Hologic Inc (HOLX) 2011 Q3 法說會逐字稿

Good afternoon and welcome to the Hologic, Inc. third-quarter fiscal 2011 earnings conference call. My name is Peter and I will be your operator for today's call. Today's conference call is being recorded. All lines are currently placed on mute.

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

Thank you, Peter. Good afternoon and thank you for joining us for Hologic's third-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 will be made during today's opening remarks.

The replay of this call will be archived on our website through Friday, August 19. Please note that a copy of the press release discussing our third-quarter fiscal 2011 results, as well as our fourth-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 third-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 questions 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 queue, and if time 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 Hologic's third-quarter call. Joining me on the call is Glenn Muir, our Executive Vice President and Chief Financial Officer, who incidentally was just awarded CFO of the Year by the Boston Business Journal, so congrats to Glenn.

Also, on the call Steve Williamson, our General Manager of our Surgical Group; Peter Soltani, our General Manager of our Breast Health Group; and David Harding, who is the General Manager of our International Operations.

Before I get into the quarter, I wanted to make a note on what you most likely read in our release, that Jack Cumming has resigned from the Board and as our Chairman. We are pleased that Jack will remain with the Company as a special adviser focused on building our international business. I also want to note that the appointment of David LaVance as our Chairman. David has been on the Board since 2002 and our lead director since 2008.

We want to thank Jack for his years of accomplishment with Hologic, and best wishes on his continued role with the Company. And we also want to wish David all the best in his new capacity as Chairman.

With that, on today's call we are going to review the highlights of our third quarter. I would like to update you on the progress being made with our rollout of our 3D Dimensions systems and review the status of some of our key strategic initiatives, including the recent acquisitions of TCT and Healthcome.

Glenn will then discuss the financial results in the quarter, and also cover guidance for the fourth quarter and the year. We will then open the call up for 30 minutes of Q&A.

Well, we are very pleased with the results for our third quarter. We achieved record revenues of $451 million, above our guidance and 7% over the third quarter of last year. We also reported year-over-year growth in all four of our operating segments.

Our non-GAAP earnings per share for the quarter were $0.32, at the top end of our guidance, and $0.02 above last year. I would like to spend a little bit of time talking about some of the highlights on our operating segments, and I'll start with Breast Health.

Revenues in the segment grew 8.4% on a year-over-year basis, with both product and service contributing to the increase. Of particular note, our interventional breast business grew nearly 20% over the third quarter from last year, as we continue to realize share gains in the US and abroad.

In addition, the shift from lower end digital mammography systems to high-end 2D and 3D Dimensions continue to occur at an accelerating rate. Just to put a little bit of perspective on this growth, the sales of Dimensions 2D and 3D systems in the US more than doubled in comparison to last year, and grew 80% on an international basis, so they're representing a far greater percentage of our revenue.

Over time this will be an increasingly important for several reasons. ASPs and margins will favorably be impacted. Greater sales of our 2D Dimensions assures that the customer's path to 3D in the future. And early increases to the sales of 3D creates the market dynamic of technological obsolescence, which eventually accelerates the turnover of existing digital mammography systems.

Early results indicate only 10% to 12% of our Dimensions sales included a digital trade in this quarter, so we are at the very beginnings of this cycle.

Although limited data thus far, we believe our 3D Dimensions has the potential to become the standard of care in screening mammography.

Lastly, we are very proud of the fact that our Dimensions product received the Medical Design of Excellence Award by the Industrial Design World. This is the fourth time a Hologic product has won this award.

I would like to talk a little bit about Diagnostics right now. Revenues grew 4.4% on a year-over-year basis and grew almost 4% sequentially. From a volume perspective worldwide ThinPrep units were up in the quarter when compared to last year, fueled by a nearly 10% growth internationally, with domestic volumes essentially stable with last year and last quarter.

Although better than the trend of a year ago, we believe the US market continues to be under pressure due to a softness in patient visits. The good news, however, is that ASPs have been stable, and we are confident we are holding marketshare on a global basis.

We are also very excited to have received SFDA approval for our integrated imager in China, which will further differentiate our product offerings in-country and ultimately help to grow that market.

We are once again very pleased with the progress being made on our molecular franchise. Molecular revenues grew 20% on a year-over-year basis. This growth was fueled by a nearly 70% year-over-year increase in Cervista revenues. Cervista realized double-digit growth sequentially, as well.

Our approach to the molecular market, more specifically, HPV, was initially challenging, but we are more capable now than ever before and able to truly leverage our ThinPrep market presence. We continue to gain share in the small- to medium-sized labs, which we believe is due to the quality of our assay and our excellent customer service.

We remain bullish on the potential of Cervista and confident we will continue to grow this product line in fiscal 2012 and beyond.

As we discussed last quarter, we filed our PMA supplement for our HTA automation product with the FDA. We are actively engaged in discussions with the agency and responding to specific questions. Our goal is to receive approval for this product in the first half of 2012, assuming we can satisfy all the FDA's requests for additional information.

To remind you, this product provides customers with a cost effective alternative to lab automation. It is based on the Tecan EVO 150 platform. The product automates DNA extraction, our Cervista set-up and incubation, as well as detection and data analyses.

