Hologic Inc (HOLX) 2012 Q3 法說會逐字稿

Good day, everyone, and welcome to the Hologic Inc. third-quarter fiscal 2012 earnings conference call. My name is Kelsey and I am your operator for today's conference. In addition, today's conference is being recorded. All lines have been placed on mute but at the conclusion of the conference we will pause for a question and answer session and now I would like to introduce Deborah Gordon, Vice President Investor Relations, to begin the conference. Please go ahead, Miss Gordon.

Thank you, Kelsey. Good afternoon and thank you for joining us for Hologic's third-quarter fiscal 2012 earnings call. The replay of this call will be archived on our website through Friday, August 17, and a copy of our press release discussing our third-quarter results as well as our fourth quarter and fiscal 2012 guidance is available in the overview section of the Investor Relations section of Hologic's website. Also in that section is a PowerPoint presentation related to the comments that will be made during today's opening remarks.

Before we begin, I would like to inform you that certain statements made by Hologic during the course of this call may constitute forward-looking statements. These statements involve known and unknown risks and uncertainties that may cause the actual results to be materially different from any future results implied by such statements.

Such factors include those referenced in our Safe Harbor Statement and our third-quarter fiscal 2012 earnings release and in the Company's filings with the SEC.

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 also be found in our third-quarter earnings release, including the financial tables in the release.

Please note today's call will consist of 30 minutes of opening remarks from management followed by a 30-minute question-and-answer session. We do need to limit each participant's question to just one with one related follow-up as necessary. However 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 call over to Rob Cascella, President and Chief Executive Officer.

Thanks, Deb. Good afternoon and thank you for dialing into our third-quarter earnings call. Joining me on today's call are Glenn Muir, our Executive Vice President and CFO, Peter Soltani, our General Manager of Breast Health, and David Harding, General Manager of International Operations.

Today I am going to summarize our third-quarter performance, update you on the marketed option of our Dimensions 3D tomo system and provide a brief review of some of our other key businesses. Glenn will then discuss the financial results in greater detail and provide color on our fourth quarter and fiscal 2012 guidance. We will then open up the call for 30 minutes for Q&A.

Before I start on the quarter, I would like to provide a brief update on the status of the Gen-Probe acquisition. I want to remind everyone we are not closed yet so my comments will be limited to the events involving the transaction.

The Gen-Probe shareholder vote will occur tomorrow, July 31, and closing of the transaction is expected on August 1. As we announced on July 11, Carl Hull, CEO of Gen-Probe, will remain with Hologic for a minimum of 15 months. He will serve as General Manager of the combined diagnostic franchise which will include both the psychology and molecular businesses. I am also pleased to tell you that the majority of Gen-Probe key senior leadership are also being retained as well as many other key employees throughout the organization.

Although Glenn will report more thoroughly, I must comment we were thrilled with the success of our financing efforts and believe our effective borrowing rate on this transaction is an indication of the power of the combination of these two leading companies. With respect to the integration planning and implementation I again could not be more pleased. It has been an intense two months of efforts on the parts of Hologic and Gen-Probe. We have had over 100 people as part of 15 functional and six cross-functional teams focused on all aspects of integration, day one priorities, future goal setting and synergies.

In addition, we have been assisted by E&Y and McKenzie who both played extremely valuable roles in this process.

Our value drivers are focused primarily on commercial requirements, product development priorities, salesforce rationalization and the international rollout of products. We are extremely pleased at how well the teams have worked together on very tough strategic and emotional issues. The success of these plans will have much more to do with revenue synergies that we have discussed in earlier presentations. We are leveraging the Hologic global distribution infrastructure for these wonderful world-class products.

In short I am even more enthusiastic about this transaction. We are confident in our growth projections and firmly believe the revenue synergies made available by this combination are even more attractive than originally expected.

Now I would like to take a few minutes to give you an update on the third quarter. In Q3, revenues increased 4.2% over the prior year to $470 million. Without question, the numbers fell short of our expectations but we believe there are favorable indicators. The Diagnostic business was strong, Surgical grew on a sequential basis and 3-D mammography ended the quarter with a very strong backlog. Also encouraging is our gross margin improvement. We are seeing a benefit from both the acceleration in our Diagnostic and Surgical segments as well as the heavier concentration of 3-D mammography in our results.

Non-GAAP earnings per share rose 7% over prior year to $0.35, ahead of both guidance and consensus. Although a challenging quarter, it has been one with many positive indicators.

I wanted to address for a moment some macro economic trends that we are seeing and how they are impacting our business. Clearly, the persistence of economic conditions in Europe is having an impact on our business. Sales cycles have slowed and there is an increasing pricing pressure. In addition the collapse of the euro has caused both margin erosion on European sales and a negative translation impact. In the quarter alone, our revenues were impacted by more than $4 million.

We do not expect this trend to improve over the near term. It will unfortunately be a reality for some time. We do believe, however, that pockets of growth remain. Our ThinPrep business continues to gain traction in both developed and emerging international markets. Dimensions 2D and 3D are thriving in places like Latin America, the Middle East and Australia.

