Hologic Inc (HOLX) 2011 Q2 法說會逐字稿

Good afternoon and welcome to the Hologic Inc. second-quarter 2011 earnings conference. My name is Anthony and I will be your operator for today's conference.

Today's call is being recorded and also all lines have been placed on mute. I would now like to introduce Deborah Gordon, Vice President, Investor Relations to begin the conference.

Thank you, Anthony. Good afternoon and thank you for joining us for Hologic's second-quarter fiscal 2011 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 May 20. Please also note that a copy of the press release discussing our second-quarter fiscal 2011 results as well as our third-quarter and fiscal year 2011 guidance is available in the investor relations section of our website under the heading financial results.

Before we begin, I'd like to remind you of our Safe Harbor statements. Certain statements made by management of Hologic 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 second-quarter 2011 earnings release including the financial tables in the release.

Please note that today's call will consist of 30 minutes of opening remarks from management 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 as necessary. We do appreciate however, that you may have additional questions, so please feel free to get back into queue and if permits, we will be more than happy to take your questions at that time. I would now like to turn the call over to Rob Cascella, President and Chief Executive Officer.

Thanks Deb. Good afternoon and thank you for dialing into our second-quarter conference call. Joining me on the call is Glenn Muir, our Executive Vice President and Chief Financial Officer; Steve Williamson, our General Manager of our GYN Surgical group; Mark Myslinski, our General Manager of Diagnostics who recently joined the Company; and of course David Harding, our General Manager of our International Operations.

Today I'd like to review the highlights of our second-quarter performance, update you on the launch activities of our recently approved Dimensions 3-D system which is our tomosynthesis system, and review the status of some of our key strategic initiatives including the recent acquisition of Interlace. Glenn will then discuss the quarterly results in greater detail and also cover our guidance for the year as well as the third quarter, and we will open up the call for 30 minutes of Q&A thereafter.

Well, we're very pleased with the results for our second quarter. Once again revenues and adjusted earnings both exceeded our guidance.

Revenues were $438.7 million compared to our guidance of $432 million which represented a 5% year over year increase. Non-GAAP earnings per share for the quarter were $0.30 which were $0.02 ahead of our guidance and $0.01 higher than a year ago. I would like to spend a little bit of time talking about our operating highlights for each of the business segments, but again stress how pleased we were with the results of the quarter.

Starting with Breast Health, revenues grew 9% on a year-over-year basis. These were primarily fueled by strong service revenues. But in addition we experienced a significant increase in the sales of both 2D and 3D dimension systems which would indicate the market is transitioning to higher-priced systems, ultimately resulting in a positive ASP impact over time.

We believe this conversion will continue to increase now that we have commercially launched our tomo system. Some other factors that influenced our Breast Health business were international sales of Dimensions.

They actually grew 169% on a year-over-year basis as customers continue to buy the future benefits of this upgradable technology. Our interventional breast group, the biopsy group, had another record quarter with revenues growing nearly 13% due primarily to Eviva's higher number of competitive takeaways and we benefit from a full quarter of revenues from Sentinelle.

Moving on to Diagnostics, Diagnostics declined 1% versus last year. A year-over-year decline in US ThinPrep volumes were the main reason, partially offset by stronger Cervista volume.

The soft year-over-year US volume for ThinPrep was due to fewer patient visits compared to a year ago, although test volumes do appear to be stabilizing which is encouraging. Overall, our US market share for ThinPrep remains strong and we are confident we are maintaining share.

In addition, imager adoption continues to increase with a 3% year-over-year gain. Turning to our Molecular business, we're gaining traction and have posted over a 30% increase when compared to a year ago. In fact, Cervista revenues increased nearly 80% on a year-over-year basis and we experienced strong sequential growth.

There are a couple of reasons for this success. Without our automation product, we focused on lab decentralization and have continued to take share with small to mid-sized labs.

And despite customers knowing there's one and likely two new competitors entering the market, we're having success winning new accounts with our Cervista and this is primarily due to the quality of our assay and the ability for us to leverage our market presence. We remain confident that Cervista sales growth will continue to accelerate during the second half of this year as we win new accounts.

Finally, as an update on our high-throughput automation, I'm pleased to announce that last month we filed with the FDA our PMA supplement for our HTA product. This product will allow us to be more effectively compete for higher volume labs.

Since the filing is a supplement, we believe approval is possible within a 180 day timeframe. However we caution you that as always, the FDA can take more time as it deems necessary and quite a few filings as you're most likely aware do get delayed.

In any event, we're excited about this development and the market expansion opportunities that it presents to our HPV franchise. In our GYN Surgical business, year-over-year revenues grew 6.5% primarily fueled by increased adoption of Adiana plus the contribution of our MyoSure product which we acquired from Interlace in January this year.

NovaSure sales were fairly flat on a year-over-year basis as positive ASP trends were offset by softer procedure volumes. We also experienced a sequential decline in our fiscal second quarter which historically is a softer quarter for NovaSure as resetting of deductibles occurs. The ASP trended upward and that was primarily as a result of a favorable customer mix in that business unit.