In the future we are intending to use this platform to also run our 1618 assay when proven to be economically feasible, meaning volumes increasing, and our CT/NG assay when completed. All of this would be available from a common delivery medium, which is our ThinPrep vial.

We believe with the HTA in our arsenal of products, we can bring the HPV battle for marketshare to a new level.

To more appropriately address the international market requirements we have developed the MTA, which is a lower volume, lower cost alternative to our HTA. We expect near-term CE Marking and release of this product in Europe by early next year.

Now I'll talk about Surgical. We are very pleased. Revenues grew 11% over last year's third quarter and approximately 11% sequentially. The contributing factors to this growth were NovaSure, which grew in unit volume 10% sequentially; Adiana, which had a record quarter; and MyoSure, which continues to gain rapid traction.

Let me provide a little bit more color on NovaSure. We are beginning to see some early benefits of our DTC investment in the US. And I will provide more detail later on in my discussion about that. And in addition, our international volumes, although small in comparison, grew over 30% on a year-over-year basis this quarter.

With respect to progress being made with Adiana, unit volumes increased nearly 50% on a year-over-year basis. This occurred with virtually no erosion in ASPs. Yield rates continue to improve and our reorder rate remains strong.

Finally, we are so pleased with our MyoSure product. Clinicians appreciate the benefits of this technology. We continue to gain solid traction, and believe this product will significantly contribute to the growth of Hologic for years to come.

Our last business segment is Skeletal Health, where our revenues grew 3% on a year-over-year basis, which really doesn't tell the entire story. Our bone densitometry systems actually grew 20% over the prior year. We believe this demand will continue to increase for the remainder of our fiscal year and through fiscal 2012.

Turning now to some points of interest, I would like to provide qualitative information about the rollout of our Dimensions 2D and 3D systems. As most of you know, Dimensions 3D received approval in February of this year. We have been pleased with the interest to date. The numbers of Dimensions systems, both 2D and 3D, continue to increase quarterly and represents a growing percentage of our total mammography revenue.

However promising, it is difficult to gauge when a more rapid turnover of the existing installed base occurs. The quote rate remains high, but here again it is impossible to know what percentage of orders materialize from these quotes.

Our best estimate is the original one we provided, which suggested that initially within the first two years the market would purchase 500 to 700 of these systems.

Of recent we have taken the 3D Dimensions seminars to the road to various cities and we have consistently experienced strong turnout. So far we have conducted nine with two more to go. At each event we have seen significant interest from radiologists, technologists and administrators, with attendance averaging somewhere between 70 to 100 people per show.

The physician-led discussions are also very stimulating, included are combinations of their case experiences, demonstration of increased detection, as well as topics of workflow, practice protocols and the implementation approaches that have been used. All necessary in order to fuel the adoption of this product.

Regarding reimbursement, as we communicated to you last quarter, we remain focused on both the short and longer-term strategies. As we stated last quarter, the ACRs provided guidance to use a miscellaneous code for 3D mammography. We have heard a small handful of centers have already used the code and have been receiving an incremental reimbursement of up to $50 for the tomo portion of the exam. This is an interim process that we are going through at this point.

Our experiences are limited at this time, since it takes months at best for hospitals and centers to have the equipment installed, perform exams and submit for reimbursement. Clearly a permanent reimbursement solution is necessary in order for this technology to be more broadly adopted. Our plan is to formalize our approach by the beginning of calendar year 2012.

Lastly, on a very bright note, ACOG has recently reinforced their support of annual breast cancer screening beginning at age 40. So we are very encouraged about that.

Moving onto an update on our strategic initiatives, starting with our two recent acquisitions, TCT and Healthcome. In early June we closed the acquisition of TCT, a distributor of medical products in China. The majority of TCT's revenues are from sales of our ThinPrep products, as well as mono sales of NovaSure, which we expect to grow over the long-term. In fact, China is our largest ThinPrep market outside the United States, and this is entirely due to TCT's efforts.

We firmly believe that in order to be successful in China, it is necessary to control distribution. And with TCT we can now better leverage our entire product portfolio to drive across multiple market segments.

Some additional benefits of this acquisition are that it allows us to control in-country sales while realizing higher margins and end-customer pricing. It also allows us to control after sales support and to have direct access to regulators and other government agencies.

Last quarter I also mentioned that we had signed an agreement to acquire a small medical equipment manufacturer. Today we announced the acquisition of Healthcome, a mammography systems manufacturer located in Beijing. We closed the Healthcome transaction in mid July and continued to work on integration efforts. In addition to controlling distribution, we believe possessing our own in-country manufacturing is essential to meeting local market needs.

Healthcome is currently a leader in analog mammography. Over the very near term our goal is to integrate our proprietary detector technology with this analog [entry]. The intent is to introduce an entry-level digital mammography system for the Chinese market, as well as other emerging markets around the world.

Our approach will be to segment the market using our existing dealer distribution and products for the high-end tier and then to penetrate the lower end tiers with a domestically manufactured system at an extremely attractive price point.

Both TCT and Healthcome serve as our global expansion initiatives quite well by providing us with a strong presence in a very important health care market.

