P&L: Hologic's 3D Technology Finds Early Stage Cancer, CEO Says

right now are up more than eight percent. They reported earnings after the bell yesterday that beat analysts estimate and uh we have a special guest with us, Steve McMillan, chairman, president and CEO of Logic to explain a little bit more about what happened in the past quarter and why it was so successful. Thank you so much for joining us. Thank you, Lisa, thanks for having us so um So, what happened? What sort of drove the better than expected earnings? Really?

I think it was broad based growth. We have three key businesses in the company. We have the mommography business, where we've become the world leader, especially behind our genius three D technology. We also a very strong molecular diagnostics business that has been the world leader in both cervical cancer testing as well as reproductive health, so all kinds of sexually transmitted infections. That business is performing very very well.

And then we have a guy in surgical division, which is really for endometrioliblation as well as fibroid removal through the uterus, and that business is also performing way above expectations. It had a seventh straight quarter of double digit growth, So it's really broad based growth. And as you know, in a very skittish healthcare and investor environment right now, we always kind of want to be a safe port in the storm, and and we showed we came through so very proud of our team. Well, I do want

to raise one thing. I mean, I would imagine that Logic is sort of at the forefront of the controversy over mammograms and how effective they are. And you know, there's some talk about removing the recommendation that the men get mamograms, which I'm sure is leading into insurance and whether or not they'll cover it. How much is that

affecting Logic and the business going forward. We we really see it as a great opportunity in that so many of the shortfalls and shortcomings of traditional mamography or mammograms has really been the old technology, and because we've brought our three D technology to the marketplace just in the last few years, it's really addressing all of the key issues historically. So if you think about it, what are the key issues historically? One is, you know, false positives.

Our three D technology dramatically reduces the amount of false positives. So what does that mean in real terms? You know, fiftcent fewer false positives means women are not having to go back and have biopsies that aren't needed, so you can see things so much better. The other part is that we're detecting early stage cancers about fifteen months earlier and or depending on how look at the data, we're getting about more positives in terms of effectively diagnosing the

breast cancer. So what's happening is a lot of the research and the guidelines are based on old mammograms. Everything that we've brought with three D is effectively addressing those shortcomings. But have fewer women been getting mamograms? And is that affecting your business? Not really, we're seeing you know, actually, part of the strength of our business over the last couple of years has been the adoption of our three D technology. So even though there's pressures on healthcare costs.

There are some controversies. You know, the USPSTF, which is the US Prevented Services Task Force Society, had come out a year ago suggesting that women should wait until they're fifty for their first mammogram. I think everybody on this planet has either a friend or someone in their family who, if they waited until fifty, would be dead. Quite frankly, my own mother was diagnosed almost twenty years ago, so

to wait until you're fifty is just completely nonsensical. And so I think what we've actually seen is despite the USPSTF guidelines, the American College of Radiology and the radiologist who were close to this are absolutely going against that, and they know that really starting at forty and frankly, if you've had a history of breast cancer, you should start sooner. You know, we all know, you know, there

are women in their twenties and thirties diagnosed. So the whole key in breast cancer it's it's an eminently deal. You know, it's a disease you can totally deal with if you catch it early, and that's what three DM ammograms are helping to do. So we actually feel we're on the right side of it, and we're reducing costs, we're improving the patient outcomes, and it's good for everybody in the system, the patient, the payer, the radiologist, and

frankly our company. You mentioned. If you're reducing the cost, what specifically, well, the big cost in breast cancer is when you start to deal with it later. If you get somebody who stage three or stage four, you're dealing with full blown you know, let's face it mustaqu to me, is radiation, chemo, all of that. When you can catch breast cancer in its very early stages, you can have much more les. You know, basically a less intervention is needed.

And so if you can get it early, when it's small and it hasn't started to fantasticize, you deal with it. And that's where the big win is both in terms of survival rates, but it's also dramatically less in cost. So that's why a win win. Something like SIGNA just in the last couple of months is now covering three D mammograms and we think that's clearly the trend that's

occurring because they're realizing it's better for the patients. It's also frankly better for their caution, seconds got to be quick. Does the election outcome impact you guys, not really? I think you know again, we've even Donald Trump says he wants to change in terms of Obamacare. At the end of the day, we are reducing healthcare costs and we're improving patient outcomes. We think it puts us in a

good place. Steve mcmilany's chairman Presidency of Logic, Morble mass Is where they're based in our New York studio on this Thursday, this is Bloemberg. Well, we want to talk a bit about Wells Fargo today because it's back in the news, the SEC investigating sales practices at the company and our Bloomberg exclusive how the stars at the company climbed as abuses flourished beneath them. Let's talk about it