To add a bit more color on Adiana, we continue to increase the number of physicians trained, currently have trained over 1500 with thousands in our queue, and we are realizing competitive wins on a routine basis. We are encouraged that our reorder rate remains strong at around 70%.

I'd also like to share a couple of other positive points with Adiana. We're experiencing improved commercial efficacy when compared to our clinical trial. As we expected, our yields are certainly improving and we are well along in the development of next-generation technologies.

Overall, our GYN Surgical business continues to be an important growth driver for fiscal 2011 and beyond in both the US and international markets. On Skeletal Health, revenues rose 7% year over year and again benefited primarily from growth and demand for our bone densitometry systems.

We believe this demand will continue to increase slightly throughout the second half of this year. I think it also important to mention last month we received FDA clearance to include advanced body composition assessment in our bone densitometry systems.

This is a new body composition reporting tool focused on obesity management and is also a great assessment tool in the sports and fitness communities. We believe that this will have a positive impact on this product line over time.

Turning now to some key points of interest, I would like to provide you some details on the FDA approval and commercial launch of our Dimensions 3D system. As you know, the Dimensions 3D received approval on February 11 of this year.

We are very proud to be the first company that has an FDA approved product in this groundbreaking technology for both screening and diagnostic indications. Moreover, this product was approved on the basis that it is superior to 2D digital mammography.

We've launched the product in the US immediately following approval. Our salesforce was well-prepared for the launch and we had already begun to provide comprehensive physician training.

Since approval we have successfully upgraded a number of domestic systems to Dimensions 3D and are extremely pleased with the early uptake so far and the high level of excitement and enthusiasm from our customers and potential customers. In fact we are hearing that a large number of customers want the product as soon as their capital budgets permit so that they can remain competitive within their local communities. Although all very positive early indicators, I want to remind everyone that the adoption of tomo will take time and as we've said, we are not expecting a rapid ramp in system sales this year.

Regarding a bit about reimbursement for tomo, we're focused on both a short-term plan and longer-term strategies and we are optimistic we will be well served by both. Short-term we're focusing on private payer education to get them excited about the clinical benefits of the technology and its potential cost savings.

To this end, we hosted a private payer panel meeting last month for educational purposes. Longer term we continue to have discussions with the American College of Radiology, other relevant professional societies, DMS and advocacy groups to develop the best solution for our customers and the patients they serve.

Importantly the ACR issued interim guidance that breast centers should reference a miscellaneous code for the 3D portion of the procedure. Our managed care teams will be working with our customers to help guide them through this initial process.

Over the near term providers will need to work with their respective payers to agree on reimbursement levels until such time as a more permanent solution is in place. As we have stated in the past, we believe reimbursement will not be an obstacle for many early adopters who are accustomed to purchasing new technologies.

As a brief update for Dimensions 3D, with respect to international activities, as I stated earlier, we're seeing great inroads with 2D and 3D system sold abroad. The clinical trials that we have been maintaining are all underway in Europe including Norway, Italy, France and the UK and these have really been designed to gain public sector support and help really spur market adoption on a worldwide basis of this technology. We still expect results from these trials sometime over the next 12 to 24 months.

Moving onto some brief updates on our strategic initiatives starting with the recent acquisition of Interlace. As you know, we acquired Interlace in January.

We've been extremely excited about this product line, the integration efforts, very enthusiastic about its potential. Interlace's technology is the MyoSure hysteroscopic tissue removal system for uterine fibroids and polyps.

These are painful and debilitating to women, causing abdominal pain, heavy menstrual bleeding and even sometimes impaired fertility. We believe the addressable annual market for MyoSure approaches $300 million to $400 million in the US alone and believe we will own a significant share of this market in five years.

MyoSure fits extremely well within the GYN Surgical product portfolio alongside NovaSure and Adiana, and it is another tool in the tool kit for our GYN surgeons. We remain on track with our expectations that MyoSure should achieve just less than $10 million for the balance of fiscal 2011.

Also on the M&A front in late February, we announced the signing of an agreement to acquire an international medical products distributor. And in January, we signed an agreement to acquire a small medical equipment manufacturer.

The closing of both acquisitions are subject to regulatory approval and other conditions. We will look forward to providing you with additional details on these potential acquisitions when they close. I will say however these acquisitions are completely in line with our tuck-in strategy to add to our existing verticals and that also allow us to broaden our presence in key markets.

Now for an update on direct to consumer awareness. In January we formally kicked off our efforts in all targeted markets with advertisements appearing in many leading women's magazines, online websites, television spots and social networks. As you may recall, our campaign calls to action for target patients to call or go online to request a brochure.

Such requests are tracking more than 13 times the run rate from a year ago. We believe we are reaching thousands of women with our most valuable message.

In addition we are hearing from physicians that patients are coming into their offices asking about the NovaSure procedure. As I previously stated, there is a significant unmet demand waiting to be addressed.

Our DTC campaign is intended to drive penetration into this large market opportunity. We expect to see a return on capital beginning in the third quarter of this year and much broader benefits over the life of this program which incidentally will carry us into next year as well.

Finally our focus on international expansion, we are making good progress on all fronts. Our international results continue to improve with year-over-year revenues increasing just over 10% this quarter.