Now just a bit on our Direct-to-Consumer awareness campaign for NovaSure. We have been in the market for six months with our DTC campaign, and continue to be encouraged by the responses we are receiving. To give you some perspective on the success of the campaign, we have had 760 million impressions or times that our ads have been viewed over this period. 285,000 incremental visits to NovaSure.com, which is an 83% increase over our previous trend, and 130,000 requests for brochures, which is 25 times our normal request rate. 34 of these requests also ended up with physician location requirements.

In our post ad surveillance, 20% of our respondents stated that they have already had the NovaSure procedure, and 54% stated they are considering it. Albeit it a small sample set, we think it is a very healthy response.

All this is great, but without a revenue pull-through this investment would not generate an appropriate return. And we are realists about this. We believe we are seeing an increase in volume specifically related to our DTC effort. The uptake is slower than we originally anticipated, but nonetheless, it is present. We remain committed to our DTC program and look forward to increase the incremental revenue in Q4 as well as throughout fiscal 2012.

I would like to now quickly wrap up, before turning the call over to Glenn. We are very excited about our products, and believe in many instances they can insulate us in the future. Our product portfolio is rich with opportunities for growth, and we are leveraging these opportunities with our expanding global distribution.

But the reality is external factors have not worked to our benefit. The US economy has not rebounded. Unemployment continues to plague our procedure oriented businesses. And the debt crises for both the US and Europe may have far-reaching negative outcomes. Having stated this, we remain confident there are growth opportunities for the right products and the right markets. Our primary objective is to assess where and when to invest in order to gain the greatest returns.

We believe thus far we are doing this effectively and remain committed to the path that we are on.

With that, let me turn the call over to Glenn to give you an update on the financials and guidance for next quarter.

Thanks, Rob. Consolidated revenues grew $30 million or 7.2% year-over-year, exceeding our expectations and driven by growth in all four of our operating segments.

Our Breast Health segment was the largest contributor to our overall growth, increasing $15 million or 8.4%, while the 11% growth in GYN Surgical revenues and the 4.4% growth in Diagnostic revenues added meaningfully to revenue performance in the period.

Consolidated revenue growth on a constant currency basis was 5.7% year-over-year. Revenues in the Breast Health segment grew to $205.2 million in Q3 2011 from $189.3 million in Q3 of 2010 last year. This growth was fueled by both the strength of the recurring revenue stream provided by our service offerings and the solid growth in and record sales of our breast biopsy lines.

In addition, we benefited from the inclusion of revenues from the sales of MRI breast coils, having acquired Sentinelle Medical last summer. Solid growth in sales of our 2D, 3D Dimensions mammography systems was a material contributor to segment topline performance again this quarter. Our Dimensions line now represents 57% of all digital mammography system revenues versus 47% in Q2 and 37% in Q1 of this year.

The vast majority of this quarter's Dimensions revenue was realized from sales of entirely new units, while only a small percentage represented revenues from 3D upgrades.

3D tomo sales are just starting in the US and are still only a small portion of the overall Breast Health business. And while we expect an increased contribution from sales of these units in Q4, we still believe that meaningful 3D tomo sales won't begin to accelerate until mid-fiscal 2012.

Switching to topline growth in our other segments, GYN Surgical posted double-digit revenue growth this quarter, driven by increased revenues from all of our Surgical products. Revenues increased to $79.4 million in Q3 2011, from $71.6 million in Q3 of last year. This quarter marks the first full quarter of revenue contribution from sales of MyoSure, which is part of our acquisition of Interlace this part January.

In addition, both our NovaSure and our Adiana product lines continue to grow, especially Adiana, which has been posting very strong year-over-year growth rates.

Our Diagnostics segment posted 4.4% growth year-over-year with revenues of $143.4 million, up from $137.4 million, which was above our expectations. We continue to see increase in sales of our Cervista HPV test and higher international ThinPrep volumes in the period. The stronger foreign currency has also helped, as on a constant currency basis diagnostics grew 2.1%.

Our Skeletal Health segment also posted positive growth this quarter with revenues at $23.1 million, up from $22.4 million as bone densitometry product sales again increased.

Overall our third-quarter 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 a topline revenue benefit of $6.4 million this quarter, which is a positive impact of approximately 1.5 percentage points on our consolidated revenue growth. Approximately half of this FX impact was within our Diagnostics segment, one-third was within Breast Health, and most of the remainder was within Surgical.

When factoring in the impact to costs and expenses the net pretax impact was a gain of approximately $1.7 million.

Turning to the rest of the P&L, our gross margins on a non-GAAP basis were 61.9%, up 170 basis points from last year, driven primarily by the increase in service revenues and an improvement in GYN Surgical margins.

Product gross margins for Breast Health, GYN Surgical and Skeletal were up year-over-year, with the strongest contribution coming from Breast Health, largely due to increased service contract revenue resulting in increased service efficiencies and the inclusion of an increasing number of 3D tomo sales. This gross margin performance was at the high end of our guidance range of 61% to 62%.

Regarding operating expenses, our non-GAAP expenses continue to be well controlled and totaled $141.4 million, an increase of $24.7 million above our third-quarter non-GAAP expenses of $116.7 million last year or 21.1%, and at the low end of our guidance of $140 million to $145 million.

This expected year-over-year increase in expenses was primarily due to the increased sales and marketing expenses for our NovaSure DTC campaign, and the inclusion of our recent acquisitions of Sentinelle, Interlace and TCT and also some growth in our R&D investments. Our R&D efforts continue to be a focus for our investment dollars, and as a percentage of sales continue to be in the 6% to 7% range.

