Q2 2021 Hologic Inc Earnings Call

April 28, 2021

[music].

Good afternoon, and welcome to Hologic second quarter fiscal 2021 earnings conference call. My name is Jenny 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.

Thank you Jenny and good afternoon, and thanks for joining us for Hologic second quarter of fiscal 2021 earnings call with me today are Steve Macmillan, The company's chairman, President and Chief Executive Officer, and Colleen over to our Chief Financial Officer, Stephen Hurly and both have some prepared remarks, then we'll have a question and answer session.

Our second 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 may of 'twenty one.

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 the Safe Harbor statement 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, we define organic revenue as constant currency revenue, excluding the divested blood screening business as well as the acquired assessor buyout Aeronautics and <unk> businesses.

Finally, any percentage of changes any percentage changes, we discussed 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 CEO. Thank.

Thank you Mike and good afternoon, everyone. We're pleased to discuss our financial results for the second quarter of fiscal 2021, we posted excellent financial results overall highlighted by best in class growth rates.

Total revenue was 154 billion and non-GAAP earnings per share were $2 59.

Both in line with our guidance.

Organic revenue doubled driven.

Driven by strong recovery and momentum in our base businesses as well as our continued contributions to the COVID-19 fight on.

On the bottom line EPS more than quadrupled.

Our diversified business model again demonstrated its value in the second quarter as strong growth rates in our core businesses enabled us to meet our overall guidance, even though COVID-19 assay sales were less than expected.

Our base diagnostics business and our surgical franchise, both finished slightly better than forecast, even while overcoming a tough January for U S health care utilization that was driven by increase in COVID-19 cases.

And our breast health Division clearly outperformed as our diversification strategy has led to a faster than expected recovery.

Currently and will cover the revenue and expense details, but before she does I'd like to discuss two primary topics.

When the COVID-19 pandemic began more than a year ago, we set out to accomplish two things in simple terms.

First we committed to make as big an impact as possible against the pandemic.

And second we wanted to ensure that every action we took helped us emerge from the pandemic as a stronger company.

We are clearly accomplishing both goals, which makes us more excited than ever about our future.

In terms of our first goal, helping fight the pandemic on a global scale.

Let's summarize our contributions by focusing on four key numbers.

Our first number.

Is $100 million.

Soon we will ship, our $100 million COVID-19 test to customers, which included $27 million in the second quarter.

At the same time, we have maintained our commitment to provide women's health test by dramatically increasing total molecular diagnostics production capacity.

We are on track with our expansion plans in San Diego and Manchester UK to have the capacity to make at least 75 million tests of quarter across our portfolio by January of 2022.

Our second number is 40.

This is the number of countries in which we have sold COVID-19 tests as we helped battle of what has been and continues to be a global crisis COVID-19.

COVID-19 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-19 sales contributed to total international revenue of $474 million in the second quarter, which represented tremendous growth of 142%.

Our third number is 717.

This is the number of Panther instruments, we have shipped to global customers over the last year, including about 190 in the second quarter.

As a reminder.

In the five years before COVID-19, we shipped an average of 225 Panthers a year.

So we've more than tripled that pace over the last 12 months.

In addition, we are encouraged that demand for Panthers remains very high Ed.

And for all of fiscal 2021, we expect to exceed last year's record placements.

Overall, our global installed base now stands at roughly 2600 instruments up.

Approximately 40% higher than when the pandemic began.

Giving us a robust platform for future growth as more customers come to appreciate our system's best in class capabilities.

And as we have discussed we are seeing this play out with our record levels of new non COVID-19 business on these Panthers.

All of these numbers lead to our fourth number.

Which is $2.35 billion.

This is the total COVID-19 assay revenue, we have generated on a global basis since the pandemic began including $680 million in the second quarter.

And this has contributed very significant kimberly to operating cash flow of nearly $1 9 billion.

Over the last year.

This has enabled us to acquire for companies.

And sign a deal for a thick.

Even while further strengthening our balance sheet.

We will discuss our business development activity more in a minute.

Before we do that we wanted to provide our current perspective on the changes in the COVID-19 testing market that you have all seen with the understanding that the pandemic and its impact on hologic remain highly unpredictable.

Based on publicly available data for the U S. Molecular COVID-19 testing volumes remained very high much higher than for any other molecular test.

But have declined significantly since January based on our better than expected vaccine rollout.

In this context, our U S sales of COVID-19 tests also declined significantly in March and further in April.

We believe that molecular COVID-19 testing demand will likely decline further as vaccines rollout, but remain important into fiscal 'twenty two and beyond.

This reflects the ongoing need for accurate clinical diagnoses the value of testing for infection control purposes, and for so called back to life testing that is helping to reopening economies.

In this environment 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 gain market share customer.

Customers continue to tell us the Panther and optima remain their products of choice and that they intend to consolidate on our platforms.

But we believe many of them are first using up less automated assays before they expire.

Customers had accumulated these tests in the winter when they needed multiple manufacturers to accommodate than higher levels of demand.

This dynamic is further supported by the public asthma data that many of you see which showed that industry wide tests performed are now running ahead of tests shipped.

Indicating that inventory is being worked down.

In response to these market changes, we pivoted in two ways in the second quarter for.

First by selling more COVID-19 tests to our base hospital customers, who want to bring highly accurate testing closer to their patients.

Proving turnaround times and clinical relevance of.

Panther is well positioned for this with first test results being delivered in about three hours.

Notably COVID-19 tests are now being run on Panthers in more than 600 clinical labs in the United States.

This means that COVID-19 is the second most decentralized tests that we sell following only optima combo too which has been on the U S market for roughly 20 years.

Second we pivoted by selling more test internationally as.

As everyone has seen in the news the vaccine rollout is proceeding at different paces around the world.

Europe in particular has struggled with inoculations, increasing the importance of testing.

For example, in the second quarter, almost 40% of our COVID-19 assay revenue came from outside the United States mainly from Europe.

Now, let's shift gears to our second major topic.

An update on how the tremendous impact we've made against COVID-19 has strengthened our business for the other side of the pandemic.

As many of you will recall before the pandemic hit our organic growth rate had been steadily improving to around 5% based on new product international expansion and our early acquisitions now.

Now as we begin our annual strategic planning process, we are confident that organic growth for the next several years.

Excluding COVID-19 assay sales will be higher than it was before the pandemic hit.

In diagnostics, we've used COVID-19 cash flows to broaden our portfolio by buying assets that are growing faster than our base business.

Since the Gen probe acquisition in 2012, we had acquired exactly zero of companies and diagnostics.

But since late February we have completed two deals and announced a third dramatically accelerating our long standing goal to become a more complete diversified diagnostics leader.

In February we closed our $232 million acquisition of <unk>, a leader in molecular tests for breast and metastatic cancers.

Enabling us to expand into the adjacent growth market of oncology.

This business is off to a very strong start.

Mainly on the inclusion of the breast cancer Index test in end CCN guidelines to predict the benefit of extended treatment with endocrine therapies.

A few days after that we close biotherapeutics.

We I'm sorry, a few days after we close by a third gnostics, we acquired <unk>.

Belgian developer and manufacturer of molecular diagnostic assays and epigenetics products for approximately $153 million.

The edge of note, which generated more than $30 million of revenue in the last year will enable us to offer a broader more differentiated menu of molecular diagnostic tests on our fully automated high throughput Panther fusion instrument.

We know <unk> capabilities and assay development well since we have partnered with them since 2016 to develop and manufacture PCR based assays for fusion.

As you might recall the ability to leverage external PCR expertise was one of the reasons, we developed the fusion system years ago.

Now that <unk> note as part of Hologic, we can accelerate those assay development efforts and make many of their CE Mark PCR tests available on our unique platform.

Further enhancing European growth.

Finally earlier this month, we announced our agreement to acquire <unk>, a Finnish developer of innovative molecular diagnostics tests.

And instrumentation for approximately $795 million.

In contrast to <unk>, which helps us leverage our fusion of installed base around the world.

<unk> brings new capabilities that we have been interested in for more than a decade.

Specifically <unk> is in is an innovator in near patient acute care diagnostics, a large rapidly growing area that we don't compete in today.

This market encompasses test for respiratory and gastro intestinal conditions healthcare associated infections and antibiotic resistance.

Others.

Having monitored this space closely over the years, we believe <unk> Novo <unk> platform is a truly differentiated asset with a unique combination of ease of use rapid turnaround multiplexing and low costs.

Moby day AG generated more than $40 million of revenue in calendar 2020.

With a limited commercial presence and no sales in the United States.

So we believe we can accelerate their growth globally, but especially in the United States. Once we get some of their assays approved here.

Before I turn the call over to Carl Lee I wanted to touch briefly on how we also strengthen our breast and surgical businesses during the pandemic.

In breast, we have continued to expand on our strategy to diversify the business across the patient continuum of care.

We now sell a full portfolio of capital equipment.

Hardware and software upgrades intervention tools and service.

While the world has been understandably focused on COVID-19, we have increased our direct presence with breast health customers.

We have launched new software products based on our investments in artificial intelligence.

And we have strengthened our intervention of franchise by re launching provera, which is doing very well and buying soma attacks.

Longtime partner and leading developer of breast cancer markers.

