How Hologic made a major pandemic pivot

Hologic CFO Karleen Oberton reflects on key decisions and turning points of the COVID-19 pandemic.

Hologic’s fiscal year closes in September, but Chief Financial Officer Karleen Oberton had seen enough by late July to call it: 2021 would be the best financial year ever.

Oberton and the women’s-health-focused company have come a long way since sketching out doomsday scenarios in March 2020.

“We quickly went from counting every penny to these exponential sales on the COVID testing,” Oberton said in an interview with Medical Design & Outsourcing.

She shared the company’s path through the pandemic, ramping up its diagnostics business to support and grow its surgical and breast health lines for the post-pandemic future.

“While already a strong leader, Karleen became an even stronger partner to me and the entire Hologic leadership team through her quick actions, clear communication and thoughtful ideas and actions early on and throughout the pandemic,” CEO Steve MacMillan told MDO.

“Karleen made moves to preserve cash and retain our financial flexibility, [enabling] Hologic to make a significant impact in addressing the global crisis,” he said. “… Karleen and the team efficiently redeployed the strong cash flow we generated from sales of our COVID assays, buying back our own stock and making several acquisitions to accelerate our growth and ensure that we to come out of this pandemic a stronger company.”

It’s a story that starts well before COVID-19, back in December 2013 when MacMillan joined Hologic (NSDQ:HOLX) as CEO.

“He was the third CEO in six months. … I was brushing off my resume,” Oberton said. “[But] he was focused on commercial excellence, he was focused on accountability and he expected more of finance.”

In his first 14 months, MacMillan ousted every executive who was on board when he joined except for Oberton. She met with MacMillan as he prepared to bring in a new CFO, sharing her perspective on the company and offering to draw up plans to support the new finance chief.

MacMillan gave her a call the next day “in Steve fashion,” she said, telling her the two executives between her and the CFO were out. “He’s like, ‘Hey, those two guys are gone. It’s all yours. Don’t do homework, just do the work.’”

MacMillan promoted Oberton to chief accounting officer in 2014 and CFO in 2018.

The first test
Marlborough, Massachusetts–based Hologic has approximately 2,700 of its Panther diagnostic machines testing for COVID-19 across the globe, including 1,000 boxes deployed throughout the pandemic.

In the early months of the pandemic, the first wave of machines went to large reference labs running Hologic’s older Tigris system, which only has four approved assays versus the Panther’s 19.

“It was a really unique opportunity to essentially recapitalize our biggest customers with our latest instrumentation,” Oberton said. “… Once the pandemic wanes, they’ll port those legacy assays over to the new instrumentation, which creates not only opportunity for us, but efficiencies as well to only have one instrument in the field that we’re supporting.”

Manufacturing partner Stratec made about 160 Panthers per year before the pandemic, and Hologic wanted to ship Panthers to smaller, regional hospital labs as it became clear that COVID testing would be decentralized.

“We took Panthers out of our research labs to give it to customers,” Oberton said. “We were finding Panthers that needed to be refurbished … to get capacity out to our customers.”

The third wave of Panthers went overseas, increasing the share of machines outside the U.S. from 30% to 45% percent, mainly in Western Europe.

A critical decision came after Hologic’s diagnostics team developed their first SARS-CoV-2 test to run on Panthers with a PCR-capable Fusion accessory.

“It was the realization that this is much bigger than we ever thought, and we need to get a TMA test on our legacy Panther so we have a test that can be run on that entire footprint, not just the 15% that have Fusion capability,” she said.

Hologic and its suppliers scaled test production from around 21 million per quarter to 50 million. That increased capacity will let Hologic offer more molecular tests to Panther customers new and old — not just tests for COVID-19, but also other respiratory viruses, cancers and sexually transmitted infections.

“We were very focused on making sure that we had discussions with those customers about commitments beyond COVID,” Oberton said. “When COVID testing wanes, what other assays are they going to agree to? One of the things we use to measure that is something called a test of record — we call it a tour. The value of a test of record is the estimated one year’s revenue of a newly validated assay on the Panther system. Prior to 2020, our highest year of tours was $20 million. We did $35 million in 2020. And then we have done another $35 million through the first three quarters of 2021. … We believe that we will be able to considerably increase molecular sales given the explosion of the Panther footprint.”

COVID cash
With the diagnostic business gearing up for record sales, Oberton and the team wanted that free-flowing cash to fuel long-term success in all three business lines. So they reactivated their full-time R&D operations and sent their business development teams searching for M&A opportunities.

“Business development sits in the divisions — it doesn’t sit at corporate, per se — and the divisions are out there identifying assets, cultivating relationships, always with the intent of finding those assets that we feel that we’re the rightful owners of, meaning we have a point of leverage, we are an expert in the area and believe that fundamentally, that asset will do better as part of Hologic versus on a standalone basis,” Oberton said.