all with us. As Laura Keller, financial reporter at Bloomberg News, she's here with Elliot Stein's senior litigation analyst at Bloomberg Intelligence. First off, Lord, let me start with you. Um, talk to me about what was going on at the company. We know about these fake accounts, these fraudulent accounts. A lot of people lost their jobs as a result. But what some of the senior people. They did just fine,

right exactly, And this is the story. UM, we hope and I think it accomplished this UM you know that was looking at accountability, so it really did focus more on these senior managers and senior levels of people rather than what we already know the company has you know, fired these very low level workers. UM. So what we essentially chronicled here was really just this generation of executives UM, who rose through the ranks even while all of these

practices were going on. UM. These were very very ambitious people. A lot of them came out of California, some of them specifically out of southern California, UM, where we already know from the Fortums former CEO excuse me, John Stump UM,

where a lot of these problems were happening. UM, and then sort of chronicled the story of these UM Southern California and California stars fanning out across the country and therefore sort of bringing these sales practices that they had you know, come to know and and used um throughout their career, you know, to these other places like Florida or like Texas. Well, hold on a second, and these star managers are they immune at this point. I mean, the story seems to suggest that some of them could

get fired. Still, yes, I mean, I want to be clear. In the story, we do name many particular managers. We did, um speak to some one who, um we note in the story who told us that indeed there are some managers that the company executives have already identified to be fired. Um, but we don't We're not able to say at this point whether those are the same people. So there's gonna be clear on that. Well, I'm curious to how this

all folds. And Elliott, let's bring you in, senior litigation analyst at Bloomberg Intelligence, and we're also talking with Laura Keller, financial reporter at Bloomberg News. So I saw the headline this morning about the SEC investigating the sales practice at well before I thought, oh okay, another chapter. What does this mean? How does it kind of maybe playing too

some of what Laura was talking about? Right, Well, it just it shows that this continues to be in evolving and growing story that the bank is really trying to you know, rapids hands and head around and they haven't quite yet. It feels like right right, Um, you know, I think they've been criticized. Well, it's interesting because the SEC investigation. First of all, it's not not really a surprise.

I mean, how could they not that and not only that, right, how could they not after the Department of Justice is investigating them? UH, states are invest to gain in them, including California. But three U. S. Senators sent the SEC a letter saying you should investigate Wells far ago UM.

And you know, the focus will probably be on whether the bank should have disclosed in their filings that they were being investigated for these things about the CFPV and the o c C. Nothing really was disclosed until the fine, the hive million dollar fine in September, even though these things have been going on for year years, including lawsuits UM and investigations by the City of Los Angeles. I

want to talk about that. As far as the expense of the litigation, you noted that they increase their litigation reserves by about seven hundred million dollars UH since the first quarter. UM. Is this is this enough? UM? All right? So, so today in their filing they disclosed that they're reasonably possible litigation costs beyond reserves or one point seven billion dollars as of September UM the same number at the

end of June three. For June thirty was one billion. So, like you said, they increased by seven hundred million dollars UM. It's unclear whether it will be enough. What's interesting is um that it's potentially not the fake account scandal may not be even the biggest um litigation cost if they'd already we knew they'd already reserved the billion dollars. They're still being investigated by the Justice Department's RMBS task Force, which has been in the news because of the anticipated

Deutsche Bank settlement and settlements with other European banks. Wells Fargo is one of one of one of the few U S banks that still has to settle with that task force. Well, go ahead, No, I was wondering the lore like in your story, So you think, you know you profile, you know, you talk about one individual Kim Young, Um, you know who? You know who? Who was I guess not senior senior or was she senior? Um? Pretty senior? Yeah.

I mean most of the people that we talked to what they call regional presidents or even beyond that, I mean within the retail bank, they're very senior people, um just not senior you would think, you know, sea level sweet for the whole company. Like, I wonder how much of this investigation, whether the SEC and others will eventually come back to some of those senior people who were rising in the ranks as all of this was going on.