Markets of emphasis for us include Asia Pacific, China specifically, the Middle East, Latin America and Eastern Europe. We are building infrastructure, sales resources and management strategically around the globe and have begun to build our sales teams to support surgical and molecular products to fuel share gains abroad.

In addition, we continue to search for acquisitions in different parts of the world to expand our distribution and manufacturing capabilities. Our approach has been to first sell what we have, sell existing products for existing markets, then expand with existing products into new markets and finally, new products into new markets as a result of the acquisitions that we are making on a routine basis.

With that, I'd like to now turn the program over to Glenn Muir to provide an update on our financial performance. Thank you.

Thanks, Rob. Consolidated revenues grew 5% year over year exceeding our expectations and largely due to the 9% growth in our Breast Health segment led by the strength of our recurring service revenue stream plus solid growth in sales of our breast biopsy lines.

In addition, we benefited from the inclusion of MRI coils from the Sentinelle acquisition last summer. Our Dimensions line now represents 47% of all digital mammography base system revenues versus 37% last quarter and 14% last year. This shift to the Dimensions platform is all 2D as 3D tomo in the US was negligible this quarter.

Since our approval mid-February our focus has been on quoting and taking orders. In fact we issued over 600 quotes in the first two months. Interest is high but it will take time to translate into sales. As such, we are still expecting meaningful tomo 3D revenue pickup to start in fiscal 2012.

Switching to our other segments, two of our newer products, Adiana and Cervista HPV, both continued to steadily increase and contributed to this quarter's solid topline results. Overall our second quarter's geographic revenue mix was approximately 77% domestic and 23% international and our mix of disposables plus service versus capital equipment sales was 76% and 24% respectively.

Foreign currency translation provided less than $600,000 of topline revenue benefit and had a minute impact on our revenue growth. Turning to the rest of the P&L, our gross margins on a non-GAAP basis were 60.9%, down [50] basis points from last year due to the increase in lower margin service revenues and a product mix shift within disposables to lower margin products. This slight decrease was as expected and at the high end of our guidance range of 60% to 61% and due to the better-than-expected overall revenues.

Regarding operating expenses, our non-GAAP expenses continue to be well controlled and totaled $138.8 million, an increase of 10.7% compared to last year and were slightly below our guidance of $140 million to $145 million. This expected increase over a year ago was primarily due to the increased sales and marketing expenses for our NovaSure DTC campaign and the inclusion of our recent acquisitions of Sentinelle and Interlace.

Otherwise, operating expenses would've been essentially flat with the prior year. Our R&D efforts continue to be a focus for our investment dollars and as a percentage of sales were 6.8%, up slightly from last year.

Our non-GAAP earnings exclude certain items that are fully detailed in our earnings release, however, one item I would like to highlight is a gain recorded as a credit to our operating expenses of $84.5 million related to our agreement to sell our rights of the Makena asset to KV Pharmaceutical upon FDA approval.

We received FDA approval during the second quarter, transferred all of the existing Makena assets to KV and in return received a cash payment of $12.5 million with future milestone payments to follow. Since this was a one-time transaction that we considered to be outside of the ordinary course of our business, we've excluded this gain from our non-GAAP earnings as well as from the cash flows from operations.

Absent the non-GAAP items, our adjusted pretax income this quarter was $119.5 million versus $118.7 million in Q2 of last year. And our non-GAAP adjusted net income increased 3.8% to $78.9 million.

We reported fully diluted non-GAAP EPS this quarter of $0.30 versus $0.29 a year ago, $0.02 ahead of our guidance. We exceeded our guidance as a result of the strength in sales this quarter as well as our continued effort to control operating expenses.

Turning to the balance sheet, our cash balance totaled $573 million, up approximately $56 million from $517 million at the end of fiscal 2010 primarily due to the continued strength of the cash we generated from operations and to a smaller extent the cash payment we received from KV Pharmaceutical as well as an increase from stock option exercises. The cash generated was partially offset by the cash we used to acquire Interlace Medical in the second fiscal quarter as well as two federal tax payments that totaled $54 million.

Our plans for use of cash remain focused on investing in our current technologies and operations, potential tuck-in acquisitions including the two we were in process of closing and preparing for the possible redemption of the first tranche of our 1.725 billion of convertible notes beginning in December 2013. Regarding free cash flow, we generated approximately $67.3 million this quarter which was down from the first quarter due to the larger tax payments we typically make in Q2.

Because of this our cash flow in Q2 is usually the lowest of the year. These cash flows were comprised of approximately $81.9 million of cash flow from operations less capital expenditures of $14.6 million.

The free cash flows do exclude the cash payment received from KV Pharmaceutical which is consistent with how we have treated previous cash payments under this agreement as they are not considered to be part of our normal operations.

Now moving onto guidance which includes our recently approved Dimensions 3D mammography system and our recently acquired businesses and excludes any future revenue or earnings from anticipated acquisitions.

For the third quarter of fiscal 2011 which will end on June 25, we are expecting revenues of $443 million to $448 million. Year over year this reflects growth across all four of our reporting segments and represents an expected growth rate of 5 to 6%.

