Hologic Inc (HOLX) 2010 Q4 法說會逐字稿

Good afternoon and welcome to the Hologic Incorporated fourth-quarter and fiscal year 2010 earnings conference call. My name is Rebecca, and I'm your Operator for today's call. Today's call is being recorded. All lines have been placed on mute.

I would now like to introduce Deborah Gordon, Vice President of Investor Relations, to begin the call.

Thank you, Rebecca.

Good afternoon and thank you for joining us for Hologic's fourth quarter and fiscal year 2010 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 of this conference call will be archived on our website through Friday, November 26th. Please also note that a copy of the press release discussing our fourth-quarter and fiscal 2010 results, as well as our first quarter and fiscal 2011 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 statement is 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 fourth-quarter 2010 Earnings Release, including the financial tables in the release.

Please note that today's call will consist of 30 minutes of opening remarks, followed by a 30-minute question-and-answer session. We, therefore, ask each participant to please limit his or her question to just one, with one follow-up if necessary. We do appreciate you may have additional questions, so please feel free to go back into the queue, and, if time permits we'll be more than happy to take your additional questions.

Before I turn the call over to Rob Cascella, I would like to remind you that Hologic management will be presenting at our annual investor meeting on November 30th at 8.00 AM Central Time at RS&A in Chicago. The presentation will be webcast, and the details may be found on the IR section of our website.

With that, I would now like to turn the call over to Mr. Rob Cascella, President and Chief Executive Officer.

Thanks, Deb. Good afternoon and thank you for dialing in to our conference call. Joining us on the call is Glenn Muir, our Executive Vice President and Chief Financial Officer; Steve Williamson, our General Manager of our GYN Surgical Group; and David Harding, our General Manager of our International Operations.

I will briefly review our quarterly performance highlights, then Glenn will discuss the financials for the quarter in greater detail and provide guidance for Q1 and fiscal 2011. I will conclude with a brief look beyond 2011, and we'll then open up the call for Q&A.

We're extremely pleased that, in light of a difficult economy, and a seasonally slow quarter, our revenues exceeded guidance. Revenues for the quarter were $428 million, compared to a range of $415 million to $420 million. Revenue growth over the fourth quarter of last year was greater than 6%, indicating a steady acceleration in growth from both prior year and prior quarter. Earnings for the quarter on a non-GAAP basis were $0.30 versus $0.28 from a year ago, and in line with our guidance. For the year, our revenues were $1.68 billion, an increase of approximately 3% when compared to last year, and earnings for the year on a non-GAAP basis were $1.18, compared to $1.17 from prior year.

Glenn will provide a bit more detail on our financial performance, and what I'd like to do now is provide some operating highlights for our business segments. Breast Health saw strong revenue in the quarter. In addition to Service, we are seeing increased sales of our Dimensions systems, fueled by both replacements in the US and Tomo abroad. Fees are running relatively flat, with a lower-end Selenia pricing being offset by increased Dimensions. An example would be that in the US, customers are either buying very low-end systems, or they're purchasing our Dimensions product. We believe that this trend will continue into fiscal 2011.

In addition to mammography, our Breast Biopsy business continued to grow, despite declining screening volumes. We saw continued adoption of our Eviva product, and, in fact, saw share gains as well. Although Sentinelle contributed little in terms of revenue for the quarter, since they were only a part of the Company for the last seven weeks, we are pleased with the progress that we've made with respect to integration, sales training, and marketing support.

Finally, you're most likely aware that the FDA has officially down-classified the regulatory requirements for 2D digital mammography. Effective sometime in early December, 2D digital will require a 510(k) submission, rather than a PMA. This will certainly make it easier for other mammography vendors to gain approval in the US. Our belief, quite frankly, is that it's too late. The installed base is already heavily penetrated, and without Tomo capabilities, which remains under PMA, such vendors will have limited success. Moreover, many of these vendors are those that we compete against in existing markets, where they have limited success in their in-country or foreign markets.

Diagnostics continues to be impacted by fewer office visits, which we relate largely to unemployment at this time. An important note, however, is that we believe that this business is stabilizing for the near to mid-term, and that we have not lost market share. In fact, international continues to show growth, even though it was impacted by a seasonally slow quarter. The decline in our diagnostic business was partially offset by strong growth in our Cervista HPV product, which was up 17% sequentially. We believe we continue to take market share, and that the sales growth will continue to accelerate over fiscal 2011.

For GYN Surgical, growth has been fueled by continued adoption of our Adiana system, as well as modest increases for NovaSure. We are pleased with the progress made with Adiana, and believe our market share for the quarter has approached mid-teens. We have several hundred physicians currently performing procedures, and continue to train physicians, with thousands registered to be trained over the next fiscal year. In addition, we have signed a national Adiana agreement with Planned Parenthood that used to be a sole-sourced agreement.

More importantly, our reorder rate is consistent with our expectations for our new product. Adoption is fueled by giving women a choice between permanent contraception technologies, and they choose Adiana because it's more patient-friendly. Finally, we continue to make steady improvement in Adiana yields, and have built up sufficient buffer stock to meet our increasing demand and to prevent any back orders. Overall, we believe that Surgical will remain a strong growth driver to Hologic over fiscal 2011.

For Skeletal Health, as discussed earlier, the bone business has benefited by favorable changes in reimbursement, coupled with a stronger replacement cycle in Acute Care. We believe this demand will continue for bone densitometry on into fiscal 2011.