Our non-GAAP earnings exclude certain items that are fully detailed in our earnings release. Absent the non-GAAP items, our adjusted pretax income this quarter was $126.8 million versus $122.1 million in Q3 of last year, an increase of 3.8%.

Using our annual effective tax rate of 33.5% for the year, non-GAAP adjusted net income increased 9.4% to $85.5 million compared to $78.2 million for the same period last year.

We reported fully diluted non-GAAP EPS this quarter of $0.32 versus $0.30 a year ago and at the high end of our guidance range of $0.31 to $0.32.

Turning to the balance sheet, our cash balance totaled $614 million, up approximately $97 million from $517 million at the end of fiscal 2010, primarily due to the continued strong generation of cash from operations, which benefited from an improvement in working capital, including a reduction in DSOs, and to a smaller degree the cash payment we received from KV Pharmaceutical, as well as from stock option exercises.

The growth in our cash balance is partially offset by the cash we used to acquire Interlace and TCT in the second and third quarters, respectively, as well as interest on our convertible debt and earnout payments from recent acquisitions.

Our plans for the use of cash remain focused on investing in our current technologies and operations, potential tuck-in acquisitions, and preparing for the possible redemption of the first tranche of our $1.725 billion convertible notes beginning in December 2013.

Regarding free cash flow, we generated approximately $105 million this quarter, a sequential increase of almost 60%, largely due to lower tax payments than in the prior quarter. The current quarter's cash flows were comprised of approximately $120 million of cash flows from operations, less capital expenditures of $15 million.

Now moving on to guidance, this includes our recently approved Dimensions 3D mammo system and our recently acquired businesses, and excludes any future revenue or earnings from anticipated acquisitions.

For the fourth quarter of fiscal 2011 ending this September 24, we are expecting revenues of $455 million to $460 million. Year-over-year and sequentially this reflects a slight increase in each operating segment. This revenue range represents an expected growth rate of 6% to 7%.

We expect gross margins of approximately 61.5% to 62.5% on a non-GAAP basis, improving slightly from the third quarter due to higher revenues and a more favorable product mix.

We expect non-GAAP operating expenses to increase slightly on a sequential basis from Q3 to a range of $143 million to $145 million, or approximately 31% to 32% of revenue. This is primarily from including TCT expenses for the entire quarter.

We are expecting non-GAAP interest expense to be approximately $11 million in Q4. And this does exclude $18.5 million of non-cash interest expense related to our convert.

Our non-GAAP effective tax rate is expected to be approximately 33.5%. And we expect non-GAAP earnings per diluted share to be $0.32 to $0.33 on shares of 265.5 million.

For fiscal 2011 ending on September 24, we are increasing our revenue guidance to account for the revenue upside in Q3 and the incremental contribution from TCT to a range of $1.77 billion to $1.78 billion, which represents growth of approximately 6%.

This guidance reflects our expectation that Breast Health will grow in the mid-single digits, that Diagnostics will grow in the low single digits, that GYN Surgical will grow in the low double digits, and Skeletal Health will improve slightly.

We are maintaining our gross margin guidance of 61% to 62% for the year. The key driver to future margin improvement is the expected increase in revenues. We expect non-GAAP operating expenses to be in the range of $555 million to $560 million for growth of approximately 12% from fiscal 2010, and up from prior guidance of $545 million to $555 million. This increase in guidance reflects the addition of TCT for the year.

And we are expecting interest expense to be approximately $42 million, excluding $73 million of non-cash interest expense related to the convert.

We are now expecting non-GAAP effective tax rate of approximately 33.5% for the year. Non-GAAP EPS guidance remains at a range of $1.24 to $1.26, which represents growth of 5% to 7% year-over-year. The incremental increase in our revenue guidance is offset by slightly higher operating expenses from the recent acquisitions. Our share count guidance of 264.5 million remains unchanged.

Looking at cash flow, we are also reaffirming our free cash flow guidance of approximately $450 million. In summary, we are pleased with our performance across all four operating segments this quarter. Our organic businesses have stabilized, and our new product lines are gaining traction. We continue to see positive response to our recently approved Dimensions 3D tomo system. We are encouraged by the growth in our GYN Surgical segment and improving trends in our Diagnostics segment.

As our fiscal 2011 guidance implies, we expect to deliver improved growth this year on the top and bottom lines and to generate continued solid cash flows from operations, while maintaining our discipline at the expense level.

Although contributions from our recently closed acquisitions are modest this year, we are excited about their growth potential in fiscal 2012 and beyond. Now let me turn the call back to Rob.

Thanks, Glenn. Well, at the beginning of the year we outlined our strategy that included a strong pipeline of products for organic growth, tuck-in technology acquisitions, and an international expansion initiative. We believe through the first three quarters of this year we have executed in-line with these expectations. Our 3D Dimensions was approved by the FDA, and we have now submitted the HTA for FDA approval.

We have completed two tuck-in acquisitions, and more recently two international expansion investments. We are pleased with our overall performance and solid year-over-year growth in all four of our business segments.