Compared to this past quarter, we are expecting the largest sequential growth to come from GYN Surgical in our NovaSure product line due to the recently launched DTC campaign. We expect gross margins of approximately 61 to 62% on a non-GAAP basis increasing slightly due to higher revenues and a more favorable product mix.

We expect non-GAAP operating expenses primarily excluding amortization expense to increase slightly on a sequential basis from Q2 to $140 million to $145 million or approximately 31 to 33% of revenue primarily resulting from the increased sales and marketing expenses for the launch of our Dimensions 3D product, the inclusion of Interlace Medical expenses for the entire quarter as well as the other investments we're making in our business.

We expect non-GAAP interest expense to be approximately $10 million in Q3 excluding $18.2 million of non-cash interest expense related to our convertible notes. Our non-GAAP effective tax rate is expected to be approximately 34% and we expect non-GAAP earnings per diluted share to be $0.31 to $0.32 on shares of 264.5 million.

For fiscal 2011 which ends on September 24, we are increasing our revenue guidance to a range of $1.76 billion to $1.77 billion. This is up from $1.73 billion to $1.76 billion and represents growth of approximately 5%. This guidance reflects our expectations that Breast Health will grow in the mid-single digits including the contributions from the recently approved Dimensions 3D system, Diagnostics will be flat with the prior year, GYN Surgical will grow in the low double digits and Skeletal Health will improve slightly.

We are increasing our gross margin guidance to 61 to 62% for the year. The key driver to future margin improvement is the expected increase in revenue. We expect non-GAAP operating expenses to be in the range of $545 million to $555 million up approximately 9% to 11% from fiscal 2010.

This increase reflects our ongoing commitment to R&D at an approximate rate of 7% of revenues, the additions of Sentinelle and Interlace for the year, expenses associated with our NovaSure DTC initiative and sales and marketing expenses associated with our recently approved 3D Dimensions. We're expecting interest expense to be approximately $40 million excluding $73 million of non-cash interest expense related to our convert.

And our non-GAAP EPS increases to a range of $1.24 to $1.26, up $0.02 from prior guidance. The incremental increase in our revenue guidance is offset by slightly higher operating expenses from the prior guidance we have given. Our tax rate guidance of 34% and share count guidance of $264.5 million remains unchanged.

Looking at cash flow, we're also reaffirming our free cash flow guidance of approximately $450 million. And in summary, our positive traction continued into the second quarter. Our markets seem to have stabilized, we're seeing positive market share gains and we are especially pleased with the early positive response to our recently approved Dimensions 3D tomo.

As our fiscal 2011 guidance implies, we're looking forward to delivering improved growth this year on the top and bottom lines and to generate continued solid cash flows from operations as well as maintain our discipline at the expense level. And with that, let me turn the call back to Rob.

Thanks, Glenn. Well in summary, we're obviously pleased with the overall performance and our solid year-over-year growth in many of our businesses. Results were strong across the board in Breast Health and we're thrilled to have the Dimensions 3D product approved obviously and very excited to be able to go to market with that technology.

Surgical again grew strongly on a year-over-year basis as Adiana adoption is accelerating. We're excited that we have formally kicked off our DTC marketing campaign for NovaSure and look forward to near-term revenue gains on that product as well. And in addition, the MyoSure product rounds out our surgical product portfolio.

Diagnostic is admittedly challenged by difficult US trends for ThinPrep but Cervista continues to gain traction. In addition, we continue to generate considerable cash flow as Glenn indicated which is enabling us to fund our long-term growth initiatives. And finally, we are delivering on objectives of solid organic growth, making strategic tuck-in acquisitions and growing our international presence.

In closing, we have much to accomplish in the second half of this year with supporting the rollout of our Dimensions 3D product, making the most out of our DTC investment and continued strides in our Molecular business just to name a few. We are optimistic about our prospects and believe that our multiple product lines are positioned for strong future growth. We're bullish about the strength of our expanding portfolio and our key initiatives for the balance of this year and beyond.

I'd like to thank you all for dialing into our conference call and I would now like to turn the call over to our operator for 30 minutes of Q&A. Thank you very much.

(Operator Instructions) Bill Quirk, Piper Jaffray.

First off, Rob, very strong start to the year in terms of first-half results. Obviously the Breast Health business is growing well and you've added the MyoSure business since you initially gave us guidance.

I guess I'm thinking here about the overall incremental numbers up about $20 million. It just seems that everything is kind of starting to really roll in your favor. That's fairly conservative numbers. There's something we're missing here. Is Diagnostics a bigger drag on the business than you initially expected? Thanks.

I think it's a great question Bill. And I think we're taking a fairly conservative attitude as we always have and really taking it on a quarter by quarter basis.

As Glenn indicated in our guidance, we believe that Diagnostic will probably end up flat on a year-over-year basis with growth in Cervista and our international business outweighing some of the erosion in the domestic business which we believe is also stabilizing. I think we have some unknowns with tomosynthesis in terms of market adoption, so we're being cautious about that, and we all would like to see great strides with our DTC success.

So we are being cautious about that as well. So I think what you're reading in the numbers is one about cautious optimism and I don't think there's any hidden facts in that.

Got it. And then as a follow-up in terms of the miscellaneous code for 3D reimbursement, what is that rate relative to 2D?