Together all of these strategies health breast health outperformed in the second quarter with total sales exceeding 2019 levels and global growth of seven 3%.

While the mammography market is not quite back to pre COVID-19 levels. We are very pleased with our competitive position and growth outlook for the future.

In the surgical both of our R&D and business development pipelines have been productive broadening the portfolio of products that we sell through of high performing highly engaged sales force.

New products, such as our fluent fluid management system, new history of Scopes, and assesses laparoscopic RF product pro view.

Complementing our market, leading <unk> and <unk> devices.

As a result surgical sales surpassed 2019 levels in the second quarter and grew six 6% on a global basis, even while overcoming a slow January that resulted from reduced procedures in U S regions that were hit hard by COVID-19.

So in conclusion.

I want to emphatically state that I have never been more excited or confident in our future.

We have responded to the world's need for COVID-19 testing in remarkable fashion and we will continue to be there for testing needs around the world.

Even more importantly, we have literally strengthened every one of our businesses.

In every geography and added multiple new growth platforms to our company during the last 12 months.

I am truly amazed at what our team has done and we really look forward to the quarters and years ahead now I will turn the call over to Carlin.

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 touch.

Touch on a few other key financial metrics and finish with our guidance for the third quarter of fiscal 2021.

As Steve said, our second quarter results were excellent as revenue and EPS grew significantly compared to the prior year.

Reported revenue of 154 billion increased 99%.

Organically revenue grew an even 100%.

Driven by strong growth in our base businesses and a healthy contribution from the global COVID-19 testing revenue.

We met our top and bottom line guidance, even as the COVID-19 testing market changed rapidly late in the quarter.

Based on our strong top line.

We significantly improved profitability compared to the prior year.

As a result.

EPS of $2 59.

More than quadrupled in the second quarter, increasing 354%.

Further operating cash flow has continued to be exceptionally strong, which I'll discuss in a moment.

Before I do that let me provide some detail on our divisional revenue results.

And diagnostics, our largest division global revenue of 1.065 billion grew 225% in the second quarter.

This was driven by molecular where sales increased 378%.

Although COVID-19 testing declined sequentially from peak levels in the first quarter demand was still very high.

We shipped about 27 million COVID-19 test to customers generating revenue of $680 million globally.

Excluding COVID-19.

Based on molecular business continue to grow as customers capitalize on the breadth of our assay menu and the strength of Panthers best in class of automation.

Randy on diagnostics that cytology and perinatal businesses grew 1% in the quarter.

In line with trends before the pandemic.

In breast health global revenue of $336 $3 million grew 7%, which we're very pleased with.

Revenue also increased sequentially compared to Q1 and exceeded the second quarter of 2019 on a reported basis.

The division's strong performance with well rounded as of breast imaging grew 6% driven by upgrade packages.

And the interventional business increased 14% driven by provera.

Furthermore, breast health achieved growth in disposable service and even capital versus the prior year period.

Although the capital environment, probably isn't fully back to normal we have been encouraged by the continued improvement in this area.

As customers have learned to effectively manage through the pandemic and become more comfortable making future investments.

In surgical.

Second quarter revenue also exceeded 2019 levels continuing the division's rapid recovery.

Compared to the prior year sales of $114 2 million grew 7%.

As elective procedure volume strengthened throughout the quarter following a challenging January.

The improving macro environment, coupled with multiple new products and of motivated sales force gives us confidence in the future trajectory of the surgical franchise.

Lastly, in skeletal revenue of $22 $6 million declined 7% compared to the prior year.

Overall in terms of geography domestic sales of 1.06 billion increased 85% on a reported basis.

On an organic basis, you rest of revenues was up 87%.

Outside the United States sales of $474 million increased 142%.

Organically sales outside the U S grew 141% a fantastic result that reflects our growing international strength.

Now, let's move on to the rest of the P&L for the second quarter.

Gross margins of 75% increased <unk> hundred basis point, driven by the sales of our high margin COVID-19 test.

Total operating expenses of $277 7 million increased 25% in the second quarter.

This included about $1 3 million of credit from BARDA associated with the development of our COVID-19 assays. This is about $5 million less than in Q1.

The increase in our operating expenses.

Driven by investments in R&D and marketing for future growth as well as incremental expense from the acquisitions that Steve discussed.

Also remember that in the second quarter of 2020, we had begun to pull back on spending given the initial uncertainty of the pandemic.

Our non-GAAP tax rate in the quarter was 21, 2% slightly lower than forecast driven by a favorable geographic mix of income primarily from sales of COVID-19 assays outside the United States.

Putting this all together our operating margin increased 2500 40 basis points to 56, 9%.

Net margin increased 20, 380 basis points to 43, 8%.

As a result, non-GAAP income finished at $674 1 million and non-GAAP earnings per share of $2 59.

In line with our guidance and more than four times the prior year period.

Before we cover our guidance I'll quickly touch on a few other financial metrics.

Driven by demand for our COVID-19 test and the strong performance of our base business cash flow from operations of $552 million in the second quarter.

These strong cash flows have given us tremendous financial and strategic flexibility.

For example, in the second quarter alone, our operating cash flow essentially paid for $568 million of productive capital redeployment.

Specifically, we repurchased one 6 million shares of stock for $120 million.

Close to Soma tech sales for $63 million.

Acquired bioterror gnostics for $232 million.

But <unk> for $153 million.

As Steve said, we believe these acquisitions will make hologic, a startup company as the pandemic subsides and sets us up for faster growth.

Overall, we had $816 million of cash at the end of the second quarter and our leverage ratio was <unk> seven times.

We intend to continue to put our cash to work on a combination of division led tuck in acquisitions and share repurchases that improve our top and bottom line growth rates.

Finally on ROIC with 33, 4% on a trailing 12 month basis, a significant increase of 2090 basis points.

Before we open the call for questions, Let me discuss our expectations for the third quarter of fiscal 2021.

While we anticipate that fiscal 2020, one will be an excellent year for Hologic overall COVID-19 testing revenue remains highly unpredictable. So we are continuing our recent practice of providing a single quarter of guidance today.

And our third quarter of fiscal 2021, we expect strong financial results again with total revenue in the range of 1 billion to 107 billion, representing constant currency growth of 18% to 26% versus the prior year period.

Ed.

As a reminder, in the third quarter of 2019 and lead generated about $850 million of revenue, which also included the divested cynosure business.

We expect to grow above those pre pandemic levels.

In our base businesses, we expect continued momentum and recovery to generate very strong revenue growth rates compared to the prior year, given the negative impact of the pandemic a year ago.

In terms of COVID-19 assay sales of the market remains unpredictable as discussed.

While trends seem to be stabilizing today the environment certainly could change again in may or June depending on a number of factors.

So we're going to be very cautious with our third quarter guidance and get back to our usual practice of providing conservative estimates that we have high visibility on.

If demand exceeds our current expectations, we are poised to deliver for our customers.

There's a lot we don't know, but what we do know is that our assays and systems are best in class and that we have Panthers in all of the right hospitals and labs.

So we are confident that we will get more than our fair share of the ongoing demand.

With this background, we expect sales of our COVID-19 test to range from $200 million to $250 million in the third quarter.

In addition, COVID-19 related items in diagnostics, such as collection kits instruments and ancillary are expected to be down 40% to $45 million sequentially.

Our third quarter guidance includes of that more than $20 million of revenue from some attacks bioterror Gnostics and Diane note.

Backing this out as well as of $9 million of expected blood screening revenue, we expect organic revenue growth of 15% to 24% in the quarter.

This is excellent growth against a difficult comp as we generated $324 million of COVID-19 assay sales on the prior year period.

Beyond revenue here are a few other points on guidance. Our guidance does not include the impact of the pending <unk> acquisition, which is expected to close early in our fourth fiscal quarter.

It does however include a full quarter of expenses from Bioterror, Gnostics, and Dianne <unk>, which will contribute to a sequential increase in total operating expenses.

Below operating income I would point out that we expect other expenses net to increase to about $25 million in the third quarter.

Our guidance is based on a tax rate of 21, 5% and diluted shares outstanding of $261 million for the quarter.

All of this net debt to expected EPS of $1 to $1 15 in the third quarter.

This would translate into very strong growth rates of 33% to 53% that significantly outpaced revenue, even as an interest increased investments for future growth.

As you update your forecast, let me remind you that macro uncertainty due to the pandemic is still high we would therefore 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 showed tremendous growth in the second quarter and posted results that met our guidance.

We continue to make a huge impact on the pandemic and on women's health globally.

Further with the organic investments and multiple acquisitions I am confident that we will emerge from the pandemic a stronger larger faster growing company.

With that I will ask the operator to open the call for questions.

<unk> limit your questions to one plus a related follow up then return to the queue.

Operator, we are ready for the first question.

Thank you.

And if you would like to ask a question. Please signal by pressing star one on your telephone keypad and if you're on speakerphone make sure. Your mute function is turned off for all of your signal for each of our equipment.

We will go first to Jack Meehan of Nephron research.

Thank you and good afternoon.

Hey, Jack.

Do you have currently and I appreciate all the color on the many dynamics at play when it comes to COVID-19 testing I was wondering as you look at the guidance for the upcoming quarter, how much of the sequential step down.

Do you say is related to kind of burn down of inventory that some of the channel.