In Breast Health we are encouraged by the strong interest in 3D. GYN Surgical grew strongly on a year-over-year basis with both NovaSure and Adiana, as well is a nice contribution from MyoSure.

In fact, even without MyoSure, Surgical would have posted record revenues for the quarter. We remain optimistic about Diagnostics, given the improvement in ThinPrep volumes worldwide and the increasing penetration of Cervista, as well as all the new instrumentation offerings that I discussed earlier.

In summary, I look forward to closing out fiscal 2011 successfully and moving on to an exciting fiscal 2012. Thank you all for dialing into our third-quarter call. I will now turn the call over to the operator for 30 minutes of questions. Thanks.

(Operator Instructions). We ask that you limit yourself to one question initially and one follow-up. (Operator Instructions). Dave Turkaly, SIG.

Thanks and thanks for all the color on the Dimensions. When you look at the $50 you mentioned for that miscellaneous code, can you just remind us is that similar to what you saw for digital early on over analog?

What actually happened with digital over analog was that a $50 premium was assessed over the existing analog rate. But it was presented as a combined rate for digital that averaged around $130 versus $80 from the former analog rate. And I'm approximating.

What we would imagine happens with tomosynthesis is that it will be an aggregate code that will be higher than the current digital code. So the $50 is clearly in line with what we -- our expectations.

You should also note that the digital mammography was about five times as expensive as analog. We are talking roughly about $150,000 premium over digital with tomosynthesis.

Thanks for that. The follow-up would just be, given the trends and all the data you mentioned in terms of the mix and the percentage, would you say as we look at Breast Health growth going forward -- this quarter you saw a nice acceleration -- should we assume that you can maintain something similar to that level even before we see a specific code release for tomo?

I would like us to really hold to the initial forecasts that we gave for the first couple of years, and that anticipated that there would not be a reimbursement code. That number, just to remind everyone again, was we assumed that there would be the purchase of roughly 500 to 700 systems over that period of time. That is probably the best information that we have at this point in time.

Isaac Ro, Goldman Sachs.

Thanks for taking my question. I just want to touch briefly on the outlook for the balance of your fiscal year. I know you're not looking past the October timeframe, but your assumptions on the hospital spending environment, both for capital funding and the price that you have related to elective procedures, what are you assuming as we move into the rest of the summer months here? [It can be] a little bit quiet seasonally, but given the uncertainty in the market, your assumptions behind the guidance would be very helpful.

It is obviously different for each business segment. So if we look at capital equipment, we still think there is a lot of downward pressure on the capital equipment for medical technologies. The difference here is that this is a new technology. So the adoption uptick will be based on whether or not the market believes that this is better technology. It is not simply replacing the current product. It is replacing it what we would think is a more efficacious technology.

So I think that the opportunities for digital mammography moving to tomosynthesis will almost be irrespective of what is happening with some of the other diagnostic imaging products, because of the newness and the clinical benefits of the technology.

With respect to some of our other product lines, I think the procedure oriented businesses -- women going in for exams -- we see that as being more stable. I'm not certain it is planned to increase, but we are certainly seeing a recovery from the dramatic falling that occurred last year. And, really, in the second half of last year it was almost like procedure volumes fell off a cliff. We think that is more than stabilized today.

The other businesses within our surgical business, there is some downward pressure on procedure volumes. A lot of that has to do with increasing deductibles. Certainly the unemployment situation doesn't help that. These are non-life-threatening diseases, all be them debilitating. And as a result of that it is our sense that we will see ongoing pressure or headwinds in those areas, probably for the next year.

Now we are maintaining a level of optimism, because we think DTC will promote more activity in the marketplace. We think MyoSure is a brand-new product that otherwise does not have another clinical alternative. And we are so early on with Adiana that we think there is still growth potential there.

But, nonetheless, the overall market itself we think is going to be under pressure.

Great, and just one follow-up on the China strategy. I am very interested in your initiatives there. I am wondering how should we think about the impact that your ex-US growth rate in Breast Health will have on the overall Breast Health division, is that part of the strategy (inaudible) [taking] shape?

This is David Harding. I think that it is going to take a little bit of time for that strategy to play out in a meaningful way and impact the overall Breast Health growth rates. Although we are looking into certainly the middle part of next year to launch new products into the Chinese market.

Keep in mind that the Chinese mammo market is still relatively immature, although it is growing fairly rapidly. So we believe that the impact will come probably in the tail end of the coming fiscal year as opposed to right away in the early quarters.

The current product line that is sold by Healthcome is an analog set of units, and so those are by their definition less high-value items, and will therefore have a smaller contributing effect in the near term.

Great, thanks so much.

Bill Quirk, Piper Jaffray.

A couple of quick questions. Rob, just to circle back to the ThinPrep business and the comment that it was up in the quarter, can you give us a little color as to perhaps why? Is this due to some of the early provisions of the Healthcare Reform Bill? Is this just plain old easy comps from last year? Any color will be great. Then I've got a follow-up.

I think you just hit it. I think it is an easier comp against last year. If we think about it, all that has really happened, though, is the domestic business has stopped bleeding. So I think we are back to a level of patient activity. And that is complemented by a stronger international growth. So we are seeing the overall business is increasing as a result of the stabilization of the US market and growth on an OUS basis.