So miscellaneous code carries no financial amount to it. What typically happens is if a provider uses a miscellaneous code, then there is a correlation to an existing exam that that provider then uses when submitting for reimbursement.

It is a crossover or crosswalk to an existing code of some amount. So let's assume for a moment there is a similar imaging code that perhaps reimburses that $50 or $75.

The payer will then make a decision as to whether or not that is fully reimbursed or some percentage of that additional code was then reimbursed. So the miscellaneous as a standalone does not have an economic value to it.

At this point it's just too early to say, Rob?

There will be a range of codes that will be correlated with this miscellaneous code and it will be done on a provider basis. Our managed-care folks will help them but it's very, very early on to know what will be cross correlated.

Bill Bonello, RBC Capital Markets.

Hey, thanks for taking my question. I'd like just a follow-up I guess more on the Diagnostic side. Just in light of the way the results have been trending, if you just could speak a little bit more broadly to your strategy going forward, how you might think about expansion or possibly regenerating growth in that business and particularly any thoughts you have on expanding your Molecular Diagnostic presence.

Thanks for the question. The strategy is to continue to benefit from the iconic nature of the ThinPrep brand in the laboratory and work off the sort of the molecular space that we have which gives us a great substrate to bring new products.

The new products are in the STD arena specifically CT/NG as well as the automation. I think as you heard Rob say, we are pleased to get that submission to the FDA and now just eagerly await their approval so we can get that automation into the marketplace, allowing us to expand our reach in that market.

Okay, and just in terms of where you might want to go beyond CT/NG on the molecular side?

Well I think -- I'd like to add a little bit to your first question as well and I didn't want to overlook international. But we also see strong growth coming from the international markets and that is really broadly based across the three product lines.

In terms of other products, it's just a little early to shed any light on that. But I will tell you we have a robust process in place to understand where the best opportunities are that we can leverage our position. So more to follow on that but at this point just a little too early to share anything.

Thomas Kouchoukos, Stifel Nicolaus.

I guess looking at the surgical business, sounds like you're expecting a decent pickup in the back half of the year. I understand the seasonality in this quarter.

Could you parse out maybe as you look forward what the components of growth there are? I'm curious to know what you expect Interlace to do for the remainder of the year. And also it sounds like Adiana picked up sequentially, if you could give some color on the performance there as well.

Sure, overall -- Tom, this is Steve. Thanks for the question by the way. Overall when we look at surgical and the growth for the rest of the year, I think we're primarily focused on direct to consumer advertising.

All of our leading indicators looked really strong there and I think Rob touched on that quite a bit. And the process that patients will go through once they see an ad, they go through getting a brochure and then by the time they see a doctor and actually have that procedure done, that could be anywhere from three to six months.

So I think over the next couple quarters we will start to see the benefits from the advertising dollars that we've spent. And that's really going to be the key driver.

From a MyoSure share perspective, MyoSure we're looking at about $10 million of sales from that product over the remainder of the year. If you look where we were last quarter, we had a small sales force that did a limited release of the product.

At the beginning of this quarter, the first week we actually trained our entire sales force. Our productions ramped up, our reps were all trained. We've integrated systems and we're moving everything into our Marlboro facility right now, so that will all be accomplished by the end of the year. But I think that will play a decent part in the revenue growth over the course of the year.

And then finally Adiana, I kind of want to take a step back and position Adiana for where it is right now. If you look at the product, we have about 15 to 20% market share in our first year of launch.

And this is a product that will bring on hundreds of new customers each quarter. We've got high reorder rates and we continue to see our key customers reordering. So that includes Mayo and Cleveland Clinic.

But this is really a huge market opportunity for us and as we launch our next generation products that Rob had mentioned which are currently in development, then we believe we will not only take more share, but we will be able to grow this market over time. So I think there's a lot of upside growth potential for Adiana in the long run and I think all three products will contribute for the rest of the year.

Okay, great, and then just a quick follow-up, in the Diagnostic space, if you touch on the impact of intervals on your Pap test business and also how that might translate to HPV as well.

Yes, I would say that what we experienced last year in terms of a fairly dramatic decline in the second half of the year had a lot to do with the economy and our employment. When we look at the results of interval expansion today, we think that the trend is certainly much more linear, not as severe and probably impacts the business on an ongoing basis at a rate of maybe 2 to 3%.

And that's not what we are experiencing this year just because we are in a recovery. So I think although we recognize that we're going to see interval expansion, we don't feel the decline is going to be more severe than that over the near term.

Isaac Ro, Goldman Sachs.

First question would be on what you're seeing so far in the effects of tomosynthesis on your base 2D business and really two things. One is do you see it accelerating market conversion for what's left in the 2D market? And then maybe secondly, do you see it helping you take some share in the replacement market?

Good question, Isaac, I think it is definitely stimulating sales of Dimensions 2D because the reality of tomo is now in the market. So the customers that were on the fence about buying a Selenia or some other manufacturer's product are buying a Dimensions product today.

I don't think the stragglers that are at the very end of this level of market maturity are the primary targets, although there are some of those that are interested in buying Dimensions even though they are late to the digital conversion. It is primarily accounts that are interested in having leading-edge technology.