Moving on to some points of interest, I'd first like to provide an update on Tomo. We're extremely pleased with the outcome of our FDA panel review, which was held on the 24th of September. As you may already know, the panel voted unanimously that the Dimensions Tomo system was both safe and effective, and that the benefits of the new system outweighed its risk. In addition, the panel felt the product was appropriate for both screening and diagnostic mammography. We believe that we're finally on a path for approval in fiscal 2011.

We have supplied the FDA with additional materials requested from the panel meeting, which is currently under review by the agency. We anticipate the FDA will schedule a facility inspection prior to approval. As you may recall, this is a PMA product, which requires an inspection of the facility that it will be manufactured at.

In the meantime, we're diligently working on developing comprehensive physician training. We believe this to be essential to the adoption of this product. These programs will be complementary to our efforts abroad, where we have been shipping the product for over a year. We are planning our reimbursement strategy and are progressing down multiple paths, including discussions with CMS, ACR and major private payors. We believe this technology will gain reimbursement on the basis that it will find more cancers, therefore, it will save more lives, and it will reduce unnecessary recalls, saving significant health care dollars.

Since it is difficult to predict the FDA timeline, we've excluded the impact of US-based Tomo revenues from our guidance for fiscal 2011. But, as stated earlier, we also believe the adoption of Tomo will be gradual for the coming fiscal year, requiring reimbursement and broader clinical validation. However, we do believe the benefits of this technology are compelling, and, in fact, are more compelling than that which fueled the conversion of analog to digital mammography.

I will now provide an update on the progress made with Sentinelle Medical. For those that don't recall, Sentinelle's products include custom MR coils, patient positioning and MR-CAD solutions; all extremely solid fits with our existing sales call patterns. We already sell MR-CAD software in the breast suite, and biopsy products for MR interventions. As a point of interest, we are the number one company in this market for MR-guided biopsies. The acquisition was completed in early August of this year, and, yet, already, we have fully trained our sales force, converted our accounting systems and customer support systems to our enterprise platform. As a data point, Sentinelle's trailing 12-month revenues were approximately $20 million, and we are expecting nearly a 50% growth for these products in fiscal 2011.

Lastly, I will speak to some important incremental investments that we will be making this year that will serve as catalysts to drive our future growth. All of these incremental investments are included in our FY 2011 guidance, which Glenn will comment on in detail. The first of our investments will support the successful commercialization of Tomo, particularly in the areas of funding clinical trials in Europe, and establishing a strong basis for reimbursement in the US. The studies in Europe are necessary to gain public sector support of Tomo in various European markets, which would accelerate our product's adoption rate. In the US, we are conducting activities to support our efforts to broaden claims for Tomo, as well as to gain reimbursement.

The next area of investment pertains to our international expansion. We plan to build out our international infrastructure and management resources, particularly in emerging markets like China, Brazil, and Eastern Europe. We are adding sales, service, and marketing support personnel, incremental senior management, and regulatory specialists to accelerate in-country product registration processes.

Finally, I am very excited to announce, in fiscal 2011, we are launching a direct-to-consumer awareness campaign targeting NovaSure. While we were pleased with the NovaSure business growth in fiscal 2010, the market nonetheless remains substantially underpenetrated. We have spent the last few years in preparing the market, by way of making it easier for physicians to perform this procedure in the office. We believe this is fundamental to market development. NovaSure needs to be the first line of defense for women suffering from AUB. We believe we have now achieved the critical mass necessary to launch this bold, strategic initiative.

The focus of the DTC campaign is to raise awareness among women that a permanent, curative solution to excessive menstrual bleeding is now available in their doctor's office that can be performed in less than five minutes. We believe this is a powerful message. We have already found this to be extremely effective in a few small pilot studies conducted over the last year. You can expect to see consumer advertising begin in print, online in social media, as well as television and other media forms, beginning in our fiscal second quarter. The combined financial impact of all of these programs will be approximately $20 million of incremental expense in fiscal 2011.

In summary, I'm very encouraged about Hologic's performance for the quarter and the year. We managed the business through an extremely difficult time, and believe we have much to be pleased with. Number one, our FDA panel review and the favorable results from same, our market share gains across multiple lines of business, our solid growth in Breast Health, the much more rapid adoption of Adiana than expected, and our consistent quarter-over-quarter double-digit growth for Cervista.

Looking forward, we are building the foundation for the future, and following Glenn's update I'll spend a few minutes providing my outlook on our long-term vision, and the strategy for how we're going to get there. I'd now like to turn the call over to Glenn.

Thank you, Rob. Consolidated revenues came in just slightly above our expectations, primarily as a result of the strong performance in our Breast Health segment, led by Service, which was up $14 million or 25% year-over-year. In addition, Breast Health benefited from the inclusion of MRI coil sales of $2.4 million from our recent acquisition of Sentinelle Medical. However, sales in our GYN Surgical and diagnostic segments were more challenged, as patient office visits continues to be down, due to lingering economic uncertainty. At the same time, sales of our two new products in these segments, the Adiana permanent sterilization system and Cervista's HPV test, continued to increase nicely.

I would like to add that our mix of domestic and international sales was 80% and 20%, consistent with prior quarters. Our mix of disposable versus capital equipment sales was 75% and 25%, respectively, and our foreign currency translation had a modest negative impact of $2.7 million, which was slightly above 0.5% year-over-year on our reported revenues. This was primarily within the Breast Health and Diagnostics segments.

