Hologic Inc (HOLX) 2009 Q2 法說會逐字稿

Good afternoon, and welcome to the Hologic, Inc. second quarter fiscal 2009 earnings conference call. I am your operator for today's call. Today's conference is being recorded. (Operator Instructions). And I would now like to turn -- to introduce Deborah Gordon, Vice President, Investor Relations to begin the call.

Thank you, Andrea. Good afternoon, and thank you for joining us for Hologic's second quarter, fiscal 2009 earnings conference call. I encourage everyone to visit Hologic's Investor Relations page of our Website in order to view the Powerpoint presentation related to the comments that Glenn Muir, Hologic's Chief Financial Officer, will be making in his opening remarks. The replay this conference call will be archived on our Website. Please also note that a copy of the press release, discussing our second quarter results, as well as our third quarter and fiscal year 2009 guidance, is available in the Investor Relations section of our Website under the heading "Financial Results."

Before we begin, I would like to remind you of our Safe Harbor statements. Certain statements made by management of Hologic, Inc. during the course of this conference call, may constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements involve known and unknown risks, uncertainties and other factors which may cause actual results, performance, or achievements of Hologic to be materially different from future results, performance, or achievements expressed or implied by such forward-looking statements. Such factors include, among others, those detailed from time to time in the Company's filings with the Securities and Exchange Commission. We expressly disclaim any obligation or undertaking to publicly release any updates or revisions to any forward-looking statements to reflect any change in our expectations or any change in events, conditions, or circumstances on which any such statements are based.

Also during this call, we will be discussing certain financial measures not prepared in accordance with generally accepted accounting principles or GAAP. A reconciliation of these non-GAAP financial measures to the related GAAP financial measures can be found in Hologic's second quarter 2009 earnings release, including the financial tables in the release. Please note that today's conference call will consist of approximately 30 minutes of opening remarks from management followed by a 30-minute question-and-answer session. We, therefore, ask each participant to limit his or her questions to just one with one followup as necessary. I would now like to turn the call over to Mr. Jack Cumming, Chairman and CEO.

Thank you very much, Deb. And good afternoon, everybody and thank you for attending our second quarter fiscal '09 conference call. Joining me on the call today is Rob Cascella, our President and COO; and Glenn Muir, our Executive VP and CFO. Also joining us today are, Tony Kingsley, Senior VP and GM of our Surgical Group; Howard Doran, our Senior VP and GM of our Diagnostics Group. Both will be available during the question-and-answer session.

I will start the proceedings with an overview of our business performance in the recently completed quarter. Glenn will then discuss the financial results and reaffirm our fiscal '09 guidance. And then, we're going to open the call up for Q&A. And as Deb said, we're going to try to conclude in an hour, out of respect for everyone's time.

I'm pleased to report revenues in each of our four operating segments tracked in line with our guidance. As stated in our press release, Q2 FY '09 revenues totaled $402 million, a 7% decrease over the second quarter of fiscal '08. This decline was primarily due from soft sales of our Selenia full-field digital mammography systems due to the global recession, which continues to negatively impact the hospital market, thereby, constraining capital equipment spending.

This dropoff, however, was partially offset by the performance in our diagnostics and surgical businesses, which were slightly impacted from the rising unemployment rate and overall economic environment. Third Wave continues to perform in line with our expectations and we're very pleased to have received FDA approval, of not only our Cervista HPV HR test but also our Cervista 16/18 test. The recent notice of Adiana approvability, pending a favorable manufacturing inspection, is equally encouraging.

For the second quarter of fiscal '09, our non-GAAP earnings per diluted share were $0.29, beating our guidance of $0.26 to $0.28. This equals our non-GAAP EPS of $0.29 for the same period last year.

Before turning to review revenues by segment, let me comment briefly on the macro economic environment and our current outlook. As I mentioned earlier, the hospital capital spending environment in the US and abroad remains very difficult. This has naturally dampened demand for our capital businesses, which comprise roughly 40% of consolidated revenues. We see budgets remaining constrained through the end of our fiscal year, while prospects for fiscal 2010 remain highly uncertain.

The international market for capital equipment is also under pressure, as governments are fighting the same issues of unemployment, tight credit and reduction in exports. However, with roughly 60% of our business and more recession-resistant disposable products, the economy's effect has been more muted than our capital businesses. This favorable mix of higher margin, disposable products helped to contribute to another quarter of non-GAAP gross margins above our initial expectations. This continues to provide confirmation that our overall earnings are not as sensitive as they once were to weakened demand on the capital equipment side of our business.

In summary, regardless of the impact from economic uncertainty to the top line, our strong cash position, financial resources, and product pipeline, including the two recently approved products, continue to give me confidence Hologic remains on target to emerge as a more focused and operationally efficient Company.

And now, I'd like to take a minute to briefly provide the second quarter revenue overview by segment. Breast health revenues were $180.1 million, down 19% from the $223 million number we posted for the same period in fiscal '08. This decrease was largely due the year-over-year decline in sales of Selenia systems sold, given the subdued hospital capital spending environment we discussed previously and today. This continued retrenchment among our hospital customers has lengthened our selling cycle, as the number of projected Selenia orders were placed on hold by hospitals.

