Hologic (HOLX) Presents at 37th Annual Canaccord Genuity Growth Brokers Conference (Transcript)

Hologic, Inc. (NASDAQ:HOLX) 37th Annual Canaccord Genuity Growth Conference August 9, 2017 4:00 PM ET

Executives

Mike Watts - IR
Justin Gaudreau - IR

Analysts

Mark Massaro - Canaccord Genuity

Operator

Question-and-Answer Session

Q - Mark Massaro

All right. Good afternoon everyone. Welcome the 37th Annual Canaccord Genuity Growth Conference. My name is Mark Massaro, I am lead analyst on the Diagnostics and Life Sciences. I'm very pleased to have Hologic back again this year. For those of you who are not familiar, Hologic is a global leader in women's health testing. We’ll be diving through some of the certain businesses today. With me today is Mike Watts, the Head of Investor Relations and Justin Gaudreau also in Investor Relations.

Mike Watts

Guys, thank you very much for joining me today.

Mark Massaro

Thank you for having us.

Mike Watts

Thanks, to Canaccord as well.

Mark Massaro

Great. So I know that some of the folks in the audience are kind of generalist growth investors, so I figured maybe would start talking at a high level about some of your leadership areas, in areas like breast health imaging, diagnostics and just at a high level if you could share what you're most excited about at Hologic today?

Mike Watts

Sure. And thanks again for having us and appreciate all you guys sticking around until the end of the day, as well. So in a couple words, if you're not familiar with the story, Hologic is an innovative medical technology company. We're primarily focused on improving women's health and well-being, primarily through early detection and early intervention.

And you know, maybe I'll try to answer your question Mark in a couple different ways. You know, one from a product perspective, we have a handful, probably four primary businesses. Our two largest businesses our breast health franchise, which is mainly a mammography franchise and our diagnostics business. Both of those in the last quarter represented about 35% of sales or so.

And then we have two smaller businesses, our Surgical business and our Cynosure business each of which are 12% or 13% percent of sales and then a small skeletal franchise as well.

And I think what really unites those businesses across the portfolio is really best-in-class products and large competitive modes and leading market positions. And I don't think I'll walk through all of them, we’ll probably get into that in some of the conversation.

But in our breast health business for example, market leadership position there, mainly based on our Genius 3D mammograms systems. So these are the most advanced mammograms that provide better cancer detection and fewer recalls than traditional 2D. I mean, we lead that market relative to some pretty big players.

Similar thing is true in diagnostics, in diagnostics we are the leader in women's health testing. So these with the infectious disease assays is for Chlamydia/ gonorrhoea, human papillomavirus which causes cervical cancer, trichomonas.

And we're really leading that market on the back of a fully automated platform, which is called the Panther system. Sure we'll get into that a little bit – get a little bit later. So the business is really characterized by top products and that includes in our Cynosure franchise and also Surgical.

You know, I think from a corporate perspective, if I can maybe take the question a different way. You know, the company is evolving from what we used to be a turnaround story, now into a sustainable growth story.

And if you're familiar with the back story Steve MacMillan joined the company very late in 2013. He spend most of his career at Stryker, proceeded to bring on an entirely management team and really stabilize some businesses early on that had been declining through better commercial execution in the United States.

You know that has continued over time, but we are supplementing that commercial execution with some new growth drivers. I think as we go forward the next chapter of the story will come more from the maturation of an R&D pipeline that is now emerging for the first time you know, from the use of our strong cash flows in terms of capital deployment, I'm sure we'll get into Cynosure a little bit later.

And third from an expansion of our international business which were - where we had previously been significantly under-represented. So I'm sure we'll get into some of those points as we get into it.

Mark Massaro

Perfect. I wanted to talk about a couple of the highlights of your quarterly results from just a week ago. The first with your international business. Can you share with us maybe what surprised you in the quarter both in the breast health and diagnostics divisions? And if you have any high level thoughts about how sustainable international growth rates like that can continue?

Mike Watts

Sure. So let me give you a little bit of the history there. I mean, you'll remember this Mark, but if we if we look back so much as six quarters ago, I think it was you know, international was an area of focus on the negative side for Hologic, I think it was our first quarter of 20 - of our fiscal 2016 where that business turned negative.

It I think probably led to the downside by our breast health business, and at the time you know, we said hey there's - this looks a bit like a start up. We've got some building to do and we think we're going to make some progress as soon as 2017. So this fiscal year.

I think two years ago that business changed from being down to being basically flat, last quarter that business was up mid-single digits, this quarter this – that business was up you know, I think 10.5% on a constant currency basis.