Turning to the rest of the P&L, our gross margins on a non-GAAP basis were 61.1%, down 50 basis points from last year, and up 90 basis points from the third quarter. The gross margins were at the high end of our guidance range of 60% to 61%. Even though revenues came in higher than expectations, gross margins remained in line, due chiefly to, first, better than expected revenues from Breast Health, particularly capital equipment and Service, which both carry lower margins than our corporate average.

And, second, although continuing to improve, we are still experiencing sub-optimal yields in scrap on our Adiana manufacturing line, resulting in margin pressures.

And, then, third, we did have lower ThinPrep volumes in the US, which is a higher than average gross margin product.

Our non-GAAP gross margins do exclude $40.9 million of amortization of intangibles in the fourth quarter of fiscal 2010, and $39.2 million in the prior-year fourth quarter. Also in the quarter, we have excluded the $123 million in impairment charges.

Regarding our operating margins, our expenses continued to be well-controlled. Operating expenses on a non-GAAP basis exclude a few charges that I will discuss in a minute and totaled $125.2 million, an increase of 6.6% compared to last year. This expense was above our guidance range of $118 million to $121 million. However, the increase primarily resulted from the inclusion of Sentinelle Medical from the date of acquisition on August 5th. We continued to invest in R&D, and reported a ratio of 6.4% as a percent of revenues in Q4 of 2010, as compared to 6.1% in Q4 of last year.

Concerning certain charges that we excluded from non-GAAP expenses, in the fourth quarter, we primarily excluded an impairment charge of $220.2 million, of which $123.4 million was recorded within cost of sales, and $96.8 million was included within operating expenses. We also excluded amortization of intangibles of $14.1 million from operating expenses.

Regarding the impairment, we recorded a non-cash charge to write down goodwill and certain intangibles related to our MammoSite reporting unit, which we acquired in the acquisition of CITEC in October of 2007. The full impact falls entirely within Breast Health. This one-time write-down is a result of our re-evaluation of the total market opportunity for breast brachytherapy.

While we continue to believe our MammoSite multi-lumen product will continue to take share, our re-examination of the overall market potential for this product and for all competing technologies in this space has resulted in our determination that the market is smaller than we originally had anticipated. This charge is also excluded from our calculation of non-GAAP adjusted net income.

Turning to our charge for convertible debt, as we have previously discussed, in the first quarter of fiscal 2010, we adopted a new standard that changed the accounting for convertible debt instruments with cash settlement featured. The charge resulting from the adoption of this accounting guidance was $18.7 million this quarter, versus $17.3 million in the fourth quarter of last year. This non-cash interest expense charge has been excluded from our non-GAAP net income for all periods presented.

Absent the impairment, the acquisition-related and other charges, our pretax income this quarter was $125.3 million, versus pretax earnings of $115 million in Q4 of 2009. Using our annual effective tax rate of 36.2%, non-GAAP net income was $79.3 million versus non-GAAP net income of $73 million last year, an increase of 8.7%. We reported fully diluted non-GAAP EPS this quarter of $0.30, versus $0.28 a year ago, which was equal to the guidance we provided to you last quarter. This also includes the operations of Sentinelle during the quarter, which reduced our non-GAAP EPS by $0.01.

For the full fiscal year 2010, our revenues were up 2.6% over fiscal 2009, led by an increase in Breast Health, as our Service-related revenues continued to increase. Dimensions 2D was successfully launched in the US and helped contribute to the growth in digital mammography systems sold, as well as an increase in our market share. The increase in revenues in our Diagnostics and GYN Surgical segments was primarily due to new products introduced during the year, Cervista for HPV testing and Adiana for permanent sterilization.

In the full year, recurring revenues accounted for 75% of revenues, and capital equipment comprised 25%; compared to 72% and 28, respectively, last year. On a non-GAAP basis, gross margins for fiscal 2010 were 61.5% versus 62.3% a year ago, and above our guidance of 60% to 61%. The decline from the prior year was due to product mix and Selenia configuration shifts, an increase in Service-related sales, a reduction in sales volumes of our higher margin ThinPrep product during the year, and pressures on margins from the manufacturing startup costs associated with the launch of Adiana.

Our operating expenses on a non-GAAP basis of $497.8 million were higher than last year's expenses by 3.3%, and were also above our guidance of $491 million to $494 million, for the same reasons that affected the fourth quarter, namely the inclusion of Sentinelle in the quarter. The total dollar backlog for all of our products was $275 million at the end of September. This was slightly lower than the $286 million at the end of June. This change is primarily the result of a decrease in backlog within our Diagnostics segment, as a result of lab consolidations, slightly offset by an increase in backlog within Breast Health, as a result of the inclusion of Sentinelle Medical.

Turning to the balance sheet, we grew our cash balance to $516.6 million from $294 million at the end of fiscal 2009, and up sequentially from $492 million at the end of Q3. Our plans for use of cash remain focused on investing in our current technologies and operations, and potential future acquisitions, as well as preparing for the possible redemption of convertible notes beginning in December 2013.

Regarding free cash flow, we generated approximately $120 million in the fourth quarter of fiscal 2010, excluding the $85 million payment we made to acquire Sentinelle. These cash flows were comprised of approximately $132 million of cash flow from operations, plus capital expenditures of $12 million.

