Hologic, Inc.

Good afternoon and welcome to Hologic's first quarter fiscal 2021 earnings conference call. My name is Eduardo and I am your operator for today's call. Today's conference call is being recorded. All lines have been placed on mute and I'd like to introduce Mike Watts, Vice President of Investor Relations and Corporate Communications to begin the call.

Thank you, Eduardo. Good afternoon and thanks for joining us for Hologic's first quarter fiscal 2021 earnings call. With me today are Steve McMillan, the company's chairman, president, and CEO, and Carlene Overton, our chief financial officer. Steve and Carlene both have some prepared remarks, then we'll have a question and answer session today. Our first 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 February 26th. 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 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, and we define organic revenue as constant currency revenue, excluding the divested blood screening and sinusure businesses, as well as the acquired assessor business. Finally, any percentage changes 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 McMillan, Hologic CEO.

Thank you, Mike, and good afternoon, everyone. We're pleased to discuss our financial results for the first quarter of fiscal 2021. We are off to a very strong start to the year across all our businesses and major geographies. Once again, our diagnostics division delivered incredible performance by making a massive impact against COVID-19. And our breast health and surgical businesses continued to strengthen. with each returning to growth in the United States, Europe, and Asia Pacific. So our performance was strong and broad-based across both divisions and geographies. As a result, our financial results were exceptional in the first quarter. Let's provide a quick overview. Total revenue was $1.61 billion with non-GAAP earnings per share of $2.86. Organic revenue more than doubled, up 104%, while EPS increased more than fourfold as higher production volumes and 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. With that introduction, I'd like to cover three main topics in my remarks today, which will echo some of the themes from our presentation at the J.P. Morgan Conference earlier this month. First, how our purpose-driven culture is contributing to, and we believe driving, our excellent financial results. Second, how we're making a huge difference in the fight against COVID-19. And third, why we'll be a stronger company on the other side of the pandemic. To begin, many of you will recall that Larry Fink, the CEO of BlackRock, wrote in early 2018 that companies, both public and private, should serve a social purpose. Three years later, we would argue that Hologic is the epitome of such a company. We are an incredibly purpose-driven, highly engaged team that is waking up every day wanting to make a positive difference in the world. And we believe this culture is contributing to differentiated financial performance, both in terms of our COVID response and the faster than expected return to growth in our breast health and surgical divisions. Our employees understand that the bigger our collective impact on the world, the more they and our shareholders benefit. What makes us tick is our strong purpose of enabling healthier lives everywhere, every day. Within this, we have a special passion to champion women's health. But we don't just help women. If, for example, you're one of the tens of millions of people who have had a Hologic COVID test in the last year, you can rest assured that you're getting a high-quality, highly accurate result. That's the promise we make to our customers, which we call the science of sure. Our purpose, passion, and promise have shown up in countless ways since the pandemic began. Some are visible externally, like extraordinarily rapid EUAs or massive increases in production capacity. But many are behind the scenes, from how we rewarded our frontline employees for their heroic efforts during the pandemic, to how our board and management team found safe ways to meet in person, to how we always tried to under-promise and over-deliver on the COVID test commitments we made to customers and governments around the world. We talk about many of these topics in our second annual sustainability report. titled The Power of Purpose, which we just published on our website last week. I'd encourage all our investors, but especially those interested in ESG issues, to take a look. Now let us give you an update on our COVID testing efforts. As you can probably tell from our financial results, we continue to make good progress on our plans to expand manufacturing capacity, for our two COVID assays out of our plants in San Diego and Manchester, UK. Total output increased sequentially compared to the September quarter, which enabled us to provide about 30 million COVID assays to customers, generating revenue of about $745 million. As we have said, we are now selling more COVID tests each quarter than we had ever produced of all of our molecular tests before the pandemic. And we are on track to meet our goal to produce at least 75 million total molecular diagnostic tests a quarter globally by January of 2022. This would represent more than three and a half times our total capacity pre-COVID. a tremendous accomplishment thanks to our employees, our suppliers, and the U.S. government, which is providing financial support. In the first quarter, about one-third of our COVID test revenue came outside the United States, mainly from Europe. COVID testing continues to strengthen our international business, our relationships with customers, our future prospects in diagnostics, and even market access for our other franchises. These COVID sales contributed to total international revenue of $472 million in the quarter, which represented tremendous growth of 145% on an organic basis. At the same time, we are also encouraged that demand for new Panther instruments remains very strong. You might recall that last fiscal year, we placed more than 500 new Panther systems worldwide, more than double our usual run rate. And we are off to an excellent start in fiscal 21 with another 150 shipments in the first quarter alone. We still have a long waiting list for instruments, which we believe reflects the longevity of COVID testing that our customers anticipate. Overall, our global installed base now stands at roughly 2,400 instruments, giving us a robust platform for future growth as more customers come to appreciate our system's best-in-class capabilities. Now, let us shift gears to our third major topic, why we believe our business will be much stronger on the other side of the pandemic. First, it's never been more clear to us that demand for highly accurate molecular COVID testing will remain robust for a while, while