So probably a little bit ahead of schedule there. You know, to be clear we still have some work to do. We're not going to declare victory after you know, two quarters of success. But we think over time we are building the foundations for that to be you know, a high single digit, low double-digit grower for a long, long period of time.

We are significantly underrepresented internationally and even in our product categories and this we'll get to your question in breast and in diagnostics. Despite the fact that we sell the same products as we do in the US, despite the fact that we compete against the same large players, our market shares in most international markets are probably half what they are domestically. So we think that as a matter of focus and execution and we now have a leadership team in place in those regions to help drive that business.

You know, in breast specifically, I think people always make a difference about a year and a half ago we moved Kevin Thornal over to fix our relationships with our - with our breast distributors. We have a mix of direct sales OUS with distributor sales and you know, frankly we were not managing those relationships well.

Kevin did a terrific job of putting those deals on better footing, executing the blocking, tackling on a day to day basis and as a result this quarter OUS breast I think was up 13% I am going to say on a constant currency basis. So nice progress there.

You know in diagnostics the story is a little bit different. It is built on Panther. As I mentioned in the introductory remarks, but it is you know catching up from a Panther placement perspective, catching up from a assay approval perspective and then driving utilization on the system.

So we continue to place more Panther instruments. We have now received CE marks remarks for our viral load assays. So these are quantitative tests for HIV, Hepatitis C and Hepatitis B. Those almost doubled our addressable market in molecular testing and those are beginning to contribute to growth.

And then finally, you know we're working with customers to drive utilization on the system. So some really nice progress both in breast health, as well as international. Having said that, we still got some work to do and we're certainly not relaxing there.

Mark Massaro

Got it. Well, I know many of the folks in the audience might have listened to your earnings call last week and there were a little bit of surprises. I think the first was that you moved Kevin Thornal to run your Cynosure business. So the stocks sold about 10% percent. This could be a pretty attractive opportunity to buy Hologic here. Would you like to repeat that?

Yeah. It could be an attractive opportunity to buy Hologic. And so I was wondering if you could just walk me through a little bit about you know, the guide down for the full year fiscal ‘17 revenue guide down $10 million to $25 million. How much of that was related to you know, the new leadership versus any other dynamics in terms of like some sales people that may have defected in there?

Mike Watts

Sure. So you know, unfortunately there's no direct quantitative answer to that. I mean, there's not a regression that will tell us you know, for how that split out. But we have put in place new leadership in – at Cynosure. As I mentioned Kevin Thornal who turned around the OUS breast business is now running that Cynosure business and then another guy who was the former Head of Marketing for Surgical business is now in charge of surgical marketing as well, a fellow named Bill Fruhan. And I think they’re going to do a great job you know with that franchise.

And really their focus in the near term is on stabilizing the US commercial organization and optimizing the US commercial organization. You know, I want to be clear with kind of our perceptions of Cynosure, post the deal. Absolutely nothing has changed about the tailwinds that are benefiting that aesthetics market.

You know, the medium and long-term growth rates, absolutely nothing has changed about our perceptions of Cynosure’s ability to you know play a leadership role in that market. As evidence of that, the international business did well in the quarter, some of the franchises did well, the skin in franchise for example, consumable sales ticked up nicely as we would expect.

But we have seen some challenges in the US sales force. And you know that is sales force attrition that was primarily related to the – of course, the rumour and Cynosure was going to be sold and then the actual sale to us.

So we had some sales force attrition. Most of it occurred in March quarter and some of that continued to a lesser extent in the June quarter. So the guide - the change in the guidance was really to allow for some of that disruption in the sales force and also to you know, at least allow for the possibility that as we get it and begin to change things that that would have a near term effect on sales. So we did lower our guidance for our fiscal fourth quarter, which is the September year end and obviously that created a bit of controversy in the stock.

Now having said that, I think what's important to realize is that we do believe that the issues at Cynosure are very well identified and characterized at this stage. We think they are infinitely fixable and in fact as we move into our fiscal 2018 year, which starts in October you know, there's a lot of stuff working in our favour.

The December quarter as you know is typically seasonally strong for aesthetics. There are two new product launches that Cynosure is planning around that time. One is a new indication for what's called submental fat, so this would be chin fat, where we think we have some nice competitive advantages there, that's in with the FDA.

They're also launching a new platform, a radio frequency platform around that time frame as well. You know, either by the end of the calendar year, maybe in the first quarter of the next calendar year.