Now, moving on to guidance. Our guidance includes Sentinelle Medical's operations, and excludes any anticipated US revenues resulting from the possible approval of our Tomosynthesis 3D digital mammography system. For the first quarter of fiscal 2011, ending on December 25th, we are expecting revenues in the range of $425 million to $430 million, comparable to Q4. This reflects a sequential increase in revenues in the GYN Surgical and Diagnostics segments from the fourth quarter, as the summer was seasonally soft, and we see continued uptick in sales of the new products, Adiana and Cervista. Offsetting these increases is an expected decline in Selenia 2D mammography system sales.

We expect gross margins of approximately 60% to 61% on a non-GAAP basis, and we expect non-GAAP operating expenses, primarily excluding the amortization expense, to increase on a sequential basis from Q4 to $135 million to $140 million, or approximately 31% to 33% of revenue, primarily resulting from Q1 trade shows and programs such as RS&A and our national sales meeting; also, the inclusion of Sentinelle expenses for a full quarter, and increased sales and marketing expenses for the NovaSure direct-to-consumer advertising campaign.

We expect interest expense to be approximately $29 million in Q1, including $19.2 million of non-cash interest expense related to our convert. Our effective tax rate is expected to be approximately 35%, and we expect non-GAAP earnings per share of $0.28 per diluted share. This includes Sentinelle, which we expect to be about $0.01 dilutive to earnings in the first quarter. For fiscal 2011, which ends on September 24th, we are introducing total revenue guidance in the range of $1.73 billion to $1.76 billion, or growth of between 3% and 5%. This guidance reflects our expectations that, one, Breast Health will grow in the low single digits, reflecting continued growth in Service and Sentinelle, offset in part by a slight decline in digital mammography systems from continued caution in hospital capital spending. Two, diagnostic will be flat with the prior year. Three, GYN Surgical will grow in the low double digits. And, four, Skeletal Health will improve slightly.

We are guiding to non-GAAP adjusted EPS in the range of $1.21 to $1.23 per share. This guidance reflects gross margins of 60% to 61% for the year. The key drivers that will continue to impact gross margins are, one, the revenue growth, which will lead to increased overhead absorption, and two, a shift to higher-margin disposable sales. For fiscal 2011, we are expecting a positive impact on gross margins from growth in NovaSure, Cervista and Adiana, which will be offset, in part, by growth in Service and Sentinelle's MRI coils, which have a lower than our corporate average gross margin.

Within Breast Health, the majority of the growth comes from this lower gross margin Service-related business. In addition, the gross margins on the new 2D dimensions products are less than the Selenia product line, since we carve out post-contract support under revenue recognition rules, and defer this amount, approximately $40,000 per system, to future periods.

Regarding gross margins, it's important to remember that even though a portion of our sales growth this year will come from product lines that seemingly reduce the corporate gross margin, many of them, such as Service, have much lower than our average operating expense, where, by virtue of higher revenues, will provide greater operating leverage. At the sales growth we are projecting, we are looking to maintain our current level of non-GAAP net income margins of 18%.

We anticipate Sentinelle will be neutral to fiscal 2011 earnings, and we expect non-GAAP operating expenses to be in the range of $535 million to $540 million, up approximately 7% to 8% from fiscal 2010. This increase will reflect our ongoing commitment to R&D at a rate of 6.8% of revenues, the addition of Sentinelle for the year, and increased expenses associated with our direct-to-consumer NovaSure advertising initiative. We are expecting interest expense to be approximately $120 million, including $79 million of non-cash interest expense resulting from our convert, and we are expecting our effective tax rate of approximately 35%.

Turning to cash flow guidance, in fiscal 2011 we expect to generate approximately $450 million of free cash flow. We are expecting capital expenditures of close to $60 million, and depreciation of approximately $70 million for the year.

In summary, we are pleased with our fourth quarter revenue performance. We continued the trend of increasing our revenue growth rate every quarter in fiscal 2010, and we believe our market share improved for many of our products. We delivered on earnings, through a solid combination of expense management and deleveraging. We are optimistic that we will deliver improved results in fiscal 2011, as our new guidance implies. Now, with that, let me turn the call back to Rob to open up Q&A.

Thanks, Glenn. Now that Glenn has outlined our fiscal 2011 guidance, I'd like to conclude the formal portion of this call by spending a few minutes sharing a bit about our strategy for the future. We believe with the incremental investments described before, as well as continued emphasis on organic growth, tuck-in product line acquisitions and our international expansion, we can get Hologic back on a strong growth track over the next five years. While there is limited clarity for fiscal 2011, due to ongoing economic concerns, we are optimistic about our longer-term prospects.

More specifically, our opportunities for growth over the next five years include, of course, our exciting new products. Tomosynthesis has the potential to recreate the market dynamic of technological obsolescence; our belief is that Tomo will do to digital what digital did to analog mammography over a three to five-year period.

With respect to NovaSure, our DTC campaign is a demonstration of our commitment to this multi-billion dollar market opportunity. We must grow the market and remain the technological leader, in order to more rapidly grow this business. Adiana, here again this is $1 billion market opportunity that remains significantly underserved and underpenetrated, due to the limitations of the incumbent technology. We believe Adiana's ease of use and patient-friendly approach is both a solution to take share, but more importantly to grow this market. With Cervista, we have barely scratched the surface with our HPV offering, and believe with our product's performance, complemented by our physician sales presence, we can garner meaningful share in the race to HPV adoption.

Just a little bit about our tuck-in acquisition strategy. It is to acquire product line extensions and new technologies complementary to our core businesses, and allow us to leverage our sales and marketing infrastructure, very similar to our Sentinelle acquisition. These are synergistic product additions that have consistent call patterns, require minimal training, are easy to Service, and, in most cases, fit within our manufacturing operations.