We note that few of these anticipated orders have been canceled outright. And as such, we are cautiously optimistic that as confidence in the economy returns, we will see our customers convert their Selenia-intended orders, presently on hold, back to actual purchases, albeit cautiously.

On the bright side, once again, service revenues related to our Selenia full-field digital mammography systems, produced solid growth in the second quarter as we continued to expand our installed base.

Revenues from our breast biopsy systems also showed positive signs, as our newly launched Eviva breast biopsy system provided gains to our top line. In addition, our Celero core biopsy system also recorded positive growth. Both products -- both are interventional breast health business.

Regarding the international market for our Selenia Dimensions Tomosynthesis 3D mammography system, the market has been modestly affected, as the economic contagion has spread to foreign markets. As a result, although we continue to see strong interest in our 3D system and remain very optimistic about the potential of the market outside the US, we believe our selling efforts will meet hurdles in the nearer term due to price pressures.

Diagnostic revenues totaled $135 million and increased 8.5%, compared to $124 million for the same period in fiscal '08. Worldwide thin pap tests sales continued to increase, while US sales were off modestly as women have foregone some preventative care in the current climate in favor of urgent care, consistent with our expectations. Imager adoption continues to increase in the US, with gains in the percent of ThinPrep tests imaged.

On the international front, sales increased as we continue to penetrate the market, particularly, in Europe and Asia. On a positive note, we've launched our Cervista HPV high-risk test internationally in the first quarter. And while the contribution to revenues in the second quarter was nominal, feedback remains quite positive, and our sales efforts are gaining traction. I'll discuss our US launch plans for Cervista in a moment.

GYN surgical revenues totaled $63.8 million and increased 16%, compared to $55.2 million for Q2 FY '08. Given the seasonality and potential for the economy to dampen procedure volume, we were quite pleased revenues were slightly better than our guidance of a $5 million to $7 million sequential decline from the prior year's quarter of $68 million -- that was from the prior quarter sale of $68 million, excuse me.

Sales of our NovaSure system are continuing to result in strong growth, primarily domestically. We enjoyed increased adoption of NovaSure as an office-based procedure. Also, we are increasing the percentage of our business, from standing monthly order agreements, which certainly enhances our predictability. With Adiana launched in select European countries in the quarter, we experienced encouraging interest, though sales were modest, which was expected as the launch was controlled.

Skeletal health revenues totaled $23 million, compared to $28 million for the same period in fiscal '08. Sales were in line with expectations given the weakness in hospital capital equipment spending, which impacted our worldwide bone densitometry and MRI sales. As I mentioned in my opening remarks, I'm particularly pleased to report, we received three very positive FDA actions on our products in the quarter. As stated earlier, both our Cervista HPV HR and Cervista 16/18 tests were approved by the FDA in March of this year. And on April 14, the FDA posted an approvable letter to their Website for our Adiana permanent contraception device, pending a favorable manufacturing inspection and FDA report/review.

Regarding Cervista HPV high-risk, we commenced our formal launch of the test in mid-April and can report very positive, early interest by way of a number of contracts already in hand. Although, we expect the process, from contract signing to recognizing revenues on Cervista, will take at least one quarter and possibly two due to installation of equipment and the validation process, we are nonetheless encouraged by the immediate response and belief Cervista holds promising revenue potential.

We feel the early response is a strong indicator the clinical benefits of our tests are compelling. In addition, our Cervista 16/18 test for genotyping will be launched later this month. While we do expect the Cervista HPV test to provide Hologic with a large market opportunity, any top-line impact will be modest in FY '09 and should become more meaningful in fiscal 2010. Therefore, we're not increasing our overall FY '09 revenue estimate as a result of these two product approvals.

We remain comfortable regarding our estimate of approval of Adiana within fiscal '09 and we'll be ready to launch Adiana upon the FDA's final approval. However, at this point for obvious competitive reasons, we'll defer our discussions about our launch strategy. However, suffice to say, we believe Adiana will be a highly competitive offering in the permanent sterilization market.

Relative to tomosynthesis, in mid-April we met with the FDA and discussed their proposed June panel date for our PMA application. Since that time, Hologic management made the decision to postpone the panel date. Although this will push out our US launch, we believe we are better served long term by doing so, based on the following key factors.

First, there is considerable internal unrest at the FDA, along with changes associated with the appointment of a new Commissioner. Therefore, we decided to delay a panel meeting because we believe it is absolutely crucial to wait until the FDA has stabilized its internal resources with leadership and decision makers in place that can review our data set and proceed with our filing.

Let me be blunt. We reached a point where we had to weigh the risks and rewards of going to panel. It is our firm belief the data in our submission clearly demonstrates the potential benefits of tomosynthesis. However, because of a fundamental difference in thinking by the current review team regarding the previously agreed upon approach since our original meetings, we believe there is risk in the submission not receiving approval.

Secondly, since we originally filed our PMA application, we have learned a great deal about what will be necessary to enhance approval and clinical adoption of tomo and believe the previous study design was not optimum in those areas. Therefore, we're considering other alternatives, including using our current data, analyzed differently and/or submitting additional clinical data to support the total value of tomosynthesis. Simply stated, the goal is to better facilitate our path to approval and to enhance the adoption of tomosynthesis.