In addition by that point, the reps who hit - we have rehired over time will have had about you know six months or so to be in the Hologic system, get trained and be up to speed. So we think as we move into 2018 that we've got some nice growth to look forward to from Cynosure. And so things should improve as we move in our next fiscal year.

Mark Massaro

Great. And maybe just to clarify a comment. I know there is - you hinted to the initial disruption around sales force departures right around the time that the Hologic, Cynosure rumour surfaced and then there was kind of a second wave in the prior quarter.

Can you maybe just directionally share with us the magnitude of the departures were at the similar level the first go around versus what we've seen in the last three months?

Mike Watts

Yeah. I mean, the majority of them are in the first go round, probably don't want to get too much into the specifics for competitive reasons. But you know, certainly enough attrition in the market - in the field force to make a difference in the marketplace.

I mean this is a - this is a business where you know reps calling on doctors and knocking on doors makes a difference and when those positions are vacant, you see the effect on revenue.

Mark Massaro

Okay. And you also indicated on the call that part of the guide down was driven by summer seasonality, right?

Mike Watts

The quarter that ends in September, you know, included July and August you know, those are seasonally a little bit weaker for the aesthetics industry, probably even more so for us this time around because the European business has continued to do well and therefore makes up a bigger portion of sales. So you know clearly August in Europe is not a terribly busy time for anything except holiday. So we try to factor that in as well.

Mark Massaro

Got it. And so anything you're seeing competitively in the marketplace that might have changed in the last couple of quarters relative to say Zeltiq and other - whether it's commercial marketing initiatives that maybe Zeltiq has done that has changed, how you guys think about the aesthetics market?

Mike Watts

Yes. So you know, obviously Zeltiq has a new owner. They were acquired by Allergan. It's a company that we know and have a lot of respect for. You know, I think the - I think a big, I know if it's a change, but certainly the magnitude of some of the things they're doing from a direct consumer advertising standpoint is probably one thing I would highlight.

You know, maybe many of us in the room have seen ads for their body sculpting system. Now – and I think they probably capitalized a bit on the disruption that has occurred at Cynosure in recent quarters.

Now having said, that there are a lot of things underway that we think will put us more on equal footing and get us back to our rightful position in the marketplace. I did mention some new indications for sculpture, which is our non-invasive body contouring product. Some of them have already been received. So we now have a label approval to use the product on the back and on the thighs in addition to the - to the flanks and the abdomen.

And as I mentioned we have filed for an approval for what's known as the submental indication where we think we're going to have some nice advantages and be you know comparable to the areas that can be treated with the competing products. So as that get approved later this year we think that's going to help.

In addition, we are just now getting our own DTC program off the ground as well. We think we can be fairly efficient and targeted with and I think that will help support demand in the marketplace as well.

Mark Massaro

That's great. I know in past you’ve used celebrity spokesperson in your DTC going back to Sheryl Crow a few years ago. Is there potentially like a celebrity that you think would be…

Mike Watts

Mark Massaro…

Mark Massaro

I mean, I guess…

Mike Watts

Celebrity body sculpting, maybe a little under here…

Mark Massaro

But you know, should we be thinking along those lines, are you thinking more traditional any color on your PTC?

Mike Watts

Yes. So I think the - this is an area where Cynosure had not had a lot of capability in the past. They were you know beginning to dip their toe into these PTC markets, but hadn't done it in any kind of scale. Now if you think back to what we've accomplished in our breast business, that's where Sheryl Crow was used.

But we've also done a lot of online targeted DTC marketing to help drive patients to centers that have the Genius 3D mammography and that has helped to grow the business and it's also helped to grow the customer base for those mammography centers.

And I think in some of those same principles that we would intend to apply to Cynosure DTC, so targeted online base, work with the customer to help build their businesses.

Mark Massaro

Got you. Can you share or provide a little more color on the radio frequency program. Are there new areas, new indications or should we think of it more as a new technology similar indication?

Mike Watts

Sure. So this is a platform that before we acquired Cynosure they had talked about as being in the pipeline. They do have a radio frequency product or an RF product today it’s called Pelleve. It is typically used for aesthetic applications.

So the new RF platform which we have filed domestically for would be a replacement for Pelleve initially. And you know, think of it as a new platform. And over time we would look for it to play a role in at least three different areas, first initially would be aesthetic procedures, so this would be wrinkle removal you know, moles, skin tags, these kind of things.

Second and over time would be some women's health applications that would be complimentary to our MonaLisa Touch product. And then third and furthest down the road would be some general surgical applications as well. So we think this is a platform that over time will be you know, a nice base from which for us to grow in some different areas.