These are people that already have digital and want to buy a tomosynthesis unit or want to replace their units with product that is tomo capable. And I think we are seeing that domestically but I think we're also seeing that on the international front as well.

Got it. And then just secondly on the diagnostics market, you maybe parsed out a little bit about the contribution to growth this quarter you got from Cervista. And then regarding ThinPrep, are there any signs in your mind regarding share loss or price deterioration in the US?

I will answer the second part first. With respect to ThinPrep we feel very confident that it is not a share loss either here or abroad.

In fact there's a lot of to'ing and fro'ing in that market but all the market data we have seen, we are maintaining share. With respect to Cervista and our growth, we have not given specific numbers but what I have done is tried to express that on a percentage basis and on an annual basis or year-over-year basis, it is growing at a very compelling rate, 80% over the second quarter of prior year. Admittedly that's off a small base, so we are garnering a lot of interest but I think up to this point, we have been focused at the low to mid-tier labs and I think with the introduction of our HDA product, I think it broadens our market opportunity as well.

Tony Butler, Barclays Capital.

Thanks a million. Rob, you made a comment about CapEx budgets at your customers. This is with respect to Breast Health, but do you feel that there is any easing at all on the total CapEx? And then second, could you parse out the behavior of early adopters with respect to the very large number of quotes that Glenn commented about? The early adopters versus those in the non-research facilities and you're seeing behavior -- is it the mix or is it partial to one or the other? Thanks again.

That's great. To respond to the first question, I think that not only Hologic but I think some of our contemporaries in the imaging field are seeing some relief on capital budgets. I think even in the MR/CT markets and so on and so forth.

So we are seeing certainly not 100% recovery, but we're seeing dollars freeing up. It is much more about the fact that tomo was a mid-year approval. Budgets did not reflect this investment, so there's a lot of scurrying around on the parts of our customers to either find money for tomo, look for some alternative financing or wait for the next budget period.

With respect to profiling who these customers are, surprisingly it is a lot of for-profit imaging centers that are looking at tomo as a way to have a competitive advantage in their marketplaces. So from a regional or community perspective, they want to be first, they want some -- would like exclusivity which obviously is not possible and believe that there not only is this clinically powerful, but it is also a marketing benefit for them to have it.

Now on the flipside, all of the researchers look at this from the advancement in the technology but quite frankly, those are going to be the guys that have a much tougher time getting budget dollars. So if we look at the 600 quotes I should say, it's really that difficult to profile other than to say I would take a guess that probably 50 to 60% of those are going to be sites that clearly are for-profit imaging centers that are looking to the benefits of the technology, believe they can get near-term reimbursement and the balance are the university settings, the early adopters that are buying it because they also want to do research in addition to commercial cases.

Jayson Bedford, Raymond James.

Just on Dimensions, you mentioned 47% of all digital mammography. Was that on a dollar basis or a unit basis? And then also you mentioned a positive ASP impact over time, and I'm just wondering did you see a positive ASP mix this quarter versus the quarter last year?

David, it's Glenn. Yes, the 47% was based upon revenues. So it is true that what we are seeing in the Dimensions line is what we expected was a higher ASP for Dimensions over the Selenia product.

So this is I think a positive as we look to the future on how it will impact our gross margins is that the Dimension line especially the 3D has a much higher gross margin than the Selenia line at the lower end. So this quarter we had 47% of the revenue was Dimensions, last quarter in Q1 it was 37% and the quarter before that was 14%. So it's been a pretty significant shift to the Dimensions line itself.

Okay, great. And then previously you guys have commented that you thought the initial demand for Dimensions 3D would come from existing Selenia users and not necessarily from those who adopted 2D Dimensions. Do you still feel like that's the case a couple of months into the launch? Thanks.

Yes, and I think you refer specifically to the notion that if somebody bought a 2D Dimension recently, they would probably be likely candidates to now upgrading the 3-D capability. And I think the reason why we thought that probably would not be the case is if a site was just now converting to digital, would that really be a likely site to now in addition to just recently converting to digital go 3D mammography.

It seemed unlikely to us. Having stated that, we have some very attractive leasing programs on tomo upgrades and some other financial packages that do make it look appealing. I think the issue may be one of reimbursement at that juncture, but I think we today at least would still stick with our earlier opinion that the majority of Dimensions 3D that are going to be sold are going to be sold as completed systems.

Tycho Peterson, JPMorgan.

Just following up on Isaac's question earlier about the competitive dynamic, are you be able to quantify what percentage of your orders are competitive wins on tomo? Obviously GE or Simmons don't have a 3D system out yet, but to what extent you are swapping out competitive platforms?

It's pretty -- right now, we are so early in this process, it's difficult to get our arms around it. I think in another quarter or two, we will have a pretty good handle on it. You're right in saying there's not a lot domestically in terms of competition because nobody else is FDA approved.

Internationally there is a product that Siemens is selling. I think they're competing primarily on price because at least today we feel the product probably has a lot of development things that need to get done with it. But in trying to dissect our quotes if you will, I would say that obviously this product, having tomo gives us a great reason to motivate an existing Selenia user to trade in their product, and it is also a reason for us to now go into competitive accounts with a product that others don't have.