Third, we do not believe the current economic climate and purchasing trends within the US hospital market provide a favorable environment to promote a new premium priced technology. We believe a more phased in approach, relative to approved indications, will allow for a more practical, initial adoption and lay the foundation for a broader future rollout.

The current environment has shown that demand for our current Selenia systems will remain weak, well into fiscal 2010 and is likely to have the same impact on selling 3D Dimensions, with its added premium. Therefore, introducing a new premium product into the market during this difficult economic time is premature. The ultimate objective is to have tomosynthesis approved for sale and we believe additional time is required to prepare for a panel to assure the fastest approval time.

I appreciate that some shareholders may view our decision to delay the panel date as impacting revenue growth for 2010. But again, given what we are experiencing in the market today and the considerable unknowns for next year's global economy, we do not see any appreciable top-line contribution even if we gained approval for tomosynthesis at this point in time.

We are confident in our guidance for EPS for the full year, as our cost reduction initiatives have helped insulate our earnings from the slowing top line. In addition, diagnostics and surgical products have been less impacted by the recession and are showing, certainly, steady gains. Glenn, I'd like to now turn the call over to you.

Thanks, Jack. Jack briefly addressed our second-quarter revenue performance by segment. Let me note that our mix of domestic and international sales is approximately 80% and 20%, consistent with historical trends. Foreign currency translation had a modest impact on our reported revenue growth. Less than 1% year over year, primarily within the diagnostics and surgical sides of our business, as most of these international sales are denominated in local currency.

This quarter, we incurred two rather large, unusual or one-time impairment charges, which we back out of our net loss to arrive at our non-GAAP adjusted net income. The first was for goodwill impairment in the amount of $2.34 billion that related to goodwill acquired in the acquisition of Cytyc in October 2007. The segments impacted included, diagnostics, GYN surgical and the MammoSite product line. This charge was driven by the significant decline in our market capitalization in the first quarter. We completed our analysis this quarter, resulting in this goodwill impairment charge.

The second charge, in the amount of $4.1 million, was for the impairment of certain intangible assets surrounding the HCV molecular test for Hepatitis C at Third Wave. During the quarter, we decided to forego pursuing regulatory approval to sell this product in the United States. This was due primarily to the increased cost and effort that would be required to obtain regulatory approval. In March, we were informed by the FDA that a PMA would be required for this product and not the 510-K filing, which we had been expecting. We will continue to sell this product in international markets.

Turning to the rest of the P&L. Our gross margins, on a non-GAAP basis, held steady at 62.7%, consistent with the first quarter. This excludes $37.8 million of amortization of intangibles and the HCV impairment charge of $4.1 million and compares favorably to our expected non-GAAP gross margins of 62%. This improvement was due primarily to, one, our product mix favoring higher margin product, such as ThinPrep and NovaSure. And, two, lower manufacturing, product and service-related costs. On a GAAP basis, gross margins were 52.3%.

We continued to focus on our cost savings initiatives in order to reduce discretionary expenses, which resulted in a favorable outcome. Our operating expenses, on a non-GAAP basis, of $122.4 million, excluding amortization of intangibles of approximately $12.7 million and the goodwill impairment charge; came in below our first-quarter expenses of $124.3 million and also below our guidance of $126 million to $128 million.

Absent the acquisition-related and impairment charges, pretax earnings this quarter were $112.5 million. Using our effective tax rate of 34%, non-GAAP net income was $74.1 million versus non-GAAP net income of $76.2 million last year, a decrease of 2.7%. We reported fully diluted non-GAAP EPS this quarter, adjusted for acquisition costs and impairment charges, of $0.29. This is versus $0.29 a year ago, which was slightly ahead of our guidance of $0.26 to $0.28 provided on our last earnings call.

This adjusted EPS includes Third Wave, which incurred an adjusted pretax loss of $10 million, comprised of an operating loss of $5 million and interest expense of $5 million. This equates to $0.03 per share after tax loss, also in line with our expectations. As noted in our press release, our total dollar backlog for all of our products was $339 million at the end of March, the same as at the end of December.

Turning to the balance sheet, we repaid an incremental $59 million on our $540 million term loan, which was borrowed on July 17 in connection with our acquisition of Third Wave last year. Thus, we have repaid a total of $163 million of the term loan, leaving a balance of $377 million at the end of March. And as of today, our balance has been further reduced to $330 million. Our strong cash flows will enable us to pay off this loan within the 2.5 years we originally guided to. We generated $107 million of free cash flow in the second quarter of fiscal '09, comprised of $120 million from cash flow from operations, less capital expenditures of $13 million.

Moving on to guidance. I'll first start with the fiscal year and then, cover the third quarter. So for fiscal 2009, ending this September 26, we are reaffirming the earnings guidance and tightening the revenue range that we provided on the first-quarter call on February 2, the details of which can be found in last quarter's press release and IR presentation, which is posted on our Website. By way of brief reminder, we stated that we expect that breast health revenues will be down for fiscal 2009, driven by the substantial slowing of Selenia sales, and that diagnostics and GYN surgical revenues will continue to trend up for the year from increased imager adoption, higher international sales, and more widespread use of NovaSure.

