COVID-19 is likely to be the biggest molecular testing category for the next couple of years, according to Hologic CEO Stephen MacMillan, who made the prediction in conjunction with the company’s fourth quarter results.
Global molecular diagnostics sales in the quarter rose more than 370% as Hologic exceeded its capacity expansion goal. MacMillan expects demand for COVID-19 testing to remain high even as the pandemic abates. His prediction is underpinned by a belief that hospitals and other settings will screen people for the virus for years to come.
- Hologic stands to benefit from both a second wave of coronavirus and recovery, SVB Leerink analysts said in a Wednesday note, as the company continues ramping up capacity faster than originally anticipated with expectations to reach more than 3.25 million tests per week by January 2022. The analysts observed that the recent $119 million HHS/DoD contract award to Hologic suggests the federal government "concurs" that COVID-19 testing demand will persist.
Though some Wall Street analysts had speculated arrival of a coronavirus vaccine could diminish the need for testing, they and Hologic execs are betting that risk is low.
Hologic has been riding the tailwinds of the pandemic. One year ago, the company was stabilizing its business after a period defined by its ultimately unsuccessful efforts to justify the $1.6 billion it paid for Cynosure in 2017. Hologic offloaded Cynosure at a loss late last year, enabling it to go into 2020 as a more focused business.
That focus has served Hologic well. At the start of the pandemic, the company aimed to double molecular testing output from 20 million to 40 million kits a quarter. Hologic cleared that target, producing 50 million tests in the fourth quarter. Half of the tests were for COVID-19. The extra capacity enabled Hologic to grow molecular testing sales by more than 370% to hit $818.9 million in the quarter.
Late last week, Hologic secured $119 million from the U.S. government to continue growing testing capacity. The goal is to make 13 million COVID-19 tests a month for the U.S. market by January 2022. Hologic cited the contract as evidence of the durability of the COVID-19 testing opportunity.
"Hospitals are going to want to continue to test patients coming in. Everybody who is going to go in for a hip and knee, cardiac, any other procedure, we think at least for the next couple of years, is probably going to be tested. We think this is going to be a big, big enduring market for us. Is it going to be exactly what it is today? Likely not, but ... we believe, and we've made the bet, that there is a longer tail," MacMillan said.
Hologic is expanding outside the U.S. to support the opportunity. Once additional capacity in the U.S. and the U.K. comes online, Hologic expects to be manufacturing 75 million molecular tests a quarter, up from 20 million at the start of the pandemic.
MacMillan said COVID-19 will probably be the biggest molecular testing category for years to come but the pandemic-driven expansion is also opening up opportunities to grow in other areas. The installed base of Panther systems has grown almost 30% over the past year and Hologic is still working through a waiting list of orders, leading MacMillan to predict "another very good year of placements in 2021."
COVID-19 is driving demand for Panther systems but once the devices are installed labs can use them to run other tests. Hologic is starting to realize those cross-selling opportunities. In its 2020 financial year, Hologic brought in $35 million of new, non-COVID-19 business in the U.S. MacMillan said that is almost 50% more than Hologic’s previous new business record.
With money flooding into Hologic, analysts have started asking about how the company will use the cash. MacMillan said each Hologic division is looking for opportunities in adjacent markets. Surgical and breast health are on the hunt but it is the fast-growing diagnostics unit that is most likely to land a deal.
"We're clearly looking at some ways to broaden our diagnostics platform, both product wise as well as geographically. So that team has been very active on the business development front," MacMillan said.
William Blair analysts said in a Wednesday note that Hologic is "willing to spend a year of free cashflow on M&A quot; which could be between $1 billion and $2 billion.
"Given the unprecedented interest we are seeing with an unprecedented number of private companies in the diagnostics universe right now, we believe the timing is relatively near term for an asset to rise to the top of the wish list and for management to pull the trigger," the analysts wrote. "With the company generating enormous profits, we do not believe modest dilution will be something that holds up a deal."