We know John Stump certainly is gone and has taken a fault because of this, but you wonder how much we'll trickle down. Coming off the financial crisis, it felt like so many financial executives we're not prosecuted at all. So I'm just curious if it'll if it will play out here. Well, yeah, and I think that's a really interesting question. I don't think we know the answer to

that yet and what authorities themselves will focus on. But I think it's very interesting in the story that you know, we note that the you know, when you go back to these exacts, um, the that have identified people already for firings, we we you know, in our story talk about how well, actually they don't want to fire them yet they're delaying this because they actually want to use those people to an aid the investigation. They like that

inquiry to keep going. So you know, whether that means they you know, eventually take the full brunt of us. You know, I don't know, We'll have to see what the investigation finds. You know, I'm looking at well Frago

shares right now. Year to date, they're down about thirteen percent. Uh. You just have to wonder, given all of this uncertainty, given potential turnover in the upper ranks of management that are below the sea level suite Laura, like you're talking about, you have to wonder, you know, what, what are going to be the implications. I mean when you talk to investors, what are they say? Yeah, I mean investors. It's funny. Originally didn't really worry about this very much because it

was only million. But if I kind of pick up on where you're going, Lisa, if this was so systemic to the point, I mean, you know, our story chronicles a lot of things here. You know, let's just say we we found you know, the bank has around two very senior managers. Let's just say, you know, wild guess, and this is really based on just you know, hypotheticals. What if of those people really had some hand in this?

Do you fire every single person? How do you actually but hold on a second, Elliott, I want just real quick and twenty seconds. I mean, what is sort of the level of scrutiny that rises to legal accountability here? Well, so you're just going back to the share, the share losses um that actually goes to the SEC investigation, because the issue there is whether it was material to the company.

You know, two million accounts sounds material um, but a hundred and eight five million dollars may not have sounded material to Wells Fargo. So that's sort of going to be the issue that plays out there, which is exactly well, Thank you so much, great conversation Laura Keller with a fantastic story on the Bloomberg as well as Elliott Stein, senior litigation analyst for Bloomberg Intelligence. Thank you so much

for being with us. This will be something that probably will keep our attention for quite a few months to come, so we'll keep an eye on it. Wells Fargo shares slightly up, but overall this year they've been they've been down quite a bit. This is Bloomberg right now, though, we want to go back to some news we got out of the UK this morning. A panel of London judges deciding that the UK must hold a vote Parliament

before starting the two year countdown to Brexit. Let's talk about what the implications of that decision, that legal decision, what it all means. Kit Hillela's legal reporter at Bloomberg News, was at the UK Supreme Court in London earlier today and joins us from London at this hour. A Kit, nice to have you here with Lisa and myself. So what does this mean, Hi, Carol? What does it mean? Well, the most important thing to remember is that this was

round one of a legal fight. Um. The government has lost today, but it will be very quickly appealed to the Supreme Court, who will ultimately have the final say on this case. Okay, so um, But the markets are responding. So it seems to indicate I mean there is some significance here in that it's not going to be an easy resolution, right, I mean even the Supreme Court how long that will take a while? Right. Well, what they've done is because because it's such an important question, they

us tracted. So the Supreme Court will hear the case quickly, um, maybe as soon as December, and will probably make a decision by January. UM. I guess the significance is that if the Supreme Court agrees with the decision today and there has to be a vote in parliament. That makes it difficult for Thereason May to do a fast, hard Brexit, which is what she wanted to do. It means they'll have to consult Parliament, They'll have to be a vote. It's going to take some time, it's going to be difficult,

and it's certainly going to going to affect the timetable. Okay, And that's what I wanted to know. What were the implications of having now the Parliament If it stays that they have to vote you mentioned speed, that it's going to slow down the process. If Thereason May was trying to go much more quickly with this, and that they've got a potentially consult parliament, what does that mean though? Then, in terms of what a Brexit might ultimately look like.

I think most people accept that Parliament isn't going to block Article fifty being triggered. It's not going to block a Brexit, but Parliament wants to have a say in how any deal will look and that makes it difficult for the reason May. She has to go to negotiate with other European nations about the terms of Britain's exit. Now she has to go and do that with a bunch of conditions from British lawmakers. That makes her job a bit harder. Well, you know, I've got to I'm

a little confused. Can you help me out here? The British on a lot of levels, but you know one in particular, the British pound. You know, it gained on the news, it gained quite a bit relative to recent history. Um. I'm wondering whether this is a realistic kind of collective effects cheering, or whether people are kind of uh getting a little bit lost in the weeds here, because realistically this just sort of creates more uncertainty, which could potentially

be negative for the economy. Right, Am I missing something here? No, it's a fair point. It is. It is confusing, I think. I think a lot of people are confused, especially even legal reporters are confused by it. Um. I think traders looking for any any sort of move that is going to affect the Brexit timetable, and they're looking to trade off any information. So in the middle of the trial, the government's lawyers made a what I thought was quite an obvious statement that they would have to be a

vote in Parliament eventually on whatever deal was reached. And you know that news sent a pound up half a percent. That's ridiculous. Of course they would have to vote on it. So so so people are looking for any sort of news, any indication of how long this is going to take.