Okay, great. Then recognizing that we are still early here, any color on the actual timing of the sales cycle for tomo? Thanks.

You know, I think it is a six-month process, but Peter Soltani is here, and Peter is out in the field every day with our account managers. Peter, what do you think about that?

Sure, thanks. This is Peter. Yes, I think it is certainly a typical capital cycle. People have to budget for it to compete with other capital projects. There is an implementation phase. They have to have [rooms] ready; they have to have folks trained. So it isn't a decision-making process that happens overnight. So, again, I would say it is a fairly typical capital cycle.

Very good, thanks.

David Lewis, Morgan Stanley.

This is [Bill Carlisle] on the line for David Lewis. So when, let's say, as we look at the replacement cycle for mammography here, I think you guys have been saying that it has been about 18 to 24 months out before we start to see replacements really start to accelerate and start to draw a larger share of placements there. I wanted to see if there is an update on that guidance and where you guys see this steady-state of replacements and mix going forward?

If you recall, when we talked about that it really assumed that there was not a new product. There wasn't tomo. It was replacing -- it was the normalized replacement cycle that we said would average somewhere between 12% to maybe even 15% of the installed base.

We think that happens with the natural maturing of the installed base, but we think the more important dynamic is the introduction of a new technology. And that new technology is tomosynthesis, which we think accelerates that replacement cycle.

What will be necessary in order for that to happen in a much grander or broader way is clearly expanded clinical validation, which is happening every day, and obviously the setting of a permanent reimbursement code.

With those two other pieces filled in this puzzle that we are talking about, we think that the replacement cycle accelerates due to the notion of this technological obsolescence that we keep talking about, which is quite different than the normal replacement cycle of maturing equipment.

This is people feeling -- they are compelled to buy because of competitive dynamics, because of clinical efficacy, because of all the benefits of this technology, not so dissimilar to what happened in the analog to digital conversion.

Okay. That is helpful. Then to follow up, you guys mentioned the Dimensions mix in the quarter was in the 57% range. Was that a worldwide mix number or was that strictly US?

This is Peter. Yes, that was a worldwide number.

Can you give us any clarity on how that breaks out between US and OUS?

I think we -- have we broken anything on domestic versus international for that, Glenn?

No, we haven't. It is Glenn. But the bulk of the growth is all in the US side. The international side on Dimensions have been fairly stable in the last few quarters. So where you are seeing the growth coming from is on the US side. And what is important there is really the mix shift, because Dimensions is the new product with a much higher selling price that we are able to achieve in either the 2D or the 3D mode. So that will help to continue to drive revenues as we go forward as that shift continues.

All right, thanks a lot.

Thomas Kouchoukos, Stifel Nicolaus.

Thanks for taking my questions. I just wanted to start with the formal release that came out this morning from HHS on that they are requiring payers to cover birth control and other preventative care for women. I wanted just to be clear whether or not this included permanent birth control and your Adiana system?

Then, also, if you could comment on what your perspective is in terms of what this means for your Adiana ThinPrep and HPV tests going forward?

The quick answer is yes, it does, and I will have Steve Williamson comment on what we believe some of the longer-term benefits will be from this.

We believe that beginning in August of 2012 there will be no co-pay or deductible associated with permanent contraception. And, obviously, Adiana is covered in that. That is for private payers. So as people renegotiate their contracts these private payer contracts will take out the deductibles and take out the co-pay. So we think this is a big plus for us moving forward.

Okay, great. Then just to follow on, I think you guys mentioned that the seminars you're holding for 3D have been quite successful. One of the things we have seen is we have seen press releases coming out from different centers across the country saying they [have] adopted 3D technology. It hasn't been necessarily academic centers. I think we had expected that early on it would just be the academic centers.

I am curious, are you seeing more mainstream centers come on than maybe would have expected to begin with?

The quick answer would be, yes. I think that the centers that are buying these that are not the academic or research centers are buying it because, obviously, they believe in the technology, but also they believe that there is a strong marketing benefit to having such powerful technology available for their patients.

Okay, that's all I had. Thank you.

Bill Bonello, RBC Capital Markets.

I have a question then a follow-up to it. The first one is just a point of clarification. The 500 to 700 system placement -- Dimensions system placement that you have talked about, is that both 2D and 3D or is that just 3D?

When we were talking about that that was actually 3D. We were saying over the first two years that we thought that the market would -- could absorb 500 to 700 3D systems.

That is what I had thought, but then I got a little confused with today's discussion. Okay, and so then the more important question. The mix that you have seen so far between 2D and 3D, is that consistent with what you had expected? And when you think of the customers that are buying these systems, are they maybe customers that had already budgeted to buy a 2D even before tomo was approved?

I will ask Peter to respond to that.

Sure. This is Peter. Again, I would say that it is still fairly early in the process, so it is really hard to split out the mix. And, certainly, folks that did budget for 2D would have the money for 2D. The advantage certainly for them would be that the 2D would give them the opportunity to upgrade to 3D at a point in time where they can basically get the funds budgeted.

Okay. That is all.

Rich Newitter, Leerink Swann.

Thanks for taking the questions. I just wanted to maybe start off with the reimbursement on tomo. I think you had said that in the beginning of fiscal 2012 you guys were going to figure out a way to more formalize the approach to reimbursement. Could you just expand on that? What does that mean and are there any further timelines that you're willing to put out there with that?