And if you'll humor me how are you thinking about longer term demand for COVID-19 testing given all of the additional capacity that you're building.

Yes, Jack it's a great question you know if we dimensionalize, we clearly see the inventory bleeding down both in that.

Tail it really throughout last quarter and were assuming continuing to bleed down this quarter.

<unk> for US, we kind of internally used of toilet paper analogy and I think people can understand this really easy win households, first went into COVID-19, the order and toilet paper from everywhere right.

Multiple brands.

And from multiple vendors and what clearly happened here and I don't think its been as fully.

Grasped in the outside World has been.

All of the vendors stockpiled as much supply as they could get for multiple vendors because we of course had people on allocation. So when you can't get enough. What do you do your order and now they are bleeding through that I think we look forward of the day, where that's probably bled down.

And we're back to test matching test ship matching tests performed I think as that comes.

That would clearly would probably be a little bit of upside for being a little cautious in how we're continuing to to think about that bleed down looking forward for the second part of your question <unk> been all over it.

Looking at everything.

I think we still see this as a meaningful business for us in the future and to put in perspective, the 2% to $250 million that we've guided to for this quarter, while it looks like a.

Big step down from where we've been I would remind everybody on this call that is larger than our entire molecular diagnostics business ever was.

Pre COVID-19.

So we're still looking at a big business and that's why we're continuing to expand our production and <unk>.

Personally I think we're gonna see of pretty strong draw, we're assuming right now, particularly in the U S. Carl June July August could be pretty fallow, I think as things come down people get up.

But dollars to Donuts next fall.

You know what people Didnt get the flu this year, they didnt get sick as people start to get out again, there's going to be a lot of people getting sniffles getting all kinds of stuff and whether it's COVID-19 or not the fear of COVID-19 is going to create an enduring demand.

And by that point all of the peripheral vendors candidly will be gone Ed.

And it's going to be the big folks with the installed basis and the most automated basis that will prevail and so I think we feel really good as we listen to all of our customers.

They want the automated platforms. They are using up their non automated stuff just because they bought it.

And they can't wait to really start just running Panthers in our tests. So.

I don't want to give you an exact number at this point because I think anybody that does is is wildly speculating so.

But I do think this is going to be a big sizable business for us.

Certainly well into.

Our next fiscal year.

But we're planning a little more cautiously near term.

That makes sense.

Pricing looked firm in the quarter at around $25 do you expect to hold at these levels given your positioning with the automated system of the market or do you think it makes sense to get a little bit more aggressive here.

I think we will be more aggressive here as we go forth, particularly of some of our.

Possible vendors by for for example of the school contracts.

Just got sort of delayed.

At this point as supply has ramped up and our ability we can offer some of the.

The cost savings through to our customers and frankly, it will still be.

Very good for us and very good for them, but I would think.

As we looked over the next year, you should expect that to.

To definitely moved down on Carlene, Yeah, I would just say as well Jack as international becomes a bigger piece of it we'll see the overall average ASP he come down for sure.

Yeah.

And so we'll move to our next question from Dan Leonard of Wells Fargo.

Thank you. So two questions first off it looks like your diagnostics business, excluding COVID-19, but of growing about 11% organically first off is that correct and then secondly.

Wouldn't that be a bit better given the easy comps of tours, the higher Panther installed base, but the things we've been talking about.

Yes.

I think.

Couple of pieces there first off we didn't exactly have an easy comp last year of you recall in Europe, our diagnostics, our molecular diagnostics business grew I think well over 30% in the quarter, we had actually a monster quarter of last year.

When we reported at this time, so we had a big number the other piece candidly is.

We're watching the toggle in the shift so still a huge part of the volume was being used for COVID-19 I think as we start to <unk>.

Shifting out here that will start to grow now it's also dependent on women going back for their their health visits and the one thing we have certainly seen I think of this bodes well for the future quarters for us.

Well women's visits are still way down there are still of lot of.

Basically pent up demand that should come back here over time, but it doesn't snap back immediately to a 100% of lot of the inner city clinics.

We have been diverted to doing COVID-19 testing as they start to get back up to speed. So.

Well I think it gives us more runway going forth, but probably slightly.

Less than exciting in the near term on necessarily that base. We also have the ancillary is in some of the other stuff.

That are in those numbers.

Okay.

And then my second question so the COVID-19 views amongst the peer sets are really diverging this quarter.

We're using a flu analogy for what might be durable.

What do you think about that analogy and how defensible is your position and COVID-19 given that you haven't historically had a whole lot of market share in molecular flu and how important is <unk> to this this calculus. Thank you.

Sure certainly over the longer run Mobi day AG is going to.

Play beautifully into that for the coming season as it relates particularly to the United States multi die of will not be a factor for us, but I still think there's going to be a strong need.

Certainly be the multiplex opportunities out there.

But we think theres going to also be a very strong need as we had continued to say through this year to confirm whether.

Something is truly COVID-19 or not as all of the broad test. So we believe with our customer base of hospitals, especially key labs everything else that there is going to be meaningful need to confirm whether people have.

Half of COVID-19 and using a true good molecular platform.

Whereas frankly traditional flu you haven't needed the levels of sensitivity and specificity. When it comes to COVID-19 people are still going to want that.

And moving on well hear from Tycho Peterson of Jpmorgan.

Hey, Thanks, I actually wanted to follow up on them will be Diane question and a couple of others. One on that note I'm just wondering Steve if you could talk a little bit more about the strategy here with diagnosed you talked about the CE marked assay for fusion. So how do we think about bringing those to the U S and timelines to build out the menu and then similarly with multi day IAG youre getting to.

It's the dyad, which similar to Panther. So how do you think about kind of future menu development on those platforms. Obviously, if those are multiplexing, but those platforms versus content on Panther.

Yes.

Clearly the way, we think about <unk> node is all about content on Panther.

And particularly a lot of the you know.

If you look at the European landscape, particularly too there is a much broader base of menu needed over there and we've been a little bit of a competitive disadvantage why we started to work with the edge node in the first place. So it's really filling out that menu with largely still a focus on our European business.

And I think a totally underappreciated aspect of what's happened to this company in the last 12 months I would argue is the strength of our European and frankly broader international business. We are a completely different player in Europe today when looked.

By leading customers leader, leading government everything than where we were 12 months ago. We were barely known and now we are front and center on so many discussions so the edge nodes going to play their beautifully and then for <unk>, we really see.

Over time, especially.

Getting into the acute care settings, as a big big opportunity one of.

Obviously in Europe, where they've already got a little bit of of presence, but ultimately getting everything ported over and cleared here in the United States.

Are we going to be more of a 2020 for 2025.

Massive growth drivers then.

We're being a little conservative in terms of when we get all of that that procure but it is kind of give us another another chance to place of box, that's a different kind of box of different capabilities.

Closer.

Two of the patient setting so I think a really great technology. We know that was a highly competitive process and are really pleased to have prevailed in that.

Okay, and then for the follow up back to kind of of COVID-19 dynamics as we think about the Panthers placed over the past year, what percentage of those went into the reference labs, because I think questions that theyre expecting you know of 50% sequential decline in COVID-19 volumes. This quarter and then on the hospital side, how long do you think of that inventory work down last.

<unk>.

Yeah, we're not going to get into the exact split between the.

For reference Labs, and hospital labs, I would say they were all meaningful when you look at 717 that we have placed I think the magic for us even with reference labs is of volumes come down recall on Tigris, we only have four assays approved on.

On Panther, we have.

In the teens. So it's immediately open up the dialogue with those customers to expand our menu.

Particularly as we come out with the BV CV other things. So I think that's going to be part of the magic for us as well as being there certainly if they do end up getting.

Some help on if they get some of the school contracts or other things, but even as we go into next year. So I think we just feel better poised across the board with our Panther placements because it gives us much more optionality.

Alright next one.

Well most of our next question for Patrick Donnelly of Citi.

Great. Thanks, Steve maybe just a follow up on that last comment it's great obviously TV.

Panther placements of 190 of the quarter.

Stall based obviously much more significant now just kind of wondering I guess when you think out.

The utilization of on demand going forward.

<unk> of clearly built out a lot of capacity given kind of this unprecedented demand for COVID-19 I'm just wondering in your view kind of of key pieces of that fill that gap as COVID-19 pulls back query of topic now, but even if that remains some level of volumes what are the key pieces to kind of fill that where do you see utilization going on on this larger fleet even.

A couple of years out.

Yeah, I think it's hard to probably fully describe our excitement Patrick as to where this goes and let's take it in simple terms.

First off lab folks have been going on adrenalin for the last year trying to get theres been so much automated stuff they were dealing with they all want to consolidate on.

On an automated platform, we are even hearing out of Europe.

On a number of customers just recently, they just can't wait to get our Panthers fully up and running because they know they can run them after hours they don't need to be handheld they don't need people there and so I think as you really look at it everybody is going to go to the best performing most automated machines with the best menu.

And you hate to say it but we say it all the time the cream rises to the top it's hard to beat our Panther system and with our menu and.

I still the number of governors the call of this last year early on asking one of why they wanted more samples was good they kept touring the.

The labs in their states and people kept saying look we need Panthers, we want Panthers that's for when we want so I think as this all.

<unk> out here in the coming months.