And it is worth remembering that this legal. You know that a potential, although very unlikely, outcome of this process is that it makes Brexit impossible or too difficult, or delays it for such a long period of time that things change and maybe people are sort of trading on that remote possibility. All right, so what's the next step. The next step is that the government has said it's going to appeal to the Supreme Court in the UK,

which is the highest court. That will happen very quickly and we'll have a rerun of all the arguments from both sides. The Supreme Court has a roughly fifty fifty track record of allowing appeals or dismissing them, so you know, you could make an argument that the government has a has a fighting chance of winning at the highest courts,

and then the Supreme Court will make their decision in January. Okay, So I'm looking up with the average hourly fee is for lawyers in Britain, and it sounds like on average it's about a hundred pounds an hour, which I guess can be less than here, um, based on where the pound is versus the dollar. But I mean, who's incurring all of these legal fees? Um? Yeah, I think the lawyers in this case are earning more than a hundred pounds an hour. I would, I would think so. But

this is this isn't going to be inexpensive yet. Yes, it is expensive to run these these cases in this country. If you win your case, Um, the other side pays your legal costs. So as of right now, the claimants of one and the government will have to pay for everything. Um. But is it is that the government versus the government here? No, The claimants are a range of different people who have an interest into laying or stopping Brexit. One of them

is Gina Miller. She's a she's an investment worker who was sort of voted to remain in the EU. There are various expat Brits living abroad. They're a diverse bunch of people. Um. A few of the lawyers are acting pro bono that they're doing it for free and you know they've also raised funds using crowdfunding to pay for this because there's obviously there's a there's popular support in the UK for the idea of there being a vote

in Parliament about Brexit. That's amazing crowdfunded legal costs web business. We did a story though about like the one, you know, kind of jobs that will actually benefit because of Brexit. They talked to think about the legal community in particular, certainly in the short run. Kitchell, thank you so much

for joining us. It's really fascinating legal proceeding. Kitchell, legal reporter for Bloomberg in London, talking about what's going on with the Brexit vote and whether or not it can be a fast, quick, easy clean Brexit sounds like not so much. We'll stick with that though. This is berk Um. I want to bring in, uh, somebody who can talk to us a little bit about, uh, what's going on with these smaller companies that perhaps people are looking over as they rush to uh the stock markets. I want

to thank you very much for coming in. John Campbell, chief investment officer of Cornerstone Investment Partners. Uh, so what are you looking at? I mean, you focus on the smaller, less, less less popular stocks. Which ones do you think are

the best best right now? Well, our approaches to look at the overall market and try and find companies that have improving fundamentals, and we try to take the risk out of buying small cap stocks by buying companies that have free cash flow so they can cover their debts in the near term to cover their capex in the near time, have tangible assets. These small small cap asset

classes an excellent class. If you look back nine the years, the returns on small cap have greatly outperformed other classes. For example, you can versus large cap stocks. Small cap stocks have done about twelve on average over that period, in large cap stocks have done closer to ten percent. So a two percent advantage over ninety years is a dramatic difference. The problem is you have a strong stomach

that for small caps it can be really volatile. You could you have to have a strong stomach, and they're much more volatile than large cap stocks. That's exactly right. So if you want to get exposure of this class, and we think it's a good idea to do it because of the higher historic returns, you have to do things to mitigate the risks so that you can make it something you can live with and you can stomach.

As you say, so, by doing things like looking for companies that are financially sound, we think we can take a little bit of that edge off, and also by diversifying. So let me ask you what does it mean now? I was looking at the small cap index and we broke it down too early. With Davi Wilson, brook Stocks columnist, small caps are at roughly two point six percent this year. I look at S and P five hundred, the large caps up about two point eight percent, pretty mu almost

on par with one another. Mid caps have done really well this year six percent. So in that kind of perspective, when we see that kind of correlation with large caps, does it tell you anything, Well, they took different paths to get there, so it's it can be sometimes just largely coincidental. Numbers are so close. For example, if you broke down small cap into say growth small cap and

value small cap, you have dramatically different numbers. Value small cap stocks have done over ten percent this year, and growth small cap have done closer to one percent. The Russell two thousand, which has a blend of all is around the number you said, so it looks like maybe a similar to large cap. But I mean the charts are almost you know, we've really seen the market kind of move, at least certainly the smart than the large

cap universe kind of move in tandem this year. And there and there are and there are some elements that are going on that are a little bit unique to this time in history. The passive investment craze has become huge, and so you tend to get a lot of indexes

and stocks moving in concert with each other. I think this is something that happens from time to time where you get these cycles, especially now, and we manage an active e t F, there are a lot of passive e t f s, and those passive ETFs are buying the market. So whatever you buy one, you get everything, and so they tend to push them together, you know.