Mark Massaro

Perfect. I will open it up to the audience if there are any questions, particularly related to the aesthetics business and I'll come back to the audience later. So I want to move on to diagnostics, here Molecular Diagnostics business grew 20% internationally in high single digits in the US. So that was a very strong performance.

I know on the call you talked a little bit about cross-selling, driving utilization, I was wondering if you could give us maybe an update on Panther utilization. Can you share with us what you're seeing driving the growth in the US and at a high level how should we be thinking about the growth profile for Molecular Diagnostics going forward?

Mike Watts

Sure. And we try to get all those questions sort of in order. If you're not that familiar with the company, our Diagnostics business is really a razor-razor blade model. So we will typically place a Panther system in the razor with a lab customer.

And oftentimes we – it will be on the reagent rental model. So they won't actually pay anything for an upfront, but then we recoup the cost of that instrument through assay sales over time.

So when Mark talks about Panther utilization, what he's talking about is the pull through on those systems. So the dollar amount of the assays that are run over some period of time. And you know, we try to update that not every quarter, but at least annually.

So at the end of our last fiscal year I think we said that utilization was about $190,000 for each Panther instrument on an annual basis. So that's pretty unheard of in the diagnostics industry. And that number has been growing since that point, probably I don't want to give you a spot you know, spot estimate, but that number has been growing since that point.

As our sales force does a much better job of helping the customer, you know, get their customer to test the guidelines. So despite the volume and testing that’s done today for things like chlamydia, gonorrhea, most people who are sexually active are not treated according to the guidelines or tested according to guidelines of the CDC and others. So it's working with our customers to help build their business in that way.

And that's been quite successful from a market expansion perspective. You know, our market shares are already very high in diagnostics, so there's probably not a ton of headroom to grow those further, but we can certainly work with customers to expand the overall market.

You know, international, we touched on that a little bit before, that's more Panther placements that's you know driving utilization on those and adding the menu. And that's what's kind of netted out to that very healthy growth OUS off a small base admittedly. Our OUS Molecular business is probably you know bit more than $20 million bucks something like that, but growing very nicely.

And I think that going forward you know, certainly molecular diagnostics can and should be you know a creative overall company – to company growth rates. You know, you're never going to be able to stay at that 20%, 30% level forever. Internationally that will kind of come back to Earth a little bit with a lot bigger numbers, but certainly it will be accretive for growth going forward.

Mark Massaro

And then you know, you’ve got Panther Fusion, which is the sidecar with PCR assays. I know last week in San Diego you gave me a good view of the Panther. Can you just speak through what the new assay content might mean to reagent utilization in placements? And I'd be curious what inning you think you guys are in placing Panthers both in the US and OUS?

Mike Watts

Sure. So let me do the baseball thing first. You know, I think in the US we are probably - you know, we place a lot of Panthers. I mean, we probably have around 500 Panthers place now globally. You know, that probably splits something like 60 40 US versus OUS. So we've come a long way in the US, still some headroom, but you know, to use the baseball analogy if it started raining, it would probably be a complete game at this point.

But what's interesting about the US opportunity is the utilization on those Panthers is still very low. Meaning, if you just take the number of assays that are being run through on a daily basis it's only about a third or so of the overall capacity of the platform. So lots of opportunity to add additional menu, like the viral load assays to the women's health menu that’s on there today.

You know, OUS is greenfield. OUS, it’s very early in the game and we look forward to a lot of continued Panther growth for a long time. In terms of the Fusion, I would encourage you to look at the Fusion from a long-term perspective.

As you saw last week at AACC, I mean, Fusion is a sidecar that attaches onto an existing Panther instrument in the field, it's kind of a one day upgrade in the field and it does two very important things for us.

One is it gives us the ability to run PCR based test, as opposed to TMA based test onboard the system. So it's a different amplification technology that each of which has strengths and weaknesses.

So as we're looking at developing a new test for a particular target if it makes the most sense on PCR we can do that, in R&D lab if it makes the most sense on TMA we can do that as well.

In addition, what Fusion offers us is the ability to do different kinds of test. So the Panther side of the instrument is really good at doing super high volume test that uses liquid reagents, the Fusion side has a different assay format, it's a little cartridge.

You know, about as big as your finger, that has reagents that are stable onboard for a much longer period of time. So much more conducive for test that maybe don't have the volume of the committee Chlamydia, gonorrhoea, but do sell at higher price points.