That we will do what we've always done really well and continued to grow our menu on Panther and that volume, which as you had seen on average revenues per Panther, we've had a tremendous track record over 789 years now.

That number is just going to continue to go north.

That's helpful. And then maybe just focusing on COVID-19 again can you just talk about the trends in the quarter of clear as you noted we can all see the data that showed a significant softening in March and April any metrics you can give around kind of hologic specific volume decline and then going forward just how youre, specifically thinking about your share.

<unk> continues to shrink here in the U S and then O U S. I know you guys have some some pretty large contracts historically tied to COVID-19 how much can those help provide a level of level of stable volumes and should we expect any more of those or is that dialogue quite a downturn.

That was of great like five part follow up.

The New award Amit.

All of our labor.

I'll I'll try to get it all of the if I if I don't get it hopefully currently the micro paying close attention.

In terms of the quarter January of continued to be remarkably strong.

At the time, we were sitting here, giving our.

Our guidance.

Think about it only 90 days ago vaccines were just barely beginning we were just transitioning from.

One president to another.

Vaccines were in the very early days and.

The post holiday testing was spiking. So then we clearly saw it start to kind.

Kind of turned a little bit in fab in I think March and April of really been a lot of inventory catch up.

And.

Would argue that that will shake itself out here probably.

Really quickly and then we'll be.

Two of good place.

The the longer term contracts on the last part it is why we feel really good about a lot of the approaches we've taken with our governments, particularly around the world.

Where we often signed folks up for six 912 month contracts.

We guaranteed them supply and.

As of right now.

We have not you want to knock on wood, but every customer that we sold into has continued to come back and wants to continue to work with us and I think that's where we feel really good we know of number of the countries that even early on when we said, we couldnt provide them what they wanted and they went elsewhere. They also came back to us.

I think we see that as being more persistent and it is where certainly our international footprint, particularly Europe, and then Australia and new Zealand's of the World.

Obviously, we're not a big player in India.

Don't expect anything there but.

For the major western markets.

We're in a really good place.

And we will move to our next question from Chris Glynn of Cowen.

Alright, thanks for taking my questions.

Two questions. So first on follow up on the COVID-19 dynamic so Steve Hologic has meaningfully accelerated organic and inorganic investments due to the cash flow associated with COVID-19. So this of mind could you just comment on how lower than expected COVID-19 volume and potential cash flow impact.

How you think about making these investments going forward do you need to pull back or are you still going to invest significantly with a longer term horizon in mind.

Yeah, we don't need to pull back on anything because none of the forward looking.

Thinking is any different than what we probably really expected. So I think what's been magical as we use the cash and it's just kind of worked out really well in terms of the investments that we've made.

We never expected. This is why we didn't give guidance for the full year.

We've taken this entire the way we've approached COVID-19 completely has been look there is an opportunity here, we're going to try to maximize it for as long as it's there and eventually we'll get back to our our other business. So I think we feel really good I also say.

The balance sheet is even stronger despite being able to buy shares back on five acquisitions, we're still will still generate a meaningful amount of cash here, even in the coming quarters and candidly, we'll probably hit a point, where theres only so many more assets, we'd be able to metabolize.

In the.

The recent term, especially on the diagnostics and European footprints.

So I wouldn't expect us to be continuing to to try to gobble up as many companies in the coming quarters. As we just have it's been an opportunistic thing but.

Also no reason to pull back.

We're not pulling back on any forward looking plans, yeah, and I would say not different from pre pandemic. We had talked about you are focused on deploying our free cash flow.

To share repurchase and tuck on acquisitions, So we will.

To do that even as of COVID-19 testing comes down.

Okay, Great and then for my follow up question.

I think the 10-Q mentioned that for media and gonorrhea volumes were lower on a year over year basis. So could you just elaborate how sexual health testing of volumes are tracking to pre pandemic levels on when you see that fully recovering and I guess specific to Q3, what do you have built into guidance for non COVID-19 test. Thank you.

Yes, so I think what we're seeing is that business is still recovering that women's still aren't getting back to that well visits to pre pandemic levels, coupled with a temporary guidelines from the CDC about not doing a screening for asymptomatic.

Women. So you know I think that's some of the pressure we see here in the current quarter I.

I think we're assuming that will continue into the next quarter, probably some improvement on well woman visits, but we fully expect of that business will recover as we kind of get back to <unk>.

Pre pandemic life.

Okay.

And we'll go next to Dan Brennan of UBS.

Great. Thanks for taking the questions.

Steve you talked about in the opening remarks, how the company was growing 5% pre COVID-19 and now certainly.

Given the acquisitions on the install base you expect to be a higher level I haven't heard the question I ask maybe I missed it but can you elaborate a little bit on that give us a sense of what youre thinking about for go forward growth rate for Hologic and any other kind of building blocks to get to that number.

Yes, Dan we're not going to articulate on this call exactly what that looks like but clearly as you know for years, we were kind of in that.

Three to four ish range, we were moving it up.

And of that five range and I think as we look at what we've been able to do both organically, but really strengthened.

Acquisitions, we've been able to do put us a lot better off than of COVID-19 hadn't hit right. We probably wouldn't have bought mobi diack biotech all of these things all of which should be.

Accretive to that growth rate. So do we see us moving a little north of that 5%, yes are we ready to commit to an exact range. We have our June board meeting, where we will be looking at our strat plan with our board, but I can just tell you. The early roll ups I think we look at every business being able to be at least <unk>.

Mid single if not.

Moving into the higher single digit and particularly with our international business.

Now on a completely different footing than it ever was we think we will be able to really drive all of our franchise of stronger outside the U S. So.

I think it puts us clearly north of five.

Which I think is a very meaningful step up for this company.

It's not something we've had for me a sustained growth and I think that should not be lost and I'm glad you asked about it.

Great. Thank you, Steve and then as a follow up I know, it's been asked a number of times I'm just wondering.

Given the.

On the COVID-19 strength that you've had on obviously the.

The rate of decay that we see will be important for your topline results, but just how do you think about the right mix. If you will of testing as we move out beyond this year into next and we get to a steady state on COVID-19 between PCR and maybe rapid testing I think you discussed earlier the accuracy is really important here much more so than flow. So we're just trying to.

Kind of think about what the right numbers to plug into models and kind of that aspect will help in terms of the mix that you see unfolding.

As we.

As COVID-19 close thank you.

Yes, Thanks, Dan I think.

Or in the molecular space, but I think as more and more people of had bad experiences candidly with rapid test and I think all of US know of number of people who have had for.

<unk> results.

I think the dynamic is going to play out where theres going to be less testing less people, reaching out to need the immediate test.

And to try to get something Super quick and as you move into a vaccinated world and more of an ongoing monitoring where a few hours of isn't going to make a difference.

I think it's going to revolve much more towards most diagnostic testing, which is you want to use the most sensitive and most specific tests.

And.

We just think that's going to ultimately prevail in that a lot of the euphoria and urgency and design even some of these people calling for everybody to be taken of test every day and none of it of that.

It's just we don't see it that way.

Ultimately the market will decide and you can come back and slap a subset of our heads if we're wrong, but.

I think we see it playing out as of more traditional market over time.

Where it goes to our advantage.

Thanks.

And we'll go next day, Anthony Petrone of Jefferies.

Thanks.

Two follow ups on just all around diagnostics and one on capital Steve maybe on the 200 to 250, if you could give us a break on U S and Europe I know in the past few quarters Europe as it relates to COVID-19 testing.

Was under weighted for Hologic, what was growing so I'm just wondering how Europe plays out and there's still heightened pandemic there and then.

On <unk> and Diane.

I'm wondering what the combined install base of of platforms.

Is there and.

And is there a.

Pathway to consolidating those tests on Panther.

Overtime.

Yes.

In terms of the first part of the COVID-19 I think we will see Europe being a bigger.

Percentage of our revenue probably this quarter.

Even the 40% I think we.

Part of our.

Business, we feel really good about the longer term contracts with book with Europe, and obviously with the rollout of the vaccination is not growing nearly as Ed.

As rapidly there feel pretty good about the persistence of the COVID-19 testing in Europe, and then Michael waving his hand, so Anthony on the second piece of that installed base.

Remember <unk> think of Dyads note as an assay factory. So the priority of there is to really get their PCR expertise in those test on to our fusion installed base rate, which is <unk>.

Roughly 15, or so one 5% of the 2600 that we have out of the field.

<unk> is a little bit of a different situation. The focus there is really on their novo diagonal instrument, which is the more rapid turnaround instrument and Theyre really just getting started with a relatively small installed base even in Europe and.

And in the United States I don't think there of any revenue so clearly some big opportunity there on that novo diagnosed.

It'd be more focused on driving that instrument that necessarily taking their stuff over to Panther.

Oh, thanks understood. Thank you.

We might have on time for one more question operator, if that's okay.

And we'll go to that last question from Vijay Kumar of Evercore ISI.

Yeah.

Hi, this is in the offer of each day, thanks for taking our question.

Now list of gross margin this quarter was down about 200 basis points sequentially.

Youre welcome Susan for some high level. Thank you.

Yeah, that's simply just because of the lower COVID-19 revenue. So COVID-19 revenue is about 745 in Q1 and six eight in Q2, so that decline in that very accretive gross margin revenue was the reason for the decline, but now that its still at 75% is pretty exceptional.