And, lastly, our international expansion efforts consist of adding infrastructure, and acquiring distribution and manufacturing capabilities in places like Asia and Latin America. International is a key element of our five-year strategy, and we are aggressively pursuing several opportunities with long-term growth potential. With this multi-tiered growth strategy, we expect that, over the next five years, Hologic will be a double-digit growth company. As always, market and product mix will impact our earnings, but we are equally confident that earnings growth will outpace revenue growth during this period.

With that, I'd like to say that we look forward to seeing many of you at our analyst briefing on Tuesday, November 30th at RS&A, and encourage those that cannot attend to participate by webcast. I would like to thank you for your participation on this call, and we will certainly make ourselves available for questions. Operator, please open the call for Q&A.

(Operator Instructions). Your first question will come from Thomas Kouchoukos with Stifel Nicolas.

Hi. Good afternoon. Thanks for taking my questions.

Sure.

Just looking at the DTC spend you talked about on NovaSure, is this going to be a nationwide effort? I guess if you could answer that first, and maybe talk about as you look at double-digit growth for Surgical overall next year, I don't know if you want to put numbers on it, but maybe kind of frame what you think the mix of NovaSure growth versus Adiana growth might be?

This is Steve. As far as the campaign goes, we'll do television, magazine, retail, online media; we'll leverage paid advertising with public relations and some social media strategies. So this will all take place in the Q2 time frame. We expect that this will go on through the year. It's actually a 15-month campaign that we'll be undertaking. And so you will see a national campaign taking place, and we expect it will be very effective.

As far as the growth for the GYN Surgical Products business, we do expect it to be low double digits. We tend to keep that as a whole number now, and don't break out the components of that number. So I will say that over the course of the year, though, we do expect to see good growth from the group.

Okay. Thanks for that. One follow-up. On the Service side, revenues in the Breast Health business, still very strong in Q4. Looks like this line is expected to be a driver for revenue in 2011 as well. Again, I don't know if you can give an absolute number but maybe frame your expectations. Can you keep up this type of strength as you go forward, or should we expect that to taper off as the comps stay pretty difficult?

As long as the installed base continues to grow, which it will, then obviously Service revenue will grow. The difference will be it won't grow at the same pace that we've seen over the rapid adoption of digital mammography. So we are expecting growth from Service over fiscal 2011 and beyond, but I would say that past fiscal 2011 we should expect that that growth will taper off. It won't ever be flat, but it will taper off.

Thanks so much.

Next we'll hear from Sameer Harish with Needham & Company.

Hi, guys. Good afternoon.

Good afternoon.

I just wanted to follow up on the DTC campaign. I guess just in general, why do you feel now is a good time to start a direct-to-consumer, given the negative trends in health care utilization? Should we infer this to imply that the Company's expectations that utilization in aggregate will increase going forward, and sort of how do you rationalize the return on investment you could get now for a program versus waiting 12 or 18 months?

I think a lot of it has to do with, number one, this program is not -- it doesn't have an instantaneous impact. It is a bit viral. What we want to do is roll it out to our patient base, or the patient base, because we believe that in order to grow this market, we have done a poor job at marketing to the patient, making her aware that there is a curative procedure that is available in her doctor's office. I would go as far as to say that if we talked to 10 women on a street corner, nine of them would not know there was such a cure.

I think that the vast majority of women that suffer from this disease fall well out of the ill effects of even the economy. We're talking about millions of women, and on average we're treating 300,000 to 400,000 of them a year. So I think the benefit of awareness will far outweigh the concerns over health care costs at this point, for a procedure such as this.

Great. Thank you.

In terms of 3D mammography, the obviously the panel focused highly on training, and you mentioned it in the prepared remarks. Can you talk about how the panel discussion has I guess influenced how you think -- thought about training, both in US and internationally? Have you changed that training methodology since the panel meeting internationally, and what impact has it had?

I think the good news is that we were already on a track of very comprehensive training, because of our experience abroad; we understood that training was going to be critical to the broader adoption of the product. If they're not used to looking at images such as 3D, then they won't get comfortable with using the technology, and it will be an impediment to the broader adoption of it.

So what we've done is take what we've learned internationally and we have developed that into a US-based program, and it is a combination of physical training, physician to physician, web-based training; it is a selection that leads from the basics of how to interpret a 3D mammogram all the way to CME classes that will be done by third parties, certainly not by Hologic. So I think that the FDA requirement is a serious one, but we also felt that we were already on that track because of our international shipments.

Great. Thank you, guys.

From Raymond James we'll go to Jayson Bedford.

Hi, good evening. Thanks for taking the questions. Just a couple quickies. Just on NovaSure, did the US NovaSure business grow in the quarter? I was a little unclear by the release.

Yes, it did.

Okay. And then just thinking of 3D Tomo, when do you think you'll be able to gain reimbursement? And maybe you can't give a set date, if you can, great, but if not, maybe comment on is it at the time of approval? Six months, 12 months later?

I don't think it's going to be at the time of approval, and primarily because it's difficult to even have meaningful conversations with the -- any of the regulators for reimbursement without an approved product. So it's always going to be a best guess, but we would think that it's probably a 12-month process. And I'm sorry to not be more specific about it, but we're talking about multiple agencies, we're talking about private pay, and each will have an individual initiative; they approach the CMSs a bit different than the approach to the major private payers around the country as well.

I'll stick to those two and jump back in queue, thanks.