And then can you talk a little bit on some of the new products, the synthetic 2D (inaudible) and then Dimensions 5000 in Europe, just any update on either of those?

On the synthetic 2D (inaudible) that's a development project and obviously would require FDA. We are using that from a clinical point of view in Europe, but we still have a ways to go on that product.

The 5000 is really a bit of a stripped version of our higher-end Dimensions product. And if you recall, what we did with Selenia was we bracketed the market with ultra-high-end, mid-tier and low-end. We're doing that same thing with the Dimensions product so we have a much more economical acquisition console without a lot of the bells and whistles of the 8000. However it does leave the factory tomo ready. So it is still a tomo upgradable product.

And then just last one. Has 2D pricing in the US remained relatively stable?

Obviously Siemens is moving into the market. Just talk to pricing dynamic there and what you are expecting. Thank you.

I would not say that we've not seen significant if any meaningful erosion. The market is such today that the low-end products are really at a very, very low price.

We are competing with the likes of GE and Siemens at the low end and Fuji. So I don't see that there has been much more erosion domestically.

I think internationally there continues to be downward pressure and it's probably because there is more competition there. And differently than the United States where we own the installed base with a 60 or 70% market share, it's a bit more fragmented OUS.

So we are finding that there are some competitive takeaways. But I don't see it as predominant, not yet, here in the states. I think that obviously changes when more vendors get approval of tomosynthesis and we will be taking the fight to 3D mammography and I think we'll start seeing some price erosion at that point.

David Lewis, Morgan Stanley.

Rob, I wanted to come back to one of your comments on DTC. You mentioned that you're seeing significant interest from a market perspective after the dollars are getting spent.

But as I recall, when Cytyc tried this program several years ago, they saw a similar effect, but what they didn't see was pullthrough of actual procedures. So I wondered if you could talk through in those regions where you are seeing the hits to whatever media sites it's appropriate, are you actually seeing increased procedures and what is your level of confidence you're actually going to get the pullthrough that Cytyc in the past did not get?

This is Steve. I'm going to jump in there if I can. I was actually at Cytyc when we had done the direct to consumer advertising campaign.

There were a lot of things that we did differently with that campaign than we have done here. A lot of it was done for a month's time in small select markets. So we didn't really have enough -- we didn't put enough umph behind it and I think that's why we didn't necessarily see that long-term payoff.

So we had a lot of lessons learned. We spent a long time really doing our diligence on this before we went out with our national campaign.

And then specifically you're talking about in these markets, we do continue to hear about markets where physicians are calling us, they're talking about major procedure days that they have coming up where patients have come in asking for the procedure. But again it really comes back to our leading indicators right now.

And we will expect that revenue to come on the back end. But to give you kind of an idea of what I mean on the leading indicators, in the past over the timeframe, over a one-quarter timeframe, we might get 3000 requests for brochures. Since we've launched this DTC campaign, we've had over 40,000 requests.

So we talk about this 13-fold increase in patient brochure requests. Well obviously not every one of those patients will have a procedure, but it is a good indicator that we are making more patients aware of a solution for this problem and it's in target with what we were expecting from the pay.

Okay, very helpful color and just maybe one quick follow-up for Rob. Speaking just to reimbursement expectations, Rob, it sounds like you're still expecting the significant demand to come from for-profit centers.

In terms of expectations for what you would like incremental reimbursement to be, I feel like the consensus expectation sort of called for a $40 to $50 incremental reimbursement. It feels like expectations have sort of fallen over the last four to six month period. Could you sort of update us on what you think is a successful level of reimbursement and what is a less successful level of reimbursement?

Well I think what we have thought was that a 25 or $30 reimbursement would be terrific in terms of the average cost of this upgrade and obviously this being applied to every screening patient that a given center was about to do a procedure on. But I would say that, yes, I think that initially some of the external resources that we use thought that a 40 or $50 reimbursement would be appropriate.

I don't think we ever got above $50, David. So I think it would be I think hard given that the increment over 2D mammography, film-based mammography was $50 to go to a digital platform and that was a product that had an ASP that was five times what the analog predecessor was. We are talking about $125,000, $150,000 software upgrade on a $350,000 gantry. So it would be difficult to try to justify that $50 again for that incremental increase.

Josh Jennings, Jefferies & Co.

Rob, I think you mentioned in your prepared remarks just about the potential of setting up a competitive dynamic between breast centers in specific regions. I was just hoping -- you know, it's still very early, but if you could just talk to us about how Boston has responded, both the academics centers and the private centers now that Mass General has installed a number of tomosynthesis systems and then just strategy for that type of environment going forward?

Sure, sure, it's interesting. I think everyone wants to be first on the block with a new technology. I think it's a little early for us to see the effects of this yet, but all that we can do is look from an analog or data point of all of this was the conversion of film to digital.

There were literally cities around the country that did not convert until one main site within that city in fact did convert and then like dominoes, everyone realized they were going to lose business if they did not. We believe that over time, that will happen with tomosynthesis. We think it will clearly take time for that to happen.