Thanks.

Thanks, Ed.

Robert.

One more question.

Yes, I'll take one more.

And well go to Ivy MA of Bank of America.

Hi, Thank you for our screens of squeezing me in.

So just wanted to follow up on that Rob screening of Attunity.

Steve as you mentioned there are any of the school programs sort of got delayed. So just wanted to see if there's any detail you could share around upcoming catalysts and we.

We could expect those health.

Paul.

Yes, I think the.

The broad approach, we're taking is just trying to be there for our customers of some get the school contracts that'd be great. We'll be there for them. If they don't we will be supporting other stuff. So I think that's probably the only <unk>.

Potential bigger catalyst I think Ivy on the horizon.

But.

Other than and obviously that will really kick in for the fall, but I think there'll be ways that obviously, we'll be working with various customers to be able to help support any of those initiatives, yeah, and we have the pulling claim as well which will be helpful for those screening programs.

Great and quick follow up for the car Inc.

Could you maybe comment more on the margin profiles of the recent acquisition.

And any opportunities for margin upside on those and how long those Michael Thank you.

Yeah, I think you know I think we had talked about Empire out there gnostics is probably a little accretive to the overall gross margin profile of the company, but more in line with diagnostics and I would think that day.

Diane to note at this point, maybe a little less than the overall average and MOV die AG would be a little less than the average at this point, but those are things that as we build those installed base and grow those revenues.

They should get in line.

Yeah.

Thank you.

That is all the time that we have for questions today.

This now concludes Hologic second quarter fiscal 2021 earnings conference call.

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Good afternoon, and welcome to Hologic second quarter fiscal 2021 earnings Conference call. My name is Jenny and I'm your operator for today's call.

Thank you Jenny good afternoon, and thanks for joining us for Hologic second quarter fiscal 2021 earnings call with me today are Steve Macmillan, The company's chairman, President and Chief Executive Officer, and Colleen Overton, Our Chief Financial Officer, Stephen Hurly, and both have some prepared remarks, then we'll have a question and answer session.

Our second 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 for.

Finally, a replay of this call will be archived through may of 'twenty one.

Before we begin I would 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.

Such factors include those that are referenced in the Safe Harbor statement 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 as organic revenue, we define organic revenue as constant currency revenue, excluding the divested blood screening business as well as of the acquired assessor bioterror and optics and diazo of businesses.

Finally on a percentage changes of any percentage of changes we discussed 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 CEO. Thank.

Total revenue was 154 billion and non-GAAP earnings per share were $2 59.

Both in line with our guidance.

Organic revenue doubled driven by strong recovery and momentum in our base businesses as well as our continued contributions to the COVID-19 fight on.

On the bottom line EPS more than quadrupled.

<unk> has led to a faster than expected recovery.

Currently and we will cover the revenue and expense details, but before she does I'd like to discuss two primary topics.

When the COVID-19 pandemic began more than a year ago, we set out to accomplish two things in simple terms.

First we committed to make as big an impact as possible against the pandemic.

And second we wanted to ensure that every action we took helped us emerge from the pandemic as a stronger company.

We are clearly accomplishing both goals, which makes us more excited than ever about our future.

In terms of our first goal, helping fight the pandemic on a global scale.

Let's summarize our contributions by focusing on four key numbers.

Our first number.

Is $100 million.

Soon we will ship, our 100 million COVID-19 test to customers, which included $27 million in the second quarter.

At the same time, we have maintained our commitment to provide women's health tests by dramatically increasing total molecular diagnostics production capacity.

We are on track with our expansion plans in San Diego and Manchester UK to have the capacity to make at least 75 million tests of quarter across our portfolio by January of 2022.

Our second number is 40.

This is the number of countries in which we have sold COVID-19 tests as we helped battle of what has been and continues to be a global crisis COVID-19.

COVID-19 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-19 sales contributed to total international revenue of $474 million in the second quarter, which represented tremendous growth of a 142%.

Our third number is 717.

This is the number of Panther instruments, we have shipped to global customers over the last year, including about 190 in the second quarter.

As a reminder.

In the five years before COVID-19, we shipped an average of 225 Panthers a year.

So we've more than triple that pace over the last 12 months.

In addition, we are encouraged that demand for Panthers remains very high Ed.

And for all of fiscal 2021, we expect to exceed last year's record placements.

Overall, our global installed base now stands at roughly 2600 instruments.

Approximately 40% higher than when the pandemic began.

Giving us a robust platform for future growth as more customers come to appreciate our system's best in class capabilities.

And as we have discussed we are seeing this play out with the record levels of new non COVID-19 business on these Panthers.

All of these numbers lead to our fourth number which is $2.35 billion.

This is the total COVID-19 assay revenue.

We have generated on a global basis since the pandemic began including $680 million in the second quarter.

And this has contributed very significantly kimberly to operating cash flow of nearly $1 $9 billion over the last year.

This has enabled us to acquire for companies and sign a deal for a fifth even while further strengthening our balance sheet.

We'll discuss our business development activity more in a minute.

Based on publicly available data for the U S. Molecular COVID-19 testing volumes remained very high much higher than for any other molecular test.

But have declined significantly since January based on our better than expected vaccine rollout.

In this context, our U S sales of COVID-19 tests also declined significantly in March and further in April.

We believe that molecular COVID-19 testing demand will likely decline further as vaccines rollout, but remain important into fiscal 'twenty two and beyond.

This reflects the ongoing need for accurate clinical diagnosis.

Value of testing for infection control purposes.

And the so called back to life testing that is helping to reopening economies.

In this environment 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 gain market share customer.

Customers continue to tell us the Panther and optima remain their products of choice and that they intend to consolidate on our platforms.

But we believe many of them are first using up less automated assays before they expire.

Customers had accumulated these tests in the winter when they needed multiple manufacturers to accommodate then of higher levels of demand.

This dynamic is further supported by the public adds med data that many of you see which showed that industry wide test performed are now running ahead of tests shipped.

Indicating that inventory is being worked down.

In response to these market changes, we pivoted in two ways in the second quarter for.

First by selling more COVID-19 tests to our base hospital customers, who want to bring highly accurate testing closer to their patients improving turnaround times and clinical relevance.

<unk> is well positioned for this with first test results being delivered in about three hours.

Notably COVID-19 tests are now being run on Panthers in more than 600 clinical labs in the United States.

This means that COVID-19 is the second most decentralized tests that we sell following only after my combo too which has been on the U S market for roughly 20 years.

Second we pivoted by selling more test internationally.

As everyone has seen in the news the vaccine rollout is proceeding at different paces around the world Europe.

Europe in particular has struggled with inoculations, increasing the importance of testing.

For example, in the second quarter, almost 40% of our COVID-19 assay revenue came from outside the United States mainly from Europe.

Now, let's shift gears to our second major topic.

An update on how the tremendous impact we've made against COVID-19 has strengthened our business for the other side of the pandemic.

As many of you will recall before the pandemic hit our organic growth rate had been steadily improving to around 5% based on new product international expansion and our early acquisitions now as we begin our annual strategic planning process.

Yes, we.

We're confident that organic growth for the next several years, excluding COVID-19 assay sales will be higher than it was before the pandemic hit.

In diagnostics, we've used COVID-19 cash flows to broaden our portfolio by buying assets that are growing faster than our base business.

Since the Gen probe acquisition in 2012, we had acquired exactly zero of companies in diagnostics.

But since late February we have completed two deals and announced a third dramatically accelerating our long standing goal to become a more complete diversified diagnostics leader.

In February we closed our $232 million acquisition of Bioterror and optics, a leader in molecular tests for breast and metastatic cancers and.

Enabling us to expand into the adjacent growth market of oncology.

This business is off to a very strong start.

Mainly on the inclusion of the breast cancer index test in MCC and guidelines to predict the benefit of extended treatment with endocrine therapies.

A few days after that we closed biotherapeutics.

We I'm sorry, a few days after we close bioterror Gnostics, we acquired <unk>.

Belgian developer and manufacturer of molecular diagnostic assays and epigenetics products for approximately $153 million.

We know <unk> capabilities and assay development well since we have partnered with them since 2016 to develop and manufacture PCR based assays for fusion.

As you might recall the ability to leverage external PCR expertise was one of the reasons, we developed the fusion system years ago.

Now the <unk> note as part of Hologic, we can accelerate those assay development efforts and make many of their CE Mark PCR tests available on our unique platform.

Further enhancing European growth.

Finally earlier this month, we announced our agreement to acquire <unk>, a Finnish developer of innovative molecular diagnostics tests.

And instrumentation for approximately $795 million.

In contrast to day AD unit, which helps us leverage our fusion of installed base around the world.

<unk> brings new capabilities that we have been interested in for more than a decade spa.

Specifically <unk> is in is an innovator in near patient acute care diagnostics, a large rapidly growing area that we don't compete in today.

This market encompasses test for respiratory and gastro intestinal conditions healthcare associated infections and antibiotic resistance among others.

Having monitored this space closely over the years, we believe <unk> Novo Die AG platform is a truly differentiated asset with a unique combination of ease of use rapid turnaround multiplexing and low cost <unk>.