Therefore, our high-level guidance is as follows. First, we are targeting total revenues of $1.625 billion to $1.65 billion. Our revenue guidance at this point includes US sales of both Cervista HPV and Adiana once approved, realizing we will only get a modest contribution from these products in the current fiscal year. We still expect to see meaningful revenue traction from these new products in fiscal 2010.

For tomosynthesis, we have revised our expectations and are now expecting only international sales for at least the next year. We are looking for full-year gross margins in the range of 61% to 62% on a non-GAAP basis. We are expecting operating expenses in the range of $500 million to $520 million, excluding the amortization and write-off of intangibles.

And we are expecting interest expense, based on current LIBOR rates, to be approximately $70 million. And our effective tax rate, absent impairment charges, is expected to be 34.5%. We continue to expect non-GAAP adjusted EPS of $1.10 to $1.15 per share. This includes the full-year results of Third Wave, including a minimal US contribution for Cervista HPV. Absent the operating loss and increased interest expense for the year, attributable to Third Wave, our non-GAAP EPS guidance would have been $0.12 higher or $1.22 to $1.27 per share.

Next, our guidance for Q3 reflects a soft capital equipment market, coupled with the planned phaseout of our DRC digital detector sales to Siemens, which all but goes away. For the third quarter of fiscal '09, ending on June 27, we are expecting revenues in the range of $390 million to $400 million. This decline is due to two primary factors, our continued conservatism with regard to the economic uncertainty affecting our hospital customers' purchases of capital equipment -- namely Selenia, the biopsy tables and skeletal diagnostic equipment, which was partially offset by continued growth in our diagnostics and GYN surgical segments.

For the quarter, we expect gross margins to decrease slightly, with the just-ended second quarter to 62% on a non-GAAP basis. We expect operating expenses, excluding the amortization of intangibles, to rise slightly on a sequential basis to $126 million to $128 million or 32% of revenue. The small incremental increase compared to the prior quarter relates to an increase in R&D expenses due to the timing of project timelines. We expect interest expense, based on the current LIBOR rate, to be approximately $16 million in Q3. And our effective tax rate is expected to be 34.5%.

We are expecting non-GAAP earnings per share, excluding the amortization of intangibles, of approximately $0.25 to $0.27 per diluted share. This includes the results of Third Wave, which are expected to be dilutive to adjusted EPS by $0.03. In fiscal 2009, we expect cash flow to remain strong and will not require any financing to fund our operations. We expect to generate close to $200 million of free cash flow in the second half of the year and to continue to steadily pay down our term loan. Capital expenditures have never been a big part of our businesses and we are still expecting CapEx of $65 million and depreciation of approximately $70 million. With that, let me now turn the call back to Jack.

Well, thanks, Glenn. In closing, we're going to continue to run our business in a highly unstable economic environment. However, it brings with it, as you well can imagine, an elevated degree of uncertainty regarding what the remainder of this year and beyond is. And overall, given the forces we must cope with today, I'm pleased we achieved the high end of our earnings forecast and delivered on our commitment to continue the cost savings initiatives we implemented last quarter. Our product pipeline remains strong, evidenced by the two products that received FDA approval this past quarter and the positive feedback from the FDA on Adiana. Our goal is, obviously, to maintain our leadership in all of the major markets we serve. And we remain committed to put our customers first and maintain our number-one position.

And as always, I'd like to thank our worldwide team of Hologic associates for their continued commitment, which is the foundation of our current and future successes. And now, this concludes our opening remarks, so Glenn, Rob, Tony, Howard and myself will be happy to answer any of your questions. So, Andrew, if you would please go forward and put people in the queue.

Certainly. (Operator Instructions). And we'll take our first question from Tycho Peterson with JPMorgan.

Hi, good afternoon. Maybe, just kicking off with a question on Dimensions. Could you give us a sense as to when you think you'll make a go, no go decision on the next step here? And how should we think about this in terms of spending around an additional trial or the clinical data generation aspect of it?

Certainly. What I'm -- I'll ask Rob if he would answer that.

Yes. Tycho, maybe just clarify the question a little bit.

Because, by the way, Tycho, it didn't come clear -- your voice didn't come clear here. We're checking on our end to see if we have our volume up high enough. So, could you just briefly say that again? I apologize to you.

Yes. The question was when do you expect to make a go, no go decision around Dimensions, in terms of another study? I'm just a little unclear as to what you're thinking about in terms of generating additional clinical data and should we think about a follow-on trial? And what would be the timelines in terms of making a decision there?

I'm going to let Rob answer that. But it's not necessarily that we're going to generate additional data, that's one of the avenues that we're looking at. But Rob, go ahead.

Yes, Tycho, it's really a bit of a multifaceted plan. There is a re-analyses of the current data that we intend to present to panel, albeit a delayed panel. And in addition to that, there are different phases of clinical work that we also believe will be necessary in order to reinforce the initial indications, additional indications for use and obviously, be used for reimbursement purposes, as well. So, it's a multifaceted plan that will take the course of the balance of this year and even into next. But there will be different milestones of accomplishments that will occur over that period of time.

Okay. That's helpful. On Cervista then, can you -- I appreciate the color around some of the initial interest. Can you just give us a little bit more color in terms of characterizing these larger laboratories? And what is the dialogue about -- around the fully automated system now? Are you getting a sense that labs are holding off in anticipation? How do we think about the timelines there, too?