While international Selenia units are slightly down on a year-over-year basis our Dimension units have nearly doubled.

On a mid- to longer term basis, we see continued growth in both our international Diagnostic business, specifically ThinPrep and Cervista. We also believe European market acceptance of 3D mammography will accelerate with the published results of important clinical trial data.

Finally we believe our surgical business will have modest OUS growth as current economic conditions do not work in its favor.

I would like to now provide you with a bit more color on tomosynthesis. We remain very pleased with the uptake of our Dimensions 3D systems. As noted last quarter, we had started to see demand for 3D eclipsing demand for our 2D systems. We firmly believe this is a result of the power of this technology, irrespective of limitations related to reimbursement and market conditions.

To rehash a bit about the third quarter. As we stated in our press release on July 11, we expect a significant acceleration in the shift of orders from 2D to 3D. This created both opportunity and some challenges. We expected tomo installation would take longer than 2D due to physician training requirements. This delay was exacerbated by the logistics of training all radiologists on image interpretation prior to shipment. Customers' preference had been to have all radiologists trained on a peer-to-peer basis before units are installed.

To be clear, this is third-party training and, as you may recall, was not a requirement for 2D training. The good news is the significant growth in domestic 3D bookings generated additional backlog and we expect the majority of these units to be installed in the fourth quarter.

So what are we doing to respond to our physician training limitation? We are working to increase access to physician training in order to support the current and expected growth demands. Additional classes are being created with more radiologist trainers. Most importantly, we want to structure broader training availability while not compromising the quality of the programs since we believe this is paramount to customers realizing the full benefit of the technology. We believe that over the next couple of quarters we will be in much better shape to respond to our increasing demand.

Nonetheless, as I mentioned, 3D sales are exceeding expectations. Based on Q3 installations, we are approximately 45% of our two-year unit goal of 500 to 700 3D systems in the United States. We have units in over 45 states today.

So with units shipped to date and units already in backlog and expected to ship in the fourth quarter, we are already at our target of 60% of this range by the end of fiscal 2012 as previously stated.

For tomo reimbursement, we remain on track with our strategy and are reaffirming our estimated timeframe for securing a dedicated tomo reimbursement solution by the end of the first half of calendar 2013. We are still expecting the publication of clinical results from some key studies to peer-reviewed journals by the end of this year.

Overall, we are very pleased with the preliminary results thus far and believe each paper will establish another level of validation for this powerful technology. A summary of papers submitted and those to be submitted are as follows.

The FDA clinical trial paper by Dr. Rafferty is submitted and accepted by radiology. The Oslo study, which is over 12,000 patients, has been submitted. Doctor [Row's] study and other prospective screening study of 9,000 patients has been submitted. There is a Magee paper on advanced diagnostics which has been submitted and an Italian paper of 7,000 patients is pending submission.

I would like to talk about some of the other business units now and their impact on Q3. Diagnostics experienced a solid quarter overall with growth of 11% on a year-over-year basis. The ThinPrep franchise remains resilient with some modest declines domestically due to lab consolidation and, therefore, some lower pricing under volume arrangements. In addition, we do see some signs of interval expansion. As a result, domestic units were down approximately 3% compared to last year. This is an erosion rate we have been indicating for some time. So, really, no surprises.

International growth was quite strong, however. Aided somewhat by sales through TCT we are very pleased with the early successes we are having with our business in China and additional growth opportunities in other emerging markets. A combination of better penetration in Europe and our focus on emerging markets has generated strong international unit growth of over 30% on a year-over-year basis. We expect sustainable international growth throughout the fourth quarter of fiscal 2012.

Regarding molecular, the revenues for our molecular Diagnostics division was up 30% on a year-over-year basis, almost all of which came from sales of Cervista in the US and in China. Revenues were again fueled by new customer account wins, growth at existing accounts and international penetration.

Our high throughput automation system approved late in Q1 is being well received in the US market. We currently have over 30 units installed domestically and early customer feedback is very promising.

Internationally, we continue to launch our medium throughput automation. We have installed 14 MTA systems internationally and have a robust pipeline of potential new accounts.

The commercial launch of Cervista HPV began in China in Q2 and, while it is still early, we are very pleased with the initial response. We have converted a large number of manual accounts and are making steady progress in the market. This should be considered as further validation of our market segmentation strategy whereby Cervista will play a valuable role in emerging decentralized markets.

We obviously expect our molecular business to undergo significant change with a combination of Gen-Probe products and technology. The combined teams are anxious to get to the market with our rollout strategies.

Now to talk about GYN Surgical. Surgical business declined 2% on a year-over-year basis but, when adjusted for the discontinuance of Adiana, the business unit grew 3% over prior year and 4% over the prior quarter. This growth was primarily due to our MyoSure product line, which nearly tripled when compared to last year. Importantly, NovaSure did realize some growth over the prior quarter of 3% sequentially.

We believe the NovaSure improvement is partially due to our now fully trained sales team additions being better focused without the distraction caused by exiting the Adiana business.

We remain totally committed to NovaSure and have a series of product improvements under development intended to enable us to effectively compete for years to come. This remains an underserved market and we believe we have the best technology available with the highest efficacy.