we may have become a little numb to infection rates that remain staggeringly high in the United States and globally. But as a reminder, the almost 2 million molecular tests that are being performed daily in the United States today would annualize to a market that's about 17 times bigger than the single largest molecular market before COVID. So while demand will inevitably decline as vaccines roll out, nucleic acid testing is likely to have a long, meaningful tale that extends into fiscal 22 and beyond, with COVID likely remaining our biggest molecular product for years to come. As we have seen, it will take time to manufacture and administer vaccines broadly, and many people will choose not to be vaccinated. The societal need for and focus on COVID testing far exceeds anything we have ever seen before, and the pandemic's emotional toll will last much longer, driving future demand. As public concern around COVID persists, the combination of our huge Panther installed base at facilities close to the patient and our gold standard assay performance have us uniquely positioned to pursue many use cases that will be around for the long term. These include testing before hospital admissions, asymptomatic screening for various purposes, and even confirmatory testing of other less accurate modalities. Studies have shown that these other tests can miss two-thirds of asymptomatic cases, and these false negative results can contribute to super spreader events. Even as the market matures and our production capacity increases, We believe our combination of robust chemistry, innovative engineering on Panther, and differentiated labeling from FDA will help us gain market share. Moving on, the second reason Hologic will be stronger in the future is the significant non-COVID business we are gaining on our rapidly growing installed base of Panther instruments. I don't think it's an exaggeration to say that in the United States, Europe, and Asia, every single Panther that our commercial teams have placed has been with an eye toward the future. They are doing a fantastic job of extending and broadening commercial contracts, winning key strategic accounts, and fueling our razor, razor blade business model. As an indicator of this, last quarter, we discussed tests of record, or TORs, which represent contracted year one revenue from new assay customers. We said that we had achieved a new record in TORs in fiscal 2020 with non-COVID business totaling $35 million in the United States, about 50% more than we had ever done before. This positive trend has actually accelerated in early 2021, with more than $20 million of additional tours in the first quarter alone. That's one reason that momentum in our molecular business, which was already good before COVID, is improving further today, especially in Europe. For example, when we removed COVID assay sales from our molecular number as well as instruments and ancillaries, core assay sales grew roughly 10% globally in the first quarter, more than double the rate a quarter ago. The third reason we believe we will be stronger post-COVID is that thanks to the tremendous success of our diagnostics business, we have been able to use the last several quarters to further bolster our breast and surgical franchises for the future. In breast, we have continued to expand on our strategy to diversify the business across the patient continuum of care. Rather than just placing capital equipment, we are now selling a full portfolio of hardware and software upgrades, interventional tools, and service. While the world has been understandably focused on COVID, we have increased our direct presence with breast health customers and developed and launched products such as Bravera, which is off to a very good start in its relaunch. And most recently, we acquired for $64 million the German company Somatex, a longtime partner of ours, to strengthen our portfolio of breast cancer markers, enhance our commercial presence in Europe, and improve our profitability. In surgical, both our R&D and business development pipelines have been productive, broadening the portfolio of products that we sell through a high-performing, highly engaged sales force. New products such as our Fluent fluid management system and new hysteroscopes are complementing our market-leading MyoSure and NovaSure devices and help that division return to growth in the first quarter well ahead of schedule. On the business development front, In August, we spent approximately $80 million plus future contingent earnouts to buy Assessa Health. Assessa's ProView is a laparoscopic RF product that is used to treat fibroids that MyoSure can't reach. So it's very complimentary to our surgical business and a nice fit for our sales force. And so far, early feedback from our customers has been good. The acquisitions of Assessa and Somatex demonstrate the final reason we will be stronger after the pandemic, the ability to use the healthy cash flow that COVID tests are generating to step up our business development activities. The pending $230 million acquisition of Biotheranostics, which we announced earlier this month, is another good example of this strategy. Biotheranostics, a leader in molecular tests, for breast and metastatic cancers enables us to expand into the adjacent growth market of oncology. More specifically, Biotheranostics has done a great job of developing a strong clinical and reimbursement foundation for their flagship breast cancer index test, which plays an important role in a large but under-penetrated breast cancer market that we know a lot about. In addition, Biotheranostics provides us clinical lab capabilities that we can use to develop markets for novel content down the road. From a financial perspective, Biotheranostics brings more than $30 million of annual revenue, growth rates in excess of 20%, and strong gross margins. We're excited that since we announced the deal, Biotheranostics has received some very good news that will benefit women with early-stage hormone receptor positive breast cancer. The National Comprehensive Cancer Network, or NCCN, included the breast cancer index test in its guidelines to predict the benefit of extended treatment with various endocrine therapies. This should help establish the test as the standard of care for this important clinical question and contribute to increased patient access. Before turning the call over to Carlene, Let me conclude by saying that we are off to an excellent start in fiscal 2021. Our purpose-driven culture is driving excellent execution and performance, both in terms of our COVID tests and the recovery of our other businesses. And we are working hard to ensure that the financial success we are experiencing now will translate into a stronger company down the road. We are confident it will. Now we'll turn the call over to Carlene.