Well, Howard is on the phone with us. So, Howard, would you answer that, please?

Sure, Tycho. I would say, just globally in general, there has been tremendous interest with Cervista, predominantly at any site. So, we're very pleased with the conversations we're having and the interest that they have in our product.

Since you brought up automation, I -- one of the things that we've done that we've not been clear enough on is that, we have certainly announced we're planning on developing a more automated solution. However, if you look at what we have to compete with today, if you take a look at what's really important to laboratories, it's the FTE's that need to actually -- the FTE manpower to actually put out a reportable result. I would suggest to you, that what we have today is, from a point of ease to run a run, is equivalent to what [Chiagen] has captured.

I would say what we're now calling semiautomated today is equivalent and very competitive in the marketplace. We think what we will have next year is complete walk-away automation that will be extremely attractive. But we have had no one that we have sat down with that has not been very encouraged and very pleased about the product offering, as it exists today and are very excited about the future. So, I don't think anyone is waiting for what's next. I think they're serious about our assay today, then that should not hinder us in our ability to sign contracts.

Okay. And then, just one last clarification before I hop back in the queue. I think Jack, in your comments, you had talked about guidance maybe incorporating Adiana pending launch. I wasn't clear if that's included in full-year guidance or not?

It is absolutely, at a very modest amount.

Okay. Thank you very much.

(Operator Instructions). And now, we'll go to our next caller, David Lewis with Morgan Stanley.

Good afternoon. So, two quick questions. One on Dimension and the other on pricing. So, Rob, just to clarify your comments, there is existing data and which obviously is going to have to be re-analyzed and resubmitted. And then, there will be new data. As it relates to just the new data, is that new data able to get a screening claim, or is that new data able to get a reduction and recall claim? And what could be the timeline on one of those two?

On the new data, the intent would be that it would be a followup and a strengthening of our original claim, which was screening. And in addition to that, we're looking at a variety of other claims, as well, that might segment the female population or focus on areas beyond just screening and into diagnostics. It will be a variety of different applications.

But without submitting new data, Rob, just sort of taking your existing data and maybe cutting it in different ways, that was my understanding. That data alone, can that generate any claim in your mind?

Yes. And it is our intent to present that, present the current data, at this rescheduled panel meeting.

And the timing of that rescheduled panel meeting, should we be thinking three months, six months, or nine months?

Yes, I would say it's somewhere between six months and nine months.

Okay. Very helpful. Thank you. And then, just moving onto pricing here, Glenn. Obviously, given the available data that we can look at, maybe you can talk about O-US and US trends? Because it appears to us, that boxes should have been stronger and revenues in line, which would imply you'll see some of the things that Phillips and GE are seeing as it relates to pricing and imaging. So, maybe talk about pricing trends and O-US and US trends? Thank you.

Yes, sure, David. On the ASP side, we have seen prices hold. But I think what's reflected in that lower revenue number is a movement down in the price point on the type of product. So really, it's the product mix and the configuration that we're seeing at this point. So we are selling or seeing more defeatured or fewer featured systems. But at the basic formula level, those prices are holding, both on the US and the international side.

But is it safe to say that the mix of your business is more down market than you anticipated when you first gave guidance?

That would be correct.

Okay. Thank you very much.

And next, we'll go to Amit Bhalla with Citi.

Hi, good afternoon. Quick Dimensions question. Jack, in your prepared comments, you said there's a fundamental difference in thinking between where you stand today and the reviewers. Can you elaborate a little bit more on the safety aspect of the data set you provided and if there's any issues there that the FDA is asking you about? And have any of the people who reviewed the data today changed from the original set of people you've been dealing with?

Well, we are walking, obviously, a very fine line in talking about the division of the government that is reviewing our current proposal. But I would tell you that we've had five different Deputy Chiefs and two Directors since we started this process. Very energetic people, very committed people. However, this change of people has -- with the current group there, the fundamental difference is what we initially agree on, in our protocols and the data that we're going to provide, is now being looked at through a different set of eyes, quite frankly. That says, "It's interesting. But why didn't you do this or why didn't you do that?" And the answer was, "We basically did what you guys asked us to do."

And so, we've had to make the decision; Do we risk going to the FDA right now in an environment where, quite frankly, with weakened Selenia sales, coming in with a tomo product that's $150,000 to $200,000 more expensive, that is going to get limited play, certainly over the next 12 months, just from economic reasons; Do we go lay out our strategy in front of our competitors? And that's one of the things that we're looking at right now, that it's open to the public. Anybody can come.

So we made the decision to delay. And it is incumbent upon us right now, the FDA is waiting for us to come back to them on a date. There was no findings relative to the data that we submitted. So there is nothing wrong with the integrity of the data that we submitted. We are very convinced in the strength of that data. However, if we go back with the data we have today to this panel meeting, we are not assured of an approval. There is a risk there.

So looking at it from the standpoint as you called it, cutting the data a different way, may answer some of those questions. What we have to decide over the course this quarter, with additional meetings with this new team at the FDA; Is that the road that we want to take or do we want to do an additional study that can supplement that and would require a supplement, David, excuse me, Amit, that would of course push out an approval to a later date.