I I wanted to bring that up. Um. You know, there's been a sort of controversy behind e t f s and actively managed the tfs in particular, especially those that invest in less liquid assets. I mean, small caps aren't exactly a liquid but they can be a lot less traded than bigger stocks. I mean, how much of a concern is liquidity for you, Well, we build a portfolio of two forty stocks, so when an investor invest with us, it's spread out of a lot of stocks and we take care of a lot of the liquidity

issues that way. Also we're taking out the bottom part of the liquidity UH spectrum and saying those maybe a little bit too a liquids. We're playing in a little bit larger space. In general, the companies were buying are our companies that have solid fundamentals UH in improving fundamentals. They also have free cash flow to cover their obligations,

so that takes a lot of the risk out. If you just look at companies free cash when compared it to their interest payments do and their capital expenditures do and you can cover that for a year, that's a pretty good gauge that that these stocks are. Okay, I'm thinking about you know, at least when I'm with Corey, I mean Corey Johnson, that's one of his favorite metrics.

I think looking at free cash flow essentially has means that they've got the money to cover the cost of their business and then some sure, if you're just trying to get exposure to this space, but you don't want to take all the risks they're one of the big risk is a lot of these companies, especially when it comes to accounting. Uh. The earnings can be you know, they can be moved around and their the opinion of the management. But cash flow it's hard to fool the

cash flow numbers well. And and one thing that that leads into is leverage. And we've heard a lot about how companies are borrowing as quickly as they possibly can so that they can take advantage of these incredibly low borrowing costs. I mean, how much of a concern is that to you as you run your analyzes of companies. Yeah,

it's uh, it's of some concern. Our portfolio generally has much lower leverage than the overall market, so uh, you know, companies that are highly leveraged could be uh, could have a more difficult time. There's been a lot of bankruptcies, for example in the energy space. But some of these companies can't cover their obligations. That's almost the definition about bankruptcy is you can't meet your near term interest payments and debt payments. So the companies were buying don't have

that issue. They can cover their cash cover with or cash flow the interest and uh principal payments under debt. Hey, I'm gonna ask you about two names that um you wanted to come in and talk about. UM. One is Grand Canyon Education tickers l o PE stocks up about se so far, uh this year, it's hitting a fifty two week high today. Drew Industries is another tickers d W that stucks up forty one so far this year. I'm curious when did you buy these or I'm assuming

you're not chasing a performance here. Well, we're not chasing performance. We've owned these these companies for some time now, what's sometime? Uh for several months? Uh so uh, you know, Drew, you know we can buy it. We were having. The fund is new to right, Well, the e t F was launched in July. But let's keep in mind we've been running the strategy for over four years and we we poured it in, actually the track record into this active ETF, and we are the first of that kind.

Nobody has ever ported separately managed account track record into an e t F before. So we feel like we're a bit, along with Advisor Shares, a bit of a trailblazer in that regard, what's your biggest contrarian bet right now? Our biggest contrarian bet is we have we're low on financials right now, and I think maybe there's some sentiment towards buying financials because they're so cheap. But a lot of the financials that are in the small cap arena

are regional banks. Some of those regional banks are struggling with the current interest rate environment. Do you think that we're going to see some kind of recession in the next year or so, or do you think that we're going to kind of chuck along for all? That's a

that's a that's a good question. We try not to forecast things like that, because but is that is it essential if you're gonna be looking at well, we buy companies that we we like, and uh, you know, you can't forecast things like interest rates or elections or brexits. But uh, you know, right now the economy is seased

to be doing just okay. And uh, I think of the Federal Reserve is scheduling, and I think there's a seventy percent chance or se kind of which priced in is a chance that they will raise rates the next goal around which means that they feel like the economy is strong enough that they can do that without without damaging too much. John Campbell, thank you so much for joining us. John Campbell, Chief investment Officer, Cornerstone Investment Partners,

covering earnings and the outlook for small cap stocks. Thank you so much for joining us. Thanks for listening to the Bloomberg P and L podcast. You can subscribe and listen to interviews at iTunes, SoundCloud, or whatever podcast platform you prefer. I'm pim Fox. I'm out there on Twitter at pim Fox. I'm out there on Twitter at Lisa Abramo. It's one before the podcast. You can always catch us worldwide on Bloomberg Radio