<unk> generated more than $40 million of revenue in calendar 2020, with a limited commercial presence and no sales in the United States.

So we believe we can accelerate their growth globally, but especially in the United States. Once we get some of their assays approved here.

Before I turn the call over to Carl Lee I wanted to touch briefly on how we have also strengthened our breast and surgical businesses during the pandemic.

In breast, we have continued to expand on our strategy to diversify the business across the patient continuum of care.

We now sell a full portfolio of capital equipment.

Hardware and software upgrades intervention tools and service.

While the world has been understandably focused on COVID-19, we have increased our direct presence with breast health customers.

We have launched new software products based on our investments in artificial intelligence.

And we have strengthened our intervention of franchise by re launching provera, which is doing very well and buying soma attacks, a longtime partner and leading developer of breast cancer markers.

Together all of these strategies health breast health outperformed in the second quarter with total sales exceeding 2019 levels and global growth of seven 3%.

All of the mammography market is not quite back to pre COVID-19 levels. We are very pleased with our competitive position and growth outlook for the future.

In the surgical both of our R&D and business development pipelines have been productive broadening the portfolio of products that we sell through of high performing highly engaged sales force.

New products, such as our fluent fluid management system, new history of Scopes, and assesses laparoscopic RF product pro view of.

Complementing our market, leading <unk> and <unk> devices.

So in conclusion.

I want to emphatically state that I have never been more excited or confident in our future.

We have responded to the world's need for COVID-19 testing in remarkable fashion.

And we will continue to be there for testing needs around the world.

Even more importantly, we have literally strengthened every one of our businesses in every geography and added multiple new growth platforms to our company.

During the last 12 months.

I am truly amazed at what our team has done and we really look forward to the quarters and years ahead.

Now I will turn the call over to Carlin.

Thank you, Steve and good afternoon, everyone.

In my remarks today, I'm going to provide an overview of our divisional sales results.

<unk> through our income statement.

Such on a few other key financial metrics and finish with our guidance for the third quarter of fiscal 2021.

As Steve said, our second quarter results were excellent as revenue and EPS grew significantly compared to the prior year.

Reported revenue of 154 billion increased 99%.

Organically revenue grew an even 100% driven by strong growth in our base businesses and a healthy contribution from the global COVID-19 testing revenue.

We met our top and bottom line guidance, even as the COVID-19 testing market changed rapidly late in the quarter.

Based on our strong top line, we significantly improved profitability compared to the prior year.

As a result.

PFS of $2.59 more.

More than quadrupled in the second quarter, increasing 354%.

Further operating cash flow has continued to be exceptionally strong, which I'll discuss in a moment.

Before I do that let me provide some detail on our divisional revenue results.

And diagnostics, our largest division global revenue of 1.0 to <unk> 5 billion grew 225% in the second quarter.

This was driven by molecular where sales increased 378%.

Although COVID-19 testing declined sequentially from peak levels in the first quarter demand was still very high.

We shipped about 27 million COVID-19 test to customers generating revenue of $680 million globally.

Excluding COVID-19 based molecular business continue to grow as customers capitalize on the breadth of our assay menu and the strength of Panther is best in class of automation.

Rounding out diagnostics cytology and perinatal businesses grew 1% in the quarter in line with trends before the pandemic.

In breast health global revenue of $336 $3 million grew 7%, which we're very pleased with.

Revenue also increased sequentially compared to Q1 and exceeded the second quarter of 2019 on a reported basis.

The division's strong performance with well rounded as breast imaging grew 6% driven by upgrade packages in the interventional business increased 14% driven by Rivera.

Furthermore, breast health achieved growth in disposable service and even capital versus the prior year period.

Although the capital environment, probably isn't fully back to normal we have been encouraged by the continued improvement in this area.

As customers have learned to effectively manage through the pandemic and become more comfortable making future investments.

In surgical.

Second quarter of revenue also exceeded 2019 levels continuing the division's rapid recovery.

Compared to the prior year sales of $114 2 million grew 7%.

As elective procedure volume strengthened throughout the quarter following a challenging January.

The improving macro environment, coupled with multiple new products and of motivated sales force gives us confidence in the future trajectory of the surgical franchise.

Lastly, in skeletal revenue of $22 $6 million declined 7% compared to the prior year.

Overall in terms of geography domestic sales of 1.06 billion increased 85% on a reported basis.

On an organic basis of Euro revenues was up 87%.

Outside the United States sales of $474 million increased 142%.

Organically sales outside the U S grew 141% a fantastic result that reflects our growing international strength.

Now, let's move on to the rest of the P&L for the second quarter.

Gross margins of 75% increase <unk> hundred basis points, driven by the sales of our high margin COVID-19 test.

Total operating expenses of $277 7 million increased 25% in the second quarter.

This included about $1 3 million of credits from BARDA associated with the development of our COVID-19 assays. This is about $5 million less than in Q1.

The increase in our operating expenses.

Driven by investments in R&D and marketing for future growth.

As well as incremental expense from the acquisitions that Steve discussed.

Also remember that in the second quarter of 2020, we had begun to pull back on spending given the initial uncertainty of the pandemic.

Our non-GAAP tax rate in the quarter of 21, 2% slightly lower than forecast driven by a favorable geographic mix of income primarily from sales of COVID-19 assays outside the United States.

Okay.

Putting this all together our operating margin increased 2500, 40 basis points to 56, 9% and.

Net margin increased 2380 basis points to 43, 8%.

As a result, non-GAAP income finished at $674 1 million and non-GAAP earnings per share of $2 59.

In line with our guidance and more than four times the prior year period.

Before we cover our guidance I'll quickly touch on a few other financial metrics.

Driven by demand for our COVID-19 test and the strong performance of our base business cash flow from operations of $552 million in the second quarter.

These strong cash flows have given us tremendous financial and strategic flexibility.

For example, in the second quarter alone, our operating cash flow essentially paid for $568 million of productive capital redeployment.

Specifically, we repurchased one 6 million shares of stock for $120 million.

Clothes, Cystoma tech sales for $63 million.

Acquired by out there on optics for $232 million.

And bought <unk> for $153 million.

As Steve said, we believe these acquisitions will make hologic, a stronger company as the pandemic subsides and sets us up for faster growth.

Overall, we had $816 million of cash at the end of the second quarter and our leverage ratio was <unk> seven times.

We intend to continue to put our cash to work on a combination of division led tuck in acquisitions and share repurchases that improve our top and bottom line growth rate.

Finally on ROIC with 33, 4% on a trailing 12 month basis, a significant increase of 2090 basis points.

Before we open the call for questions, Let me discuss our expectations for the third quarter of fiscal 2021.

While we anticipate that fiscal 2021 will be an excellent year for Hologic overall COVID-19 testing revenue remains highly unpredictable. So we are continuing our recent practice of providing a single quarter of guidance today.

Ed.

As a reminder, in the third quarter of 2019 lead generated about $850 million of revenue, which also included the divested cynosure business.

So we expect to grow above those pre pandemic levels.

In our base businesses, we expect to continue momentum and recovery to generate very strong revenue growth rates compared to the prior year, given the negative impact of the pandemic a year ago.

In terms of COVID-19 assay sales of the market remains unpredictable as discussed.

While trends seem to be stabilizing today the environment certainly could change again in may or June depending on a number of factors.

We're going to be very cautious with our third quarter guidance and get back to our usual practice of providing conservative estimates that we have high visibility on.

If demand exceeds our current expectations, we are poised to deliver for our customers.

There's a lot we don't know, but what we do know is that our assays and systems are best in class and that we have Panthers in all of the right hospitals and labs.

So we are confident that we will get more than our fair share of the ongoing demand.

With this background, we expect sales of our COVID-19 test to range from $200 million to $250 million in the third quarter.

In addition, COVID-19 related items in diagnostics, such as collection kits instruments and ancillary are expected to be down 40% to $45 million sequentially.

Our third quarter guidance includes of that more than $20 million of revenue from some attacks bioterror gnostics and diocesan Ed.

Backing this out as well as of $9 million of expected blood screening revenue, we expect organic revenue growth of 15% to 24% in the quarter.

This is excellent growth against a difficult comp as we generated $324 million of COVID-19 assay sales in the prior year period.

Beyond revenue here are a few other points on guidance. Our guidance does not include the impact of the pending multi day AG acquisition, which is expected to close early in our fourth fiscal quarter.

It does however include a full quarter of expenses from Bioterror Gnostics Andi as you note, which will contribute to a sequential increase in total operating expenses.

Below operating income I would point out that we expect other expenses net to increase to about $25 million on the third quarter.

Our guidance is based on a tax rate of 21, 5% and diluted shares outstanding of $261 million for the quarter.

All of this net debt to expected EPS of $1 to $1 15 in the third quarter.

This would translate into very strong growth rates of 33% to 53% that significantly outpaced revenue, even ethylene crest increased investments for future growth.

Yes.

Before we open the call for questions, let me wrap up by saying that Hologic showed tremendous growth in the second quarter and posted results that met our guidance.

We continue to make a huge impact on the pandemic and on women's health globally.

Further with the organic investments and multiple acquisitions I am confident that we will emerge from the pandemic a stronger larger faster growing company.

With that I will ask the operator to open the call for questions.

Please limit your questions to one plus a related follow up then return for the Q.

