revenues in the third quarter came from the United States, expanding production capacity will enable us to serve more global customers going forward. In the third quarter alone, we shipped almost 60 Panther instruments to lab customers outside the United States. And like in the U.S., Our commercial teams are capitalizing on the intense demand for COVID tests to drive pull-through of our other assays, which is a robust opportunity given our lower market shares globally. Before turning the call over to Karleen, let me conclude by saying that the COVID-19 pandemic has really highlighted the importance of diagnostics within the healthcare system. In the future, we hope that this will lead to a strengthening of the public health infrastructure, more favorable reimbursement for diagnostic testing, and hopefully even more appreciation for the value of early detection, which is our core focus. At the same time, our response to the pandemic is also making Hologic a much more successful and influential player within the diagnostics industry. Both domestically and overseas. This is based on the power of our technology and automation and the ability of our people to quickly and effectively respond to public health needs. There is absolutely no doubt that our diagnostics division and therefore our company as a whole is becoming a stronger organization through this challenging time. Now we'll turn the call over to Karleen.