Hologic’s first pandemic acquisition was in August 2020, when the surgical business bought Acessa Health for $80 million. Hologic already had a laparoscopic treatment for smaller fibroids, and Acessa similarly treats larger fibroids.

Diagnostics — which had not made an acquisition since 2012 — followed with four deals, “deploying all of this, what we call our COVID cash that we had generated, in acquiring things that prior to the pandemic we probably couldn’t afford to actually buy,” Oberton said.

The first, in January 2021, was the $64 million purchase of Somatex Medical Technologies, which develops minimally invasive devices for tumor diagnostics, biopsy and interventional specialties.

The day after announcing that diagnostics deal, Hologic revealed another: its $230 million purchase of Biotheranostics, maker of a molecular oncology test that can tell a woman whether endocrine therapy after breast cancer treatment will help enough to justify its side effects.

The next deal was the $159 million acquisition of Diagenode, a PCR assay manufacturer that developed assays for Hologic and will offer more Panther test options.

Hologic’s latest and largest deal was its $808 million purchase of Mobidiag, a Finnish-French developer of molecular low-plex and high-plex testing. Hologic, which closed the deal in June, had long wanted in on that near-patient, acute care space but couldn’t find a way past high per-unit testing costs.

“Mobidiag solved that issue in that they designed a simplified cartridge with a low number of parts and more simple parts that allow not only a cheaper per-cartridge cost, but also allows better and more efficient scalability of the manufacturing of the test,” Oberton said. “A lot of companies set out with that goal, but during the course of development kind of stray from that simplified cartridge. They stuck to it.”

The road ahead
Hologic is still on the hunt for deals, though executives seem to have a smaller appetite following their $1.65 billion acquisition of Cynosure in 2017. Hologic sold that underperforming medical aesthetics business for about $205 million in November 2020.

“We’re looking for … those assets that are close adjacencies, where we’re experts, we have a point of leverage,” Oberton said. “I’ll give an example. Surgical is our smallest division, basically three products, but our largest sales force. Our sales force there is focused on the OB-GYN. So what else can we put in the bag of that sales force that the OB-GYN is already buying or would like to buy? What we’re trying to do is find those points of leverage and high confidence in the revenue growth rate across all of the portfolios.”

Morningstar analyst Debbie Wang started following Hologic before MacMillan’s tenure and said she sees the recent acquisitions as more strategically sound than the Cynosure chapter.

“This company is making some very smart moves to optimize its newly enlarged installed base. … Can they expand the test menu quickly enough that they can get adoption of those tests going to offset the pressure that they’re going to feel on the COVID-19 tests as demand for that starts to dial down?” she said. “I will be watching very carefully what happens in Europe. Hologic has historically not had a very robust presence in Europe, even though I think that a lot of the company’s technologies are actually a very good fit for Europe, [where] smaller labs and their needs would be a really good match for what Panther can do: smaller numbers of specimens run, but versatility in the different types of tasks and flexibility in the timing of it. … Can they ramp up usage of those machines?”

Wang said she’s always been puzzled by the mid-sized medtech’s “mish-mash of businesses” and how they will work together in the long term.

“What does Hologic want to grow up to be? This pandemic has offered a real opportunity and clear prioritization to put a lot of resources behind the in vitro diagnostics (IVD) business and grow molecular diagnostics,” she said. “A lot of times, it’s hard for management to make very tough decisions about where are resources going to go. In this particular case, the pandemic has made it clear that this company needs to bolster its presence and really invest in the IVD business and make that the priority. Just from an organizational standpoint, I always think it’s good to have that kind of clarity.”

For the first time, all three of Hologic’s business lines expect annual growth of 5–7%. The company has more of its diagnostic machines in labs across the world than ever before, and it’s all because the business moved quickly to fight one of the deadliest pandemics of the modern age.

“Heading into fiscal 2022, it feels like the company has never been stronger,” Oberton said. “For me as a CFO, enabling the company to take advantage of that opportunity (was) a once-in-a-lifetime experience — hopefully.”

Design Notes: The Hologic Panther

The Hologic Panther diagnostic device is a fully automated high throughput, random access testing machine.

“Random access means you can load the sample as it comes in,” Oberton said. “Most of the machines, like a Roche Cobas, are a batch system, so you have to wait to have a bolus of samples before you can run them through the machine. Our low hands-on time for the techs really makes it desirable, as well as the size. The size of a Panther is probably the footprint of an office photocopier, but a little taller, so it can fit in a hospital lab. It can fit in a smaller regional lab versus some of these other machines. And even with our legacy Tigris machine, sometimes you have to take down walls to get it into a lab. … We’ve also done Panther scalable solutions where we can link several Panthers together and run them through one kind of central operating station to create more efficiency in a larger lab setting.”