Operator, we are ready for the first question.

Thank you.

And if you would like to ask a question. Please signal by pressing star one on your telephone keypad and if you're on speakerphone make sure. Your mute function is turned off for a lot of your signal for each of our equipment.

We will go first to Jack Meehan of Nephron research.

Thank you good afternoon.

Hey, Jack.

Do you have currently and I appreciate all of the color on the many dynamics at play when it comes to COVID-19 testing I was wondering as you look at the guidance for the upcoming quarter, how much of the sequential step down.

You say is related to kind of burn down of inventory that some of the channel.

And if you'll humor me how are you thinking about longer term demand for COVID-19 testing given all of the additional capacity that you're building.

Yes, Jack its a great question, if we dimensionalize, we clearly see the inventory bleeding down both in that.

Tail it really throughout last quarter and were assuming continuing to bleed down this quarter.

Part of for US, we kind of internally used the toilet paper analogy and I think people can understand this really easy.

When households, first went into COVID-19, the order and toilet paper from everywhere right.

Multiple brands.

And from multiple vendors and what clearly happened here and I don't think its been as fully.

Grasped in the outside World has been.

All of the vendors stockpiled as much supply as they could get for multiple vendors because we of course had people on allocation. So when you can't get enough. What do you do your order and now theyre bleeding through that I think we look forward of the day, where that's probably bled down.

And we're back to test matching test ship matching tests performed I think as that comes.

That would clearly would probably be a little bit of upside of being a little cautious in how we're continuing to to think about that bleed down looking forward for the second part of your question you know <unk> been all over it.

Im looking at everything.

I think we still see this as a meaningful business for us in the future and to put in perspective, the 2% to $250 million that we've guided to for this quarter, while it looks like a big step down from where we've been I would remind everybody on this call that is larger than our anti.

Molecular diagnostics business ever was.

Pre COVID-19.

So we're still looking at a big business and that's why we're continuing to expand our production and per.

Personally I think we're gonna see of pretty strong we're assuming right now, particularly in the U S. Carl June July August could be pretty fallow I think as things come down people get up.

But dollars to Donuts next fall.

And by that point all of the peripheral vendors candidly will be gone.

And it's going to be the big folks with the installed bases and the most automated basis that will prevail and so I think we feel really good as we listen to all of our customers.

They want the automated platforms. They are using up their non automated stuff just because they bought it in.

And they can't wait to really start just rubbing Panthers in our tests so.

I don't want to give you an exact number at this point because I think anybody that does is is wildly speculating so.

But I do think this is going to be a big sizeable business for us.

Certainly well into.

Our next fiscal year.

But we're planning a little more cautiously near term.

That makes sense and pricing looks firm in the quarter at around $25 do you expect to hold at these levels given your positioning with the automated system for the market or do you think it makes sense to get a little bit more aggressive here.

I think we will be more aggressive here as we go forth, particularly of some of our.

Possible vendors by for for example of the school contracts.

But you know just got sort of delayed.

At this point as supply has ramped up and our ability we can offer some of the cost.

Cost savings through to our customers and frankly, it will still be.

Very good for us and very good for them, but I would think.

As we look over the next year, you should expect that to.

To definitely move down on Carlene, Yeah, I would just say as well Jack as international becomes a bigger piece, we'll see the overall average ASP should come down for sure.

Yeah.

Thanks for we'll move to our next question from Dan Leonard of Wells Fargo.

Thank you. So two questions per saw it looks like your diagnostics business, excluding COVID-19, but of growing about 11% organically first off is that correct and then and then secondly.

There'll be a bit better given the easy comps of tours, the higher Panther installed base, but the things we've been talking about.

Yes.

I think.

When we reported at this time, so we had a big number the other piece candidly is.

We're watching the toggle in the shift so still a huge part of the volume was being used for COVID-19 I think as we start to ship.

Shift out here that will start to grow now it's also dependent on women going back for their their health visits and the one thing we have certainly seen I think this bodes well for the future quarters for us.

Well women's visits are still way down there are still of lot of.

Basically pent up demand that should come back here over time, but it doesn't snap back immediately to a 100% of lot of the inner city clinics.

I have been diverted to doing COVID-19 testing as they start to get back up to speed. So.

Well I think it gives us more runway going forth, but probably slightly.

Less than exciting in the near term on necessarily that base. We also have the ancillary is in some of the other stuff.

That are in those numbers.

Okay.

And then my second question. So the COVID-19 views of amongst the peer sets are really diverging this quarter.

We're using of flu analogy for what might be durable.

What do you think about that analogy. How defensible then is your position and COVID-19 given that you haven't historically had a whole lot of market share in molecular flu and how important is <unk> to the calculus. Thank you.

Sure certainly over the longer on <unk> is going to.

Play beautifully into that for the coming season as it relates particularly to the United States <unk> will not be a factor for us, but I still think there's going to be a strong need.

Certainly be the multiplex opportunities out there.

But we think there is going to also be a very strong need as we had continued to say through this year to confirm whether.

Something is truly COVID-19 or not as all of the broad test. So we believe with our customer base hospitals, especially key labs everything else that there is going to be meaningful need to confirm whether people have.

Have COVID-19 and using a true good molecular platform.

Whereas frankly traditional flu you haven't needed the levels of sensitivity and specificity. When it comes to COVID-19 people are still going to want that.

And moving on well hear from Tycho Peterson of Jpmorgan.

Hey, Thanks, I actually wanted to follow up on them will be Diane question in a couple of one on Dag node I am just wondering Steve if you could talk a little bit more about the strategy here with diagnosed you talked about the CE marked assay for fusion. So how do we think about bringing those to the U S and timelines to build out the menu and then similarly with multi day youre getting to.

On the equity dyad, which somewhat of Panther. So how do you think about kind of future menu development on those platforms. Obviously those are multiplexing, but those platforms versus content on Panther.

Yes.

Clearly the way, we think about <unk>. It is all about content on Panther.

And particularly a lot of the.

Over time, especially.

Getting into the acute care settings, as a big big opportunity first of.

Obviously in Europe, where they've already got a little bit of of presence, but ultimately getting everything ported over and cleared here in the United States.

Give me more of a 2020 for 2025.

Massive growth drivers then.

We're being a little conservative in terms of when we get all of that that proved here, but it's going to give us another another chance to place of box, that's a different kind of box of different capabilities.

Closer.

Two of the patient setting so I think a really great technology. We know that was a highly competitive process and are really pleased to have prevailed in that.

Okay, and then for the follow up back to kind of of COVID-19 dynamics as we think about the Panthers placed over the past year.

What percentage of those were at the end of the reference labs, because I think questions said, they're expecting 50% sequential decline of COVID-19 volumes. This quarter and then on the hospital side, how long do you think of that inventory work down lasts.

Yes, we're not going to get into the exact split between the.

On Panther, we have.

In the teens. So it's immediately opening up the dialogue with those customers to expand our menu.

Particularly as we come out with the BV CV other things. So I think that's going to be part of the magic for us as well as being there certainly if they do end up getting.

Alright next one.

One of your next question for Patrick Donnelly of Citi.

Great. Thanks, Steve maybe just to follow up on that last comment it's great. Obviously, TV Panther placements of 190 of the quarter.

Stall based obviously much more significant now just kind of wondering I guess when you think out.

About the utilization of demand going forward.

<unk> of clearly built out a lot of capacity given kind of this unprecedented demand for COVID-19. Just wondering in your view of kind of a key pieces of that fill that gap as COVID-19 pulls back clearly, it's operating now, but even if that remains some level of volumes what are the key pieces to kind of fill that where do you see utilization going on on this larger fleet even.

A couple of years out.

Yes, I think it's hard to probably fully describe our excitement Patrick as to where this goes and let's take it in simple terms for.

First off lab folks had been going on adrenalin for the last year of trying to get theres been so much automated stuff that we're dealing with they all want to consolidate on.

On an automated platform, we are even hearing out of Europe from a number of customers. Just recently, they just can't wait to get our Panthers fully up and running because they know they can run them after hours they don't need to be handheld they don't need people there and so I think as you really look at it everybody is going to go to the best.

<unk>, most automated machines with the best menu.

And you hate to say it but we say it all the time the cream rises to the top it's hard to beat our Panther system and with our menu and.

I still the number of governors that call of this last year early on asking one of why they wanted more samples was good they kept touring the.

The labs in their states and people kept saying look we need Panthers, we want Panthers thats. The one we want so I think as this all.

<unk> out here in the coming months.

That we will do what we've always done really well and continued to grow our menu on Panther and that that volume, which as you had seen on average revenues per Panther, we've had a tremendous track record over 789 years now that number is just going to continue to go north.

That's helpful. And then maybe just focusing on COVID-19 again can you just talk about the trends in the quarter of clear with you notice. We can all see the data that showed significant softening in March and April any metrics you can give around kind of hologic specific volume decline and then going forward just how you're specifically thinking about your share as the <unk>.

<unk> continues to shrink here on the U S and then O U S. I know you guys have some some pretty large contracts historically tied to COVID-19 how much can those help provide a level of level of stable volume and should we expect any more of those or is that dialogue quieted down.

That was of great like five part follow up.

For the New award.

But as all of our lately.

I'll try to get it all of it.