The timelines probably would be more challenging, but I think I can explain with a fair amount of color what we mean by the process. So one of the areas that we are really focused on is we certainly want CMS to support this, but we want the ACR to support it as well. And we also are looking for some advocacy groups and the like.

Well, that is taking some time relative to the clinical work that has been done, clinical papers that are being written. We think some of the first of these will surface at RSNA this year, and then later also with some of our European studies at the ECR in March.

So as a result of that, we are -- we have delayed a more aggressive stance with the paying organizations until we get really our ducks in order with respect to clinical validation in a much broader way.

Does that -- maybe that you are delaying the aggressive stance, do you maybe have more comfort today versus a few months ago delaying that, given some of the initial success that you describe with the initial submissions on the miscellaneous code?

I think it is a little bit of that. We are not kidding ourselves at all that we don't think that is a permanent strategy. But we are also encouraged that customers are interested in buying tomosynthesis or 3-D Dimensions almost irrespective of reimbursement right now.

And I think it is because the technology benefits are so compelling. So that part of it is probably very, very encouraging. But don't misunderstand at all. We think there is a true sense of urgency of getting a permanent reimbursement code. And our path to doing so may have been delayed, but only delayed because of things like clinical papers and results from clinical trials being published, not because we are at all comfortable with the miscellaneous code that is being used on a very limited basis.

Okay, thanks. That is good color. Then just one last one. During the quarter would you mind just characterizing the mix between 2D and 3D? Were you -- would you say it was more that you say an increased willingness to make a purchase or interest in your platform on the 2D side, where the pathway to getting to a 3D is being established, or was it fairly evenly split increasing interest in 3D and 2D?

You know, it is a great question. So if you think about the market, what we are finding is that a lot of the folks that have not bought mammography products yet are buying Dimensions products. And they are buying it because of competitive reasons and they are buying it for the upgrade path that it presents. We don't view those as being the early adopters of tomo.

The folks that are buying the 3D configured product are buying that because they believe in tomo, and they already do digital mammography and are using their Selenias as either a way to fund the partial purchase of a new system or they're adding tomosynthesis to their practice. So there really are two different camps.

If you look at international right now, it is almost a 50-50 split in terms of the customer profile and what their buying pattern is.

Thanks a lot, guys.

Jayson Bedford, Raymond James.

Thanks for taking the questions. First, in terms of the tomo centers, how are you seeing them use the device, meaning screening or diagnostics? And I guess, are you seeing a center buy one and seeing how it goes or do most of your tomo centers have more than one device?

I will have Peter comment on that. Peter.

Sure, thanks. This is Peter. I think it is a bit of a mix. It just depends on the potentially previous exposure the physician might have had to tomo, to a Reader Study or training. So they will, based on their preferences, will either start it in the diagnostic mode. We certainly have centers that start out in a screening mode.

There are centers that will start with one to gain experience. Again, as I mentioned, there is a tremendous amount of training -- excuse me, a lot of training that needs to go along with these units. So they will take a more cautious approach to, again, at least some sites that have had the physicians within their facilities well trained and are capable of implementing it for screening across the board. So there isn't really any one particular approach at this point.

Okay, thanks. Just as a follow-up, and this may be a confusing question, but I am trying to get a little clarity here. It seems like you've got quite a few 2D Dimensions units in the field, let's call it, at least a few hundred. Are those folks separate from the 500 to 700 devices that you have talked about that could be purchased within the first two years, or is there a lot of overlap between those two buckets?

When you say are they separate, the folks that bought 2D may, in fact, upgrade to 3D mammography, and they are included in the 700, but it is unlikely that those that recently bought a 2D Dimensions are going to be the early adopters of tomo. That was my point earlier.

I think they are -- we are locking in that socket for a future upgrade, but my sense would be that they are not the initial buyers of tomo. The people that will be the initial buyers of tomo are -- they will be limited upgrades, which as Glenn indicated in his portion of the script, there has been very few upgrades, and the bulk of the tomo units that are being sold are being sold as new systems. That is what we anticipate being the vast majority of these initial systems that are sold over the first two years. Is that helpful?

That is helpful. Thank you.

Tycho Peterson, JPMorgan.

Are you able to give us an organic growth rate? I understand the currency contribution, but can you back out what Interlace and TCT and Sentinelle did to get us a true organic number?

It is Glenn. Yes, the overall growth rate -- are you talking by segment or are we talking about overall? The overall (multiple speakers).

I was asking overall, but if you want to give it to us by segment that's fine.

Well, I can help you with that a little bit, thinking it through though. Let me -- if we go to -- and after the call, maybe just pull up the presentation on the PowerPoint because it does give the segments and what the growth per segment was, and it gives it on a constant currency.

So the first thing, let me just point out that the overall growth was 7.4%. The constant currency was 5.9%. You're asking for the organic without TCT and without MyoSure. That was just a small number though. So you almost can look at the segment. And we don't give out the exact millions for each of those groups within the product categories. But we are just starting off with those products.

So they did not have any kind of meaningful impact on that organic growth rate in this quarter. I think going forward we are excited that they will. But you can eyeball it by looking at the segment PowerPoint.

Okay, but Sentinelle didn't either, because you did that in August, right?