We could also do two things -- we could make -- we could go to panel with one submission and come in with a supplement for a second one. It is clearly our intent and what we've learned in understanding this technology and we have had what we consider very good results, is it will be a series of supplements based on the ability of this system to be able to catch cancers and lower the recall rate, etc. as we've talked to. So consequently, I think you'll see filings from us over the course of the next two years. But as far as the short date on getting approval, I certainly agree with Rob that, it's going to be 2010. And I would say the latter part of that just because of the FDA's calendar.

Okay. Thanks. And a followup would be on the diagnostics and surgical segment. You said that you are starting to see a little bit of impact from unemployment. Can you just elaborate there and talk to us about what kind of assumptions you have for the rest of the year in those segments? Thanks.

Right. Rob or Howard, or--?

Yes. I think in general, it's been slow in coming. I think it's maybe a little bit more obvious on the diagnostics side than it would be on the surgical side. And that is that overall visits, OB-GYN visits are down. [Mapta] is being down from a frequency perspective. So, as a result of that, although it is much more difficult to detect because of the vast number of paps that are done, we certainly are seeing a number or a decline in the overall number of paps or tests that are being conducted on a quarterly basis. We really don't see that, as of yet, on the surgical side. And I think that's probably related much more to the fact that it is much earlier in the adoption process and penetration is far less than what the available market is. So, I think that it will be more resilient than some of the other businesses.

Okay. So for the rest of the year, you don't expect an impact from unemployment on the surgical business?

Yes. On the surgical side, I think we will be much more resilient and are not anticipating that.

Okay. Thanks.

And we'll take our next question from Peter Bye with Jefferies and Company.

Great. This is actually Josh calling in for Peter.

Okay, Josh.

Good afternoon. So, if you could just help us out with some of your assumptions on guidance, specifically your breast health division. Are you assuming any price pressure going back in the back half the year, increased competition, any new entrants in the US market? And then, are you still assuming a worsening of that sort of mix shift down to the downstream with the lower end products?

Well, Rob and I can answer that. And I don't see any difference in competitors or new entrants. Phillips is selling a Siemens clone under a private OEM agreement. They're selling that internationally. I don't see any other companies coming here at the moment. And I don't see any different pricing pressures than we've already faced for the last couple of years from the big guys. Rob, do you want to --?

Yes, I think the market is fairly stable at this point. If we can describe it that way, relative to, it has hit a level of weakness that we believe is recoverable. And in fact, our order rate was stronger this quarter than it was the last. Having said that, you are accurate in that the ASP's in the market today are lower. And they're lower because of competing at different levels of buyer. And we're at a segment of the market that is looking for price, predominantly, and obviously some features. But it is predominantly being governed by price. So what we have done to respond, is we are defeaturing Selenia and taking costs out of the product to come out with tiers of different levels of Selenia that allow us to segment the market and bracket where we think certain competitors are. And that's how we have succeeded thus far with maintaining our market share and prevailing in these very difficult times.

Great. And just a followup. On the international side, you mentioned how you're seeing some increased pressures there. You had had expectations for the international Selenia business to grow modestly. Do you still expect that and can you just give us a little bit more color on your Dimensions unit internationally and whether you're seeing sequential upticks in unit sales there?

Yes. Yes, international I think is still doing well and is performing well. The differences are that some of the economies that we were counting on for growth, like the UK, has certainly not materialized. Just recessionary trends and budget freezes and the like. I think in other parts of Europe, we are seeing similar, if not even worse, conditions with respect to Selenia sales.

There are nuggets of great news, in eastern Europe and Latin America, parts of the world that -- for instance, the Middle East, which we had gone into the year not believing would have significant growth. But in fact, this year we are seeing it. So we still feel very good about international, albeit, we are cautiously proceeding through the year, with the idea that pricing may end up being a factor.

As far as Dimensions, because it's so relatively new, the -- obviously it's growing but it is also growing at a very steadied rate. The European market, which is where we're primarily selling it, really has to go through a lot of government approvals and sanctions on the new screening technology. So where it is being used and sold today is in university setting. Much the same way as it might be here initially because there is really not specific reimbursement in the public sector for it. I could tell you that from a user's perspective, both here in the United States and abroad, that there isn't a physician that has used the product that has not commented on the clinical viability and acceptability of it, relative to its performance in the task that it was designed to do, and that was to find more cancers. So we're very, very encouraged and pleased with the performance of the product. But again, I think there is a realistic growth pattern that is going to take time because of things like regulatory here in the States and obviously, reimbursement in other parts of the world.

And we'll go to our next question with Jayson Bedford with Raymond James.

Good evening. Thanks for taking the questions. Just a couple quickies. On the timing of Dimensions in the US, I think you mentioned six to nine months for a panel. Is this simply a function of generating new data, then going back and asking the FDA for a panel date? And then, have you and the FDA agreed upon the additional data that's needed?

Well, let me clarify. The delayed panel and the rescheduling of that would really involve the existing data. There, literally and practically, is not time, even within the scope that I've explained, to do another clinical study. We are intending and in fact, have protocols out at all of our beta sites across the country in gathering more data. But the revisit with the FDA with respect to panel is really a reanalysis of the existing data. So, is that clear?