If I don't get it hopefully correlated Mike we're paying close attention.

In terms of the quarter January continued to be remarkably strong.

At the time, we were sitting here, giving.

<unk>.

Think about it only 90 days ago vaccines work John.

Just barely beginning we were just transitioning from one president to another.

Vaccines were in the very early days and the.

Of the post holiday testing was spiking. So then we clearly saw it start to kind.

And.

Would argue that.

That will shake itself out here probably.

Pretty quickly and then we'll be.

Two of good place.

The the longer term contracts on the last part it is why we feel really good about a lot of the approaches we've taken with our governments, particularly around the world.

Where we often signed folks up for six 912 months of contract.

We guaranteed them supply and.

As of right now.

I think we see that as being more persistent and it is where certainly our international footprint, particularly Europe, and then the Australia and New Zealand for the World.

Obviously, we're not a big player in India.

Don't expect anything there but.

For the major western markets.

We're on a really good place.

And we will move to our next question from Chris one of Cowen.

Alright, Thanks for taking my questions I have two questions. So first on follow up on the COVID-19 dynamic so Steve Hologic has meaningfully accelerated organic and inorganic investments due to the cash flow associated with COVID-19. So with this in mind could you just comment on of how lower.

The expected COVID-19 volume and potential cash flow impact how you think about making these investments going forward do you need to pull back or are you still going to invest significantly with a longer term horizon in mind.

Yeah, we don't need to pull back on anything because none of the forward looking.

Thinking is any different than what we probably really expected. So I think what's been magical as we use the cash.

It's just kind of worked out really well in terms of the investments that we've made.

We never expected. This is why we didn't give guidance for the full year.

We've taken this entire the way we've approached COVID-19 completely has been look there is an opportunity here, we're going to try to maximize it for as long as it's there and eventually we'll get back to our other business. So I think we feel really good I also say.

The balance sheet is even stronger despite being able to buy shares back done five acquisitions, we're still will still generate a meaningful amount of cash here, even in the coming quarters and candidly, we'll probably hit a point, where theres only so many more assets, we'd be able to metabolize.

In the.

The recent term, especially on the diagnostics and European footprints.

So I wouldn't expect us to be continuing to to try to gobble up as many companies in the coming quarters. As we just have it's been an opportunistic thing but.

Also no reason to pull back.

No we're not pulling back on any forward look plants, yes, I would say not different from pre pandemic, we had talked about focused on deploying our free cash flow.

On to share repurchase and tuck in acquisitions. So we will continue to do that even as of COVID-19 testing comes down.

Okay, Great and then for my follow up question I think the 10-Q mentioned that for media and gonorrhea volumes were lower on a year over year basis. So could you just elaborate how sexual health testing of volumes of tracking to pre pandemic levels on when you see that fully recovering and I guess specific to Q3, what do you have built.

Guidance for non COVID-19 test thank you.

So I think what we're seeing is that business is still recovering that women's still aren't getting back to that well visits to pre pandemic levels.

Bold with you know of temporary guidelines from the CDC about not doing a screening for asymptomatic.

Women. So you know I think thats some of the pressure we see here in the current quarter I.

I think we're assuming that will continue into the next quarter, probably some improvement on well woman visits but we.

We fully expect of that business will recover as we kind of get back to.

Pre pandemic life.

And we'll go next to Dan Brennan of UBS.

Great. Thanks for taking the questions.

Steve you talked about in the opening remarks, how the company was growing 5% pre COVID-19 and now certainly given the acquisitions and the install base you expect to be a higher level I haven't heard the question I ask maybe I missed it but can you elaborate a little bit on that give us a sense of what youre thinking about for go forward growth rate for Hologic and any other kind of building.

To get to that number.

Yes, Dan we're not going to articulate on this call exactly what that looks like but clearly as you know for years, we were kind of in that.

Three to four ish range, we were moving it up.

And of that five range and I think as we look at what we've been able to do both organically, but really strengthened.

Acquisitions, we've been able to do put us a lot better off than of COVID-19 hadn't hit right. We probably wouldn't have bought <unk> biotech all of these things all of which should be accretive to that growth rate. So do we see us moving a little north of that 5%, yes are we ready to commit to it.

Jack brand, we have our June board meeting, where we will be looking at our Strat plan with our board, but I can just tell you. The early roll ups I think we look at every business being able to be at least mid single if not.

Moving into the higher single digit and particularly with our international business.

Now on a completely different footing than it ever was we think we'll be able to really drive all of our franchise of stronger outside the U S. So.

I think it puts us clearly north of five.

Which I think is a very meaningful step up for this company.

It's not something we've had for me a sustained growth and I think that should not be lost and I'm glad you asked about it.

Great. Thank you, Steve and then as a follow up I know, it's been asked a number of times I'm just wondering.

Given the.

On the COVID-19 strength that you've had and obviously the rate of decay that we see will be important for your topline results, but just how do you think about the right.

Mix, if you will of testing as we move out beyond this year into next and we get to a steady state on COVID-19.

Between PCR and maybe rapid testing I think you discussed earlier the accuracy is really important here much more so than flow. So we're just trying to.

Kind of think about what the right numbers to plug into models and kind of that aspect will help in terms of the mix that you see unfolding.

As we as.

As COVID-19 close thank you.

Yes, Thanks, Dan.

Consider is biased because we are.

In the molecular space, but I think as more and more people of had bad experiences candidly with rapid tests and I think all of us know of number of people who have.

Had.

False results.

I think the dynamic is going to play out where theres going to be less testing less people, reaching out to need the immediate test.

And to try to get something Super quick and as you move into a vaccinated world and more of an ongoing monitoring where a few hours of isn't going to make a difference.

I think it's going to revolve much more towards most diagnostic testing, which is you want to use the most sensitive and most specific tests.

And.

It's just we don't see it that way.

Ultimately the market will decide you can come back and slap a subset of our heads if we're wrong, but.

I think we see it playing out as of more traditional market over time.

Where it goes to our advantage.

Thanks.

And we'll go next day, Anthony Petrone of Jefferies.

Thanks.

A few follow ups on just all around diagnostics and one on capital Steve maybe on the two hundreds to 250, if you could give us a break on U S and Europe I know in the past few quarters Europe as it relates to the COVID-19 testing.

Was under weighted for whole logic, what was growing so I'm just wondering how Europe plays out and there's still heightened pandemic there and then.

On Mobi diagonal dyads note I'm wondering what the combined install base of of platforms.

Is there an.

And is there a.

Pathway to consolidating those tests on Panther.

Over time.

Yes.

In terms of the first part of the COVID-19 I think we will see Europe being a bigger per.

Percentage of our revenue probably this quarter.

Even the 40% I think we.

Part of our business, we feel really good about the longer term contracts booked with Europe, and obviously with the rollout of the vaccination is not growing nearly as.

As rapidly there feel pretty good about the persistence of the COVID-19 testing in Europe, and then Michael waving his hand, so Anthony on the second piece of that installed base.

Remember Diazine I would think of dyads note as an assay factory. So the priority of there is to really get their PCR expertise in those test on to our fusion installed base rate, which is <unk>.

Roughly 15, or so one 5% of the 2600 that we have out in the field.

Moving to IAG is a little bit of a different situation.

The focus there is really on their novo diagonal instrument, which is the more rapid turnaround instrument and Theyre really just getting started with a relatively small installed base even in Europe.

And in the United States I don't think we have any revenue. So there is clearly some big opportunity there on that novo diagnosed.

Yes, it will be more focused on driving that instrument that necessarily taking their stuff over to Panther.

Understood. Thank you.

We might have on time for one more question operator, if that's okay.

And well go to all of that last question from Vijay Kumar of Evercore ISI.

Yeah.

Hi, This is in the offer of meeting. Thank you for taking my question.

I will now list of growth margin this quarter was down.

Great. Thanks for this point sequentially.

It's working for you high level of client.

Thank you.

Thanks.

Okay.

Right.

One more question.

Yes, I will take one more.

And well go to Ivy MA of Bank of America.

Hi, Thank you for our screens, Inc. Squeezing me in.

So just wanted to follow up on that broad screening of Attunity.

On today's as you mentioned earlier the school programs sort of got delayed so just wanted to see cash any details.

Sure.

On the catalyst and we.

We could expect those would be helpful.

Paul.

Yes, I think.

<unk> bigger catalyst I think Ivy on the horizon.

But.

Other than and obviously that will really kick in for the fall, but I think there'll be ways that.

Obviously, we will be working with various customers to be able to to help support any of those initiatives and we have the pooling claimed as well which will be helpful for those screening programs.

Great and quick follow up for the car Inc.

Maybe comment more on the margin profile of the recent acquisition.

And any opportunities for margin upside from the from those and how long those Michael Thank you.

Yeah I think.

I think we had talked about <unk> is probably a little accretive to the overall gross margin profile of the company, but more in line with diagnostics and I would think that day.

Diane to note at this point, maybe a little less than the overall average and will be die AG would be.

Although less than the average at this point, but those are things that as we build those installed base and grow those revenues.

They should get in line.

Thank you.

That is all the time that we have for questions today.

This now concludes Hologic second quarter fiscal 2021 earnings conference call.

Good evening.

Q2 2021 Hologic Inc Earnings Call

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