Yes -- well, Sentinelle is part of the Breast Health, and Breast Health had $205 million in revenues, so Sentinelle is just a tiny, tiny piece of that overall segment. That is really what I meant. When you look at the products, a lot of them all hit different areas, because Sentinelle is in Breast Health, and TCT is in diagnostics, and MyoSure is in GYN Surgical. So when you just doing some rough math it becomes obvious that most of the growth was organic from current products.

So then maybe on Breast Health, you have had a lot of growth from kind of the service component. Two questions there. How much of that is driven by tomo versus just kind of the aging installed base?

And then can you also comment on the underlying dynamics in the 2D market? I mean, you have got Siemens coming in, has pricing dropped off there and pulling down the 2D market?

I think we are certainly seeing -- I will go to the second part of the question. I think we are certainly seeing in some of the international markets where Siemens is presenting certainly a competitive challenge because of lower pricing.

I don't think the dynamics have changed dramatically in the US market right now. And we are certainly not seeing -- there is aggressive competition as always, but certainly nothing above the norm.

We would anticipate that 2D pricing over time will come down as capital equipment matures, but we think we're very early on with both Dimensions and obviously, tomo, at this point in time. So I don't think ASPs have been challenging for us yet, and that is not to say that they won't be. With respect to -- and the first part of your question, maybe if you can just --.

Well, just on the service business, service has been driving a lot of the growth in Breast Health. How much of that is a function of the aging installed base versus more service around tomo?

Well, no, there is really not a lot of service on tomo, because, right, first off, it is a new product so it is going to be under warranty. Secondly, it is a software product, so in fact, over time if tomo were to experience explosive growth, there would almost be a decline in service because you're replacing a lot of new units -- or older units under service contracts with new units that would be under warranty.

We are not seeing that effect yet, but we would anticipate that as the tomo curve accelerates, you're going to have a very high ASP at a very high gross margin, but you're probably also going to lose the service revenue on the existing Selenia that we would anticipate being traded in to buy that tomo unit. Does that make sense?

Okay, yes, thank you.

Amit Bhalla, Citi.

Rob, I wanted to clarify one of your comments you said on reimbursement. You said that the $50 premium that you initially are seeing was in-line with what you were thinking. But I remember on previous conversations, and even on the last conference call, you said it was more of like a $25 to $30 premium that you're looking for. Can you clarify what you are actually expecting?

Yes, I think the $50, it clearly is at the high end. I think we have been saying a range of $25 to even $50. In fact, some of our customers are even looking for a higher rate, but I don't -- I have no crystal ball as to acknowledging where it is going to end up.

I think we have said that a reimbursement as low as $25 may be livable, but we certainly would think that something on the higher end of that would make this a much more attractive from a cost perspective, because it is the added cost of not just the equipment, but it is also the added reading time.

So between a combination of technical and professional, I think everybody would feel better with a higher end of that range being the reality.

Okay, and then secondly on Cervista HCA, I think I remember last conference call you said you were expecting 180 days approval, which would put it into fourth quarter. But now you are saying first-half of 2012. Can you just clarify what is going on there (multiple speakers)?

Remember, we did have a delay in the submission. So we took a step back. So we were about a month to 60 days delayed. We think that the normal six-month period would have taken us into the first quarter.

We are still thinking along that line, but we are hedging our bet, because it is always difficult to put a stake in the ground relative to FDA timing. We have to respond to a variety of questions and so on and so forth.

So we tried to put a little bit of a cushion on when we think the product will be available, given that we are now just in the process of responding to FDA questions, and that was really the rationale.

Okay, thanks.

We have time for one more telephone question. Anthony Petrone, Jefferies.

Two -- one on tomo. I'm just wondering if the price discussions on tomo have changed much, if at all, from market assessment runs pre the approval of tomosynthesis?

Then one on HPV, you mentioned marketshares for the assays are increasing across small-and mid-volume labs. I'm wondering upon approval can you remind us if those platforms will be sold into new accounts or will they be placed in an attempt to just increase assay sales? Thanks again.

Sure. I think with respect to the notion of tomosynthesis, I mean, Peter you may want to comment on that.

This is, again, Peter. I think that certainly the pricing has been domestically has been relatively stable, and it is pretty much in line with where we thought things would end up. I think certainly as was pointed out earlier on the international side, you see more pricing competition in many areas.

But again, I do think we have a product that from a tomosynthesis standpoint is highly refined and it becomes a huge competitive advantage that helps us drive sales.

That's great. And as far as the -- you are referring to the automation and instrumentation products on our HPV assay.

That is correct.

There is going to be, just like there is today, with Imager and some of our other instruments processes and the like, there are a bunch of different market models. The one that will probably most frequently be used is really a per use model. But it will be built into the use of the product versus [reselling] capital equipment.

But it is not to say that we are -- that is 100% exclusive approach. We do sell capital equipment as well, but the goal here is really not to rush out and try to have some quick wins with capital equipment. It is really to secure higher volume labs where we have an opportunity to really reap the benefits of the assay versus a one-time sale of instrumentation.

Got it, thanks.

Ladies and gentlemen, thank you. That is all the time we have for questions today. This now concludes Hologic's third-quarter fiscal 2011 earnings conference call. Have a good evening.