Next we'll go to David Lewis with Morgan Stanley/Smith Barney.

Good afternoon. That's the first time I've heard Smith Barney. First question, Glenn, just thinking about guidance for fiscal 2011, I think you said 3% to 5% reported; I am just trying to work down to an organic number. Is it safe to assume Sentinelle is around 2% tailwind for fiscal 2011? I wonder if you could give us your currency assumption for 2011?

Well, the 3.5% is the $1.73 billion to $1.76 billion. Sentinelle, when we think about Sentinelle we've already disclosed that when we acquired them, their trailing 12 months revenues were $20 million. So we're looking for close to a 50% increase in the Sentinelle business for FY 2011.

Okay. And then currency, Glenn, I'm imagining it's somewhat of a tailwind for your business in fiscal 2011?

It was a tough one in 2010. We started off where the dollar was weak, and then it has strengthened in the last couple quarters for us. This particular quarter here, it impacted us negatively by $2.7 million. But on the year, once again, it only had a $2.7 million impact as well. It was the same number for the quarter, and for the year it kind of offset itself.

We have to remember that only 20% of our revenues are international, so we don't have a big number that's impacted. And of those sales, less than half of them are even denominated in a local currency. So our exposure, David, I think we're still talking only about a few million dollars either way.

Okay. Very helpful. And then maybe Rob, a follow-up here on Tomo. Just two related questions. First off, given the site inspection, is it unlikely that you have an approval prior to RS&A? And the second kind of related question would be, as we think about fiscal 2011, is it possible given the gradual ramp in Tomo, if you were to get approval here in fiscal 2011, that when you update guidance for Tomo that could be an EPS dilutive event, and that you have more spending on marketing, sales and training, with less of a ramp for Tomo given reimbursement? Thank you.

Yes, I don't think that it's possible to get approval by RS&A. I think it is possible to get an approvable letter by RS&A, but that's obviously difficult to predict, with the distinction being the process is an approvable letter facility inspection and then a final approval. So we believe it is possible to get the approvable letter, which would then trigger the facility inspection and an FDA report.

As to the launch in 2011, keep in mind this is a product that is a Dimensions 2D product with Tomo software on it. We've been training our salespeople now for the last six months, in terms of making them familiar with the benefits of the technology and how to sell it, and in addition to that we have a lot of experience overseas; so I think the incremental volume, albeit perhaps not significant initially, will not be dilutive relative to the support expenses that will be necessary for the launch.

Thank you very much.

And next we'll go to Josh Jennings with Jefferies & Co.

Great. Thanks for taking the questions. Just back to the Tomo Synthesis and potential reimbursement, can you give us a little bit more color in terms of types of discussions you've had with CMS or private payers to date regarding potential reimbursement, and whether you talked to the [ROC] or not about recommending a CPT code prior to actual approval?

And also the likelihood of carrying a miscellaneous code or a temporary code in the interim period, before a national coverage decision is made by CMS or technology assessments are completed by private payers? That would be great to start off with.

Sure. I mean, as I prefaced earlier, it's difficult to have a lot of meaningful discussions without an approved product. We think there are multiple paths and multiple alternatives. I think an interim coding approach may be the most expeditious, and we also think there is a very strong argument for private pay relative to what we believe the savings could be from the use of this technology; a reduction in recall, perhaps a million fewer women going in for diagnostic mammography, breast intervention and the like.

So I hate to sound vague about it, but until we have an approved product, and really sit in front of the powers that be, be it CMS or otherwise, it's difficult for me to comment about what they will require. But I think that all of the things that you mentioned and what I followed up on are really what we're looking at in terms of alternatives.

So a miscellaneous code is a potential prior to sort of formal national coverage decision?

I think an interim code, a G code is a possibility, but it's difficult to assess. I mean, if you recall, digital mammography today is still reimbursed under a G code, and it is reimbursed under that code's structure. So clearly, that's always an alternative. A longer-term route is a CPD-1 code, AMA sanctions and the like, but those are all of the things that are on the table relative to how we think we might partition our approach, be it a near to mid-term strategy and then ultimately a longer-term strategy.

If I could just follow up with, moving over to the NovaSure product line, looking at your GYN Surgical expectations of double-digit growth for next year, there's got to be some assumption that the NovaSure will grow in the low to mid single digits, by my math. But if you're looking at new products by competitors such as Boston Scientific, how much of a competitive threat is this product, one; and then how are you viewing growth prospects for endometrial ablation market, next year, maybe not specifically NovaSure. Lastly, if you could just talk about the pricing in this product line, and how you expect GMs to fare going into fiscal 2011 in GYN Surgery? Thanks a lot.

This is Steve. As far as the competitive growth goes, we have seen some releases or expect to see some releases of competitive products. As you know, we've got AAGL this week in Las Vegas. We recently launched our next generation NovaSure device. We've seen good pickup on that product as well. A lot of the physicians that are using the product in the office have spoke highly of it. We've been able to get into doctors that had not used it, or that had used it and perhaps had an issue with whatever it might be. We've been able to get into those doctors again and relaunch the product. So from a share perspective, I think we continue to hold share or grow share, depending on where you look to see what's going on competitively. So we feel strong in that area.

As far as the pricing of this product line goes, we do see some pressure in the offices, but at the same time we have been able to hold AUPs across-the-board with the product. So there is some pricing pressure, but we fare well with that. Did you have a third question there?