Yes. That's helpful, Rob. But I guess then just to the second point, in terms of additional or follow-on data, has the FDA given you any instruction on what is needed or --?

We are in the process of submitting a variety of different protocols to the FDA that range from limited indications of use to very broad indications of use. And as I indicated earlier, it might be a natural segmentation of the female population, it might be within a diagnostic application. And each of those has different ramifications with respect to the review path and the regulatory path. Meaning we, as you know, have an FDA-approved 2D Dimensions product. While that's a tomo-ready product and can be marketed that way and is also the foundation for resubmitting a PMA supplement on that product for, let's say, a diagnostic application. So there are many, many variables that we have to consider. And therein, was yet another reason why we didn't want to rush to panel with just the current data that we had already presented.

And Jayson, the -- we could have gone to this June panel meeting with the data we have. We were not asked to not come. We were the ones who elected to not go. I'm sure you read publicly that the FDA is looking at an August date for their next one if they can recruit two radiologists. They've had their own issues recruiting people. So, there's a lot of moving pieces over there.

They have right now a whistleblower situation, where letters are going out to Congressmen and Senators from people inside the Medical Device Group, the group that we're dealing with, which has created a lot of uneasiness there within the organization. So, and it's not -- you've got a lot of good people working in an environment that is not, I think, that healthy at this moment. And quite frankly, we opted to, as I said, to wait and decide as we talk with them over the course of the next -- well, the balance of this quarter, to come up with -- if we decide that we want to do new data what that would be, agree on those protocols. Or if we're going to "cut the data differently" and approach the panel from a different perspective.

Okay. That's helpful. And then, just a quick question on Cervista. Which sales force is selling the device? Is it both labs and OB-GYN or is it just the lab folks? And then, is the focus on existing Hybrid Capture users or are those nonusers? Thanks.

We'll let Howard answer that.

Yes, Jayson, we're focusing on both. Obviously, primarily over the -- since the acquisition timeframe, we've been staffing up -- excuse me, not staffing up but training the lab team to go out and be talking to the laboratories about converting over to Cervista. Now that we have FDA approval and we actually have our claims, we have been actively training our physician office sales representatives, as well. So, we've been calling on the labs now for about six months.

And we just, upon FDA approval, are out describing the differences between Cervista and Hybrid Capture 2 to the OB-GYN. I would say that the majority of our reference from a lab perspective, to your last part of your question is, we certainly are focusing more on the current users than trying to bring labs currently not offering HPV testing to the marketplace. It's just obviously, a larger opportunity. So, we're spending the majority of our time there but both are executing today.

And we'll go to our next question, Sameer Harish with Needham and Company.

Hi, guys. Can you hear me?

Hear you fine.

Perfect. I was wondering if you could maybe just tell us a little about the NovaSure placements in the quarter? Were they tracking similar to last quarter or -- and the disposables, as well?

Tony?

We were tracking -- as Jack said, we had predicted that this recent quarter would be down from the prior quarter. And it was in line with that expectation. So placement in consumable sales were right on track and actually, a little bit better than what we had expected.

Okay.

And just to add, historically, second quarter has always been down for NovaSure. So, it was expected based on historical results. Not for any other reason than that. And we happened to do better than what we anticipated.

And I know in your prepared comments, you talked a little about increasing presence of NovaSure in the office setting. Do you have any anecdotals you can add there or maybe a sense of how much penetration you have in that market?

Yes, it's Tony again. We are around 14% I believe in the office. That business has continued to grow a little bit incrementally each quarter. And we think it will grow nicely. We'd obviously like it to grow a little bit faster.

Okay.

We also have about -- a little less than half of our offices signed up on standing order programs, which we think is encouraging.

Okay. Just for the overall Company, I know we don't necessarily get the number for the backlog but can you give us a sense, directionally, from end of the year, where we track?

Glenn will take that.

Sameer, the backlog on NovaSure specifically or in total?

In total.

Our total backlog for the Company ended right at the same amount it was at the end of December, the $339 million. So the increase in that backlog was a slight increase in the diagnostics side and a slight decrease on a dollar basis on the capital equipment side, meaning the breast health and the skeletal.

Okay. So it decreased in revenue potential versus units, is how we should interpret that?

Yes, the units are holding. I think we're seeing this product configuration change driving to some of the lower priced units in the market. So yes, when we look at the backlog, there was a slight decrease on both the breast health and the skeletal side, offset by an increase in the diagnostics. And the surgical held level.

Thanks. The last area, everyone's kind of talked a lot about the tomo, maybe just looking for a silver lining here. Any opportunity to pick up some incremental orders at Selenia, as customers may have been holding off for tomo?

I don't know if that's the silver lining, but I do believe that the silver lining is to really more aggressively market our 2D Dimensions, which will be marketed as a tomo-ready product at this point.

And it's the only approved product on the market.

Thank you.

And next, we'll go to Isaac Ro with Leerink Swann.

Hi, thanks for taking the question. Just first off, is it safe to say regarding digital -- the tomo holdup, that we're talking about nuances around stratifying the rate patient population and treatment paradigm, not necessarily worried about safety issues?

We may not be understanding the question. Could you maybe go through that again?