So the way to think about Fusion is to give customers the ability over time to consolidate the vast majority of their testing on one system, that being the Panther fusion, so it enables us to knock out competitive boxes and they can just centralize their testing on Fusion.

Now over time the menu will expand, the first menu that we are developing as you learned last week is really the respiratory test, so that is three separate respiratory assays for things like flu, parainfluenza, rhino, things like that between these three test.

Those are not huge markets, and they are seasonal and largely based on flu testing. But over time we think that you know, Panther will really become the center of – Panther Fusion will become the center of the clinical lab.

Mark Massaro

Got it. Thank you. All right. So a moving to Breast Health. We're half way - more than half way through here. So you grew 13% currency neutral OUS. I think you declined about 2% in the US, did you see anything onetime in nature last quarter.

And I guess I'm just trying to figure out what kind of pathway for growth you have internationally, if you could give us a sense for whether more is new to Hologic business or upgrades to 3D from 2D?

Mike Watts

Yes. So your numbers are right. We were down just fractionally in the US in Breast Health in the quarter. We do not think that is a lasting state to be hundred percent clear about that. You know, we are in the process of launching several new products in Breast Health.

One of them is already on the market, that's our Affirm Prone Biopsy system. That has been building nicely, over the course of this year should be bigger still in 2018. Around the end of the year we will also launch an entirely new and we think revolutionary closely biopsy system called Brevera, which will be additive to next year's growth.

And in our most recent call last week, we talked for the first time about two new – two completely new mammography systems that help us better segment the market. You know, one is a high end system that provides a new detector, better detection capabilities, better 2D reconstruction, more comfort features for the patients, a new breast stabilization system you know, breast density software. So really the high end - you know, high end system to extend our leadership position in that portion of the market.

Then we also talked about kind of a defeatured 3D as well for that lower volume segment of the market that perhaps doesn't need all the bells and whistles that we have in our current platforms, touch screens and power controls and height adjustments and things like that.

So you know, we think with that refreshed product portfolio and I'll tell you our Breast Health business deserves a lot of credit for you know, developing and nurturing a pipeline that is just now coming to fruition.

We do think the Breast business can improve from the level that you saw in the third quarter. And you know continue to be you know, not a - it's not a double-digit grower to be clear, but we think it can be a low single digit grower going forward.

Mark Massaro

Got you. I know - if I have this right, the lower volume new product I think is 3D performance, higher one is 3D Dimensions. Should we think of 3D Dimensions as a potential replacement of 3D tomo? Is that the natural progression. I guess I'm trying to understand if this is you know, ever placement for 3D tomo both OUS and US?

Mike Watts

Well, it's still 3D tomo, to be clear. It's just better, 3D tomosynthesis. So you get the same benefits that you're seeing today. You know with our existing product so much better cancer detection, fewer recalls. We're the only company with a specific claim to be better for women with dense breasts, as you know that's about roughly half the population you know, really important because about I think 35 states have enacted laws now where women have to be notified of their density – breast density status.

So you know, it is an upgrade over what we were selling today, which is already the best in the market and we think that for those customers who are really early adopters, who might have gotten their original 3D system in the 2011, 2012 timeframe and are just now beginning to think about their next system to stay on the cutting edge, that they would take look at this.

Mark Massaro

Got it. We have two minutes left and I want to focus on potential strategic opportunities. Obviously, you divested the blood screening business, you made a relatively large deal in Cynosure.

How should we be thinking about maybe some of the pipeline of deals you looked at over the last year or so. And whether or not the recent, what I would call, blip at least on Cyno, does that impact some of the strategic rationale you make going forward?

Mike Watts

Yes. So you know, we're a company that's blessed with really strong free cash flow, well in excess of $500 million of free cash. So that gives us quite a bit of flexibility. The first priority for that cash in the near term is as you know we've got some convertible debt that's callable in December and March of next year that we'd like off of our balance sheet. You know, that's face value about $530 million I think, cost us much more than that to take it out. So I think that’s the first priority.

But at the same time we do continue to look for small tuck-in acquisitions in all of our businesses. We recently acquired for example the German distributor of our Breast Health products, I think that was about a $20 million transaction.

And certainly we look for those kinds of opportunities. As we as we go forward we think we have more than enough capacity to do small tuck-ins, certainly nothing like the size of Cynosure, but rather opportunities to put in other products in our sales reps bags to leverage the existing channel, those kinds of things.

Mark Massaro

Wonderful. I'm afraid we're out of time. Mike, Justin, thank you very much for coming back.

Mike Watts

Thanks.