An expectation if you could, looking across the last couple quarters, you have had some gross margin erosion in GYN Surgical; is that mostly related to the overhead from the Adiana product and the Costa Rican facility, and should we expect gross margin expansion in GYN Surgical going forward?

It's definitely from the Adiana product, and as we sell more Adiana -- Adiana's not at the margin that NovaSure is, and as that becomes a larger part of our product mix, we will feel pressure from that. We are doing what we can to improve the yields, and increase the productivity from that product line.

Your next question will come from Tycho Peterson from JPMorgan.

Good afternoon. Maybe just kicking off with a question here on Tomo, as we think about the go-to-market strategy, can you talk a little bit more about the trialing efforts? I think you alluded to them in your comments, how we think about size and scope. You also talked about broadening the claims here in the US, and just mechanically what you need to do to try to kind of move forward with some of that?

Sure, we have a range of clinical trials that have been planned, and are really underway in various countries. I think we have programs in the UK, in certainly Italy. We have a major study going on in Oslo right now, and we'll have studies in France as well. Beyond that, we -- and these studies are all being designed to in some cases validate both diagnostic and screening for Tomo, validate Tomo from a screening perspective and its benefits over digital. So we believe that they are essential relative to the in-country public sector adoption of this from a reimbursement perspective.

In addition, on the US front, we've amassed a tremendous amount of clinical data that we were anticipating filing when in fact we thought we would submit a new clinical study. That is being used to formulate a couple of different trials that would focus on things like dense breasted women, certainly other women of high risk, perhaps using it from a 3D alone perspective in Diagnostics. So there are a range of alternatives with that level of data.

And then, finally, for reimbursement purposes, the screening data is being used to support what we believe to be the claims of better specificity and better sensitivity, so that we can point to saving lives and saving money. But it is kind of a multi-pronged approach, Tycho, that really covers many, many elements that are specific to a country's requirements, as well as what we believe is going to be necessary from both an FDA claims and a reimbursement perspective here in the States.

Okay. That's helpful. Turning to the Third Wave business, I think you talked about 17% growth for Cervista. Can you talk a little bit more about the types of accounts you've been able to convert, and any updated thoughts you can share on timing of the automated platform, and menu expansion and things like that?

Yes, we're really happy that the size of our accounts are increasing; the -- I think our belief is that with the better training, ease of use of the product, some of the things that we've done with our phase zero or phase one automation, I think has helped. We are landing larger accounts, which has given us confidence in terms of the progress that we will make in fiscal 2011.

The HTA or automation time line is really not changed. We believe that we will submit before the end of this calendar year. This is a migration study under a PMA supplement to the FDA that we think can take anywhere from six to nine months, potentially longer, but that's at least what the expectation is at this point. So therein I think is -- again, I think that's an opportunity for us, but I don't see us pulling that time line in much more materially than that.

With respect to menu expansion, we're constantly evaluating in-house development versus partnerships and outlicensing, so we are looking at a variety of alternatives in terms of whether we really take on a major project which something like CT/NG would be a natural for us, or do we look at other ways of developing in our Invader platform as both an out-licensing and a partnering technology for others to commercialize diagnostics.

Okay. Just lastly, on the DTC, is that something at some point you would look to roll over to Adiana as well, or how do we think about --

I think that could happen, but I mean Adiana has a long way to go. We have thousands of physicians that are registered for training, that we'll be training this coming year. We certainly believe that it's a matter of demonstrating to our doctors first that it is effective, it is easy to use, much the same as the several years of heavy lifting that was done with NovaSure.

So we don't want to be premature with the inclusion of Adiana. This program is focused entirely on NovaSure, and we believe that we've done all the market prep that's necessary in order to make it successful. We're not there yet with Adiana, and would not suspect to be there over this next year.

Okay. And then just one clarification, have you said what the installed base of Tomo upgradeable units is in the field now?

No, we have not.

Your next question will come from David Clair with Piper Jaffray.

Yes, good afternoon, everybody. It's Dave Clair here for Bill Quirk. I just have a couple of more questions on the NovaSure DTC campaign. I guess you mentioned that you've kind of tested a DTC strategy for NovaSure. I was hoping you could give us some kind of metric as to what kind of increase we saw in those markets? And then for the $20 million in spending related to the campaign, is that something that we should think about being spread kind of evenly throughout the second through the fourth quarter of the year?

So the $20 million that Rob talked about was not specifically for this campaign. It was for the Tomo initiative, the international initiative, as well as the DTC campaign, so it was the three initiatives that he was talking about. As far as what we've seen in the past for DTC, we've done several different campaigns with physicians in targeted markets, high use physicians, where we've gone in and done co-marketing agreements with them. We've seen their business increase significantly. Now, that depends on who you're talking to -- that depends on where you're looking, though. If you've got high volume users that are going out and they're speaking first line treatment for NovaSure, we see a major, major return there.

Now we're going into a second tier. And we've done some testing both with patients as well as doctors in this area to get a feel for what kind of return we'll see from those patients, and who will be compelled to act. I will say that what we've seen in that testing has been very positive. The patients have responded very well, and have shown a presence to go and take a call to action and speak with their doctor about the procedure.

All right. Thank you.

And we'll hear from Amit Bhalla with Citi.

Hi, good evening.

Good evening.

First question, Glenn, can you talk about the backlog for a second? What are your expectations for the backlog into fiscal 2011? You said for a couple quarters in a row you expected it to stabilize. It continues to decline. And along that same line, how can you -- how do you reconcile Diagnostics guidance flat, given that the backlog is declining because of Diagnostics?