Well, when it comes to tomo, there's obviously increased radiation, things of that sort that could be of question. Is it fair to say that you're not so much worried about the safety risks associated with tomosynthesis and more from the questions with the FDA when it comes to the right treatment paradigm, the right patient population?

Yes. I think what we want to be able to do is show the product in its best light, which is to find more cancers, save lives, obviously, and reduce the recall rate. Eliminate the need for women to go back in and have follow-on studies that are unnecessary. So when you talk about the safety and effectiveness of the product, hands down, finding more cancers trumps dose, if you will. And that is the intent of the product. And that's where we believe the product truly shines.

Yes, Isaac. Let me add something, give you again -- go back a couple years. When 2D first came out, our Selenia 2D, dose, of course, was higher but it was under FDA guidelines. Today, we have been able to do a very good job of taking down that dose and we've done that through, we're on our third-generation detector today. We have faster electronics. Since we control our own supply chain, on the coating of the selenium and the scientists there, we've done a better job there with that formula. Dose is not going to be an issue long term.

3D today, using a combo mode of 2D plus 3D, which our competitors like to talk about, as far as high dose, is, first of all, under again current FDA guidelines and QSA guidelines. And secondly, is not going to be an issue again long term. And the reason it's not is because we're already working on the next-generation detector, which is going to have even faster electronics than we are delivering to date in Europe, backwards compatible. We have a new x-ray tube that is in the product today. We're looking at optimizing that. So, those issues will go away. But there's never been a safety issue with the product and we are strictly adhering to the FDA guidelines.

Okay. Got it. And just secondly on ThinPrep, can you comment on market share? You mentioned the US is down a little bit. Is there any chance that there's either a little bit of share loss or perhaps inventory destocking out there in the channel?

Well, Howard waits for this question, so he can answer it. Howard, go ahead.

We do not have any inventory issues in the marketplace. I do think as Rob had alluded to, what we're really seeing is a little bit of softening in patients going to the physician. We -- there's been plenty of articles out in the lay press talking about the consumer using their healthcare dollars now more for urgent care, as opposed to wellness. And we're out in the laboratories each and every day. And they're just describing just a very, very slight softening in their volumes.

There's going to be an article or some results in G-2 coming out in June. We've seen a little bit of the data. And although the global independent laboratories are reporting growth about the same levels, some are saying it's a little up, some are saying it's a little down. Histology, however, 67% of the labs in the survey said they've seen volumes drop and only 17% saw volumes up.

So the softness that we're seeing is probably you can completely attribute to the economy and not competition. If you look at the numbers reported by our competitor, the revenue has been flat, basically for the last three quarters. So, there's really no revenue to point to that would say any significant share shift has occurred.

Fair enough. Thanks very much, guys.

And we'll take our next question from Jonathan Block with SunTrust.

Thank you and good afternoon. First, want to (inaudible) and on the Third Wave side, I believe you said it's $0.03 dilution this quarter, and another $0.03 in dilution in fiscal 3Q. When should that turn accretive? Is that a 1Q 2010 event where Third Wave would add to the bottom line? And the follow-on to that would be, with Adiana, you're leveraging the same sale force. Is that accretive from day one or are there some launch costs associated with that?

So if we look at Third Wave first, Jonathan, I did indicate that we were expecting in Q3 a continued $0.03 loss, as we begin to get some traction in the market. So that will decrease in Q4. So, down to about $0.02. So for FY '09, we are expecting that $0.12 worth of dilution.

Looking into 2010, and we really haven't firmed up our guidance for 2010, but you can imagine, that as Cervista takes hold and the revenues begin to grow, we're going to quickly hit that break even point early on in FY 2010. And we'll give a little bit more color as we go forward but that's kind of the timing to keep in mind.

As it relates to Adiana, it's a little bit different. The infrastructure is in place for manufacturing the Adiana product. The approvable letter that we received was at the Costa Rican facility where we do manufacture the NovaSure product. So we have already a manufacturing facility ready to go. Adiana helps cover that direct overhead that's down there and better absorbs those costs. And we use the same sales force as we use into that GYN surgical market that sells the NovaSure product. So, the Adiana very quickly becomes a positive product.

Okay. Great. And then maybe just a followup. I'm just looking for some clarity on the Dimensions. So just to be clear, if you do not need an additional study, do you think you can go to panel in six to nine months, that's if you're able to sort of recut the data you already have? If you need an additional study, that six to nine month timeline that Rob gave earlier, gets pushed out. Is that correct?

It's correct with one modification. We don't need new clinical data to go panel. Two, if we went for the broadest of claims with new clinical data, it would go beyond the six to nine months. If we used modified claims with a supplement, it may be a shorter time period. So the -- unfortunately or perhaps fortunately, there are alternatives. But your first statement is the one that, I'd like to leave you with, is we do not need new clinical data to go to panel.

Okay. Great. Thanks, guys.

And that concludes the question-and-answer session today. At this time, Mr. Cumming, I will turn the conference back over to you for any additional or closing remarks.

Well, thank you very much. I appreciate everybody's time. And we look forward to getting together here in another couple months. And we'll look for better times in the economy and wish everybody well and good health. Thank you so much and have a good evening.

And that concludes today's conference. We thank you for your participation.