What I mean by that is broader adoption, a more stable and permanent reimbursement. So that's why we're being realistic in terms of what we think this trajectory is.

And when we initially said we think there's 500 to 700 accounts that will buy this kind of a product without reimbursement or without permanent reimbursement, we still believe in that number, but we're talking about 9000 MQSA sites and in order to get that kind of traction, we're going to need these two other elements of clinical validation and reimbursement in place for that to happen. But once that starts, that takes away the argument as to why you wouldn't buy it and then it becomes a competitive dynamic as to why you have to buy it.

Maybe if we could just shift over to the international side. I think this is the first time I have heard the metrics about the sort of year-over-year increase in international sales at 10% this quarter.

I just wanted to know is that accelerating from previous quarters and where do you expect that to go? And then also just on the international side, wondered if you had growth in ThinPrep procedures internationally? And two on the Dimensions revenue, 47% of all mammography system revenues, can you break that out in terms of at least for trends and from that 47% level in terms of is most of that growth coming from the US or is it also coming on the international side? Thanks a lot.

This is David Harding. Thanks for your question.

We are seeing very good growth across virtually all of our lines of business on a year-over-year basis on the international front. Recently that has been led to dramatically by our Breast Health business and now we're seeing something like about 50% of the overall units being sold either Dimensions 2D or 3D and getting a lot of competitive bang for our buck out of the new product which is really allowing us to gain new market share in a wide variety of marketplaces. Our breast biopsy business is growing very strong internationally as well so across the board Breast Health is quite strong.

As for ThinPrep, we saw modest growth on a year-over-year basis, good growth coming from our Cervista business, admittedly though on a relatively small base. ThinPrep was steady and we saw good pockets of growth in emerging markets while some of our more developed markets have in fact experienced some interval expansion.

So it's taking down those numbers there. But overall we feel very bullish about the future growth prospects for ThinPrep and the rest of our Diagnostic products. Surgical has been an extremely strong performer on a year-over-year basis, solid double-digit growth in virtually every market where we play.

And finally on the Skeletal Health business, we had remarkably strong business led in large measure by the some real strength in China this past quarter. So we are feeling very, very good about overall international growth rates and we are seeing it pick up in general from what was a more difficult time in the last several quarters previous.

Amit Bhalla, Citigroup.

Rob, can you just talk a little bit more about those 600 quotes and just tell us what are you quoting in terms of delivery time for those quotes? And then secondly maybe for Glenn, you took the Breast Health guidance up from low single digits to mid, how much of that is coming from your expectations of US tomo?

On the leadtimes, there really is not a significant lead time difference on this product, so we are quoting depending on backlog 30 to 45 days. So it's nothing extraordinary.

We bill to a bill plan, we think we know what our expectations are for the next quarter and so on and so forth. So it is not -- we're not struggling like in the old days of Selenia where we had manufacturing issues. That is not the case on this product.

The biggest gating item on tomosynthesis is really training because it is in addition to clinical applications training, physicist training, we are also doing physician training. So we're literally teaching radiologists how to interpret tomo images.

And that's not we, that's our clinician partner is teaching -- they are teaching physicians or radiologists on how to interpret these new 3D images. So that is a significant commitment on our part and in fact it's probably much more of a gating item than service or production.

And Amit, it is Glenn, if we think about the guidance for a moment, it is obviously a moving target as we move forward in the quarter, and we do have a little bit more clarity. And what we increased for guidance this quarter was number one the revenue side of things and number two the gross margin side of things as we see a pickup to our higher priced products mix. At the same time, we also increased what we think our operating expenses will be, so that brought down the overall EPS a little bit. But what we had I think clarity on mostly was in the Breast Health segment.

And if the play between the Sentinelle MRI coil and also the new Dimensions product line, so we are seeing some increase on the Dimension 2D as we would expect, and then beginning on the 3D side. But if we think about those 600 quotes, and we're quoting we can deliver those as quickly as possible, that's really not the issue when we quote delivery time. It's really the customer, when they'll have room readiness, when they'll have their physicians and technicians trained, when they'll have it in their budget, when they are ready to go.

So as we think about guidance for the next two quarters, we still have really just a very small minimal number for the 3D tomo. It's really driven by the 2D Dimensions and we're really expecting 3D tomo to kick in in the 2012 timeframe. That being said, that is the piece that helped the Breast Health move up to the mid-single digit when we look at it in totality.

Okay, thanks, and just a quick follow-up. Earlier, Rob, you said the early adopters for tomo don't really care as much about reimbursement. Outside of just billing miscellaneous codes, can you talk about any early adopters looking to bill patients directly? Is that a possibility?

I think there is a variety of different alternatives. The use of a miscellaneous code with the ability to then cross correlate within an established code is certainly one that will likely be used by more than those that are going to a patient pay.

But having said that, there are some centers that are looking at this from a patient pay perspective for just the tomo portion of the exam because they believe that there is obviously a strong attraction to a technology that can clearly be marketed as superior to the 2D digital mammography. So it is a little bit of a mixed bag relative to what their preferences are ongoing.

Thank you. This is all the time we have for questions today. This now concludes Hologic's second-quarter and fiscal 2011 earnings call. Thank you and have a great evening.

Thanks very much.