Right. Amit, so I think it's gotten more difficult with the pieces of our business, because it really is the capital equipment side of the business where we had the steady really backlog type of business itself where orders would be taken for delivery either this quarter or the next quarter, and what we're finding is the diagnostic side is slightly different.

As we're going through this lab consolidation, we're seeing labs move more to a just-in-time type of ordering, without the long, year long backlogs that they may have had in the past; so we have a real change in the business. It's not impacting what our expected ship rates are. We still have those underlying orders for the year, there's just not firm delivery dates lined up. The labs are changing their business slightly on a go-forward basis.

So when we look at the capital equipment side, that side has been steady, the CapEx type of orders, and I don't think there's much we can do about the ups and downs on the diagnostics or disposable part of the business itself.

As far as the issue of the diagnostic business overall, to answer that segment of the question, yes, there's down pressure on the US business that we think is stabilizing, but our international business on both conventional Diagnostics is growing, as is our Molecular business. So the US erosion, if you will, is being offset by these other two elements of it, and that's why the Diagnostics business is flat for 2011.

Okay. And then a question on the operating expense guidance for next year. In total, you have an incremental $40 million of operating expenses, and you outlined the $20 million from the Tomo trials international expansion in DTC; what's the additional $20 million there? Since it looks like the Tomo trials were already included, what's the added $20 million for expense?

Well, three quarters of that $20 million additional would be just including Sentinelle Medical for the full year; so there's about $15 million of operating expenses directly related to Sentinelle that we'll be absorbing in FY 2011. So you're absolutely correct. The big pieces are the investment that we talked about in new programs, international and DTC, a big chunk of it, $20 million, and then Sentinelle. To a certain extent, I think we can look at it that we're pretty much controlling operating expenses I think pretty well when we look at 2011 going into the year, and that's something I think we did well in 2010, was to control expenses and to come in where we thought we would on the expense side.

Okay. Thank you.

We have time for only one more question. And your final question will come from Amit Hazan with Gleacher & Company.

Hey, thanks for squeezing me in. Just a couple more questions, maybe a follow-up first on the Diagnostics side. I think this is the third quarter in a row now that we've seen a sequential decline on the Diagnostics side, while HPV has been growing very nicely. So I'm wondering maybe you could help us a little bit, try and understand what domestic PAP values were down by, and what you refer to I think in your press release about more on the abiding by guidelines, if you're actually seeing any insurance companies change the way they reimburse for PAP, moving toward the guidelines?

I think what we tried to suggest in the scripted portion of this is that no doubt, the domestic PAP volume is down, and we are attributing a significant portion of that to be as a result of the economy, and more specifically unemployment. Simply, fewer people are going in -- fewer women are going in for their wellness exams. We hate to sound like a broken record to continue to talk about that, but we firmly believe that is the most significant element of what plagued FY 2010.

In addition to that, all of the other elements of that business in the US remain of concern, but they are much more gradual, and that is interval expansion, further consolidation in the market, clearly the compliance with revised guidelines in terms of younger women not going in for baseline PAPs until over 20 years old or 23 years old, specifically. But we believe that those will continue to be negative elements but they will be much more gradual in terms of their impact on the business, and that our comment earlier about that market stabilizing is that we don't believe the dramatic declines that we saw this past year and, again, more specifically in Q4, which is a seasonally very poor quarter for that business, will repeat themselves for either Q1 or for the balance of fiscal 2011. We think that the more gradual effects will be there, but not the significant declines that we experienced in fiscal 2010.

So why is it that you don't expect those declines to continue, the significant declines?

Because we believe that they are related to specifically the economy and unemployment, which we believe unless that situation worsens more dramatically than where it is today, that we have leveled off relative to the numbers of women that are not going in for their wellness exams or their annual checkups. So we're obviously seeing some trending of that in our Q1 as well, but at the end of the day, this is all an if about what happens with unemployment in the States.

And my follow-up question would be on the Adiana side, just trying to understand maybe to the extent that you have color on same store sales, kind of trialing versus sustainability, if you will, just we saw there were a couple recent papers and one paper, one presentation, highlighting some of the pregnancy issues that we knew that there were in the trial before the approval even. But what are you seeing in terms of same store sales? Do you know of any pregnancies that have happened since you started selling the product, and has that been -- to what extent has that been an issue in your ability to sell the product?

Our same store sales are what we would expect for a product like this. They're between 70% and 80%. We see that customers use it, they go out, they trial it, and that they're coming back, they're using more. As far as the paper that you talked about, I'm not quite sure which one you're talking about. Is that the ESGE paper?

Yes, I can follow up offline with that one.

That's fine. There were a few pregnancies that were presented on a paper that was done by a group of Dutch physicians. It was 130 patients in the study, there were three pregnancies presented. The first was a non-reliant patient, the patient just didn't go back for their HSG. I think as you know with our competitors as well, non-reliant pregnancies, you really -- can't be held against you.

As far as the second patient, the group that did the paper came out and said it was a nonoptimal HSG on that patient; and then the third patient was somebody that should have been excluded from the study because they didn't meet the protocol for that study. So I think the most important thing for you to take from that is if you look at that group of physicians, they still use Adiana, and they're happy with the performance of the product. They're happy with the ease of use, and they don't see these pregnancies as anything to be concerned with.

Okay. Great. That's good color. Thanks very much.

Thank you, everyone. That is all time we have for questions today. This concludes Hologic's fourth quarter and fiscal 2010 earnings call. Have a good evening.