One newer data point supporting this is the meta-analysis published by the British Medical Journal on global endometrial ablation. This analysis included 19 randomized controlled studies where the result of over 3,000 women undergoing such procedures were analyzed. The results concluded NovaSure was more effective than either thermal balloon or free fluid ablation technologies. We believe this is a compelling example of the superiority of our product.

We were encouraged by Surgical's performance in the quarter and believe it will be a growth business in the future.

In summary, we were generally pleased with the quarter. We believe we have the appropriate plan in place to respond to our increasing demands for tomo, our international Diagnostics business continues to outperform our initial expectations, Surgical's long-term growth outlook is encouraging and, finally, we are excited to be approaching the closing of the Gen-Probe acquisition and pleased with the tremendous progress made with our integration efforts.

With that, I would like to turn the call over to Glenn.

Thank you, Rob. Starting with some additional data on our acquisition of Gen-Probe.

On July 19 we announced the pricing of our private placement of high-yield notes as well as expected pricing on our anticipated $2.8 billion of senior secured credit credit facilities. We are very pleased with the terms we were able to secure. The expected blended average interest rate of all the traunches of the debt financing is approximately 4.8%, slightly below the 5% estimate we shared with you when we announced the acquisition in April. The cash rate is actually 4.64% and with the original issue discount included the yield at the 4.8% rate we announced.

The offering is expected to close concurrently with the completion of Hologic's acquisition of Gen-Probe.

Our acquisition strategy changes following the Gen-Probe acquisition. Specifically our capital allocation plans will focus squarely on the repayment of our debt obligation. We estimate our total debt to EBITDA ratio will start out over five times upon the close of the acquisition and we have a target of reducing this to 2.5 times over the next three years or by the end of our fiscal year 2015. Given our cash flow generation abilities coupled with Gen-Probe we remain confident this goal is achievable.

As Rob mentioned, the integration plans are comprehensive and sound and we expect to integrate Gen-Probe into Hologic smoothly. After undergoing a rigorous integration planning process over the last several months, we remain highly confident in the $40 million in year one cost synergies we guided to at the time of the acquisition and the $75 million in the first three years.

We also remain confident that our projected revenue synergies are achievable and will help us to realize a return on invested capital of approximately 13% well above our 8% weighted average cost of capital.

With regards to Gen-Probe's June quarter, we are mindful the acquisition is not yet closed so we are not at liberty to discuss. We will begin incorporating their results from August 1 forward which will be part of our September quarter reported at our next earnings conference call scheduled for November 12 along with expected guidance for fiscal 2013.

In addition, we will include their June quarter's results in our upcoming SEC filings specifically in the footnote disclosure in our Form 10-K to be filed at the end of November and as part of pro forma financial information and a registration statement for our high-yield notes to be filed in January. Our efforts today are focused on a successful start to our integration and the launch of our combined commercial operations.

Now moving on to the quarter. Consolidated revenues of $470.2 million this quarter increased $19.1 million or 4.2% from last year and we are slightly below the low end of our guidance range of $475 million to $480 million. We saw growth in two of our four operating segments with the increases in Diagnostics and Breast Health offsetting softer year-over-year results in both GYN Surgical and Skeletal. FX had a negative impact on consolidated revenues of approximately $4.3 million this quarter or a reduction of 100 basis points to total revenue growth year over year. So revenue growth on a constant currency basis was 5.2%.

Turning to our operating segments. Breast Health revenues increased $6.3 million or 3.1% from last year. This revenue growth came from a 9.5% increase in service revenues. Product revenues on the mammography side were slightly down year over year due to the ongoing shift to our Dimensions mammography product line from our legacy Selenia as Rob discussed. Revenues benefited from growth in our breast biopsy line again this quarter, specifically Eviva, which posted 30% growth year over year. Digital Mammography product sales and associated service revenues represent the largest portion of this segment revenue, almost 70% this quarter with about half coming from each.

Looking closer at digital mammography product sales, results were driven primarily by our Dimensions line which represents 71% of digital mammography revenue and 60% of units this quarter. And we are sharply higher than one year ago.

As we reported in our press release on July 11, third-quarter product revenues were slowed by the increase in shift of orders from 2D digital mammography systems to our 3D tomo systems. The number of 3D tomos in our domestic backlog increased 76% sequentially from last quarter. 3D upgrades represented 25% of all tomo unit sales in Q3 up from 21% last quarter. We continue to believe that over time all 2D dimensions sold will upgrade to 3D, and as such, upgrades remain an important contributor to 3D tomo adoption.

Shifting to Diagnostics, this segment was the largest contributor to consolidated revenue growth again this quarter. Year-over-year revenues increased $15.3 million or 10.6%. Almost 3/4 of this segment's growth this quarter came from our core Diagnostics businesses primarily our ThinPrep [app cap] with the balance coming from our Molecular Diagnostic product lines. Worldwide ThinPrep test volume increased 8% year over year and 7% sequentially.

Importantly, core Diagnostics sales growth benefited from our acquisition of TCT in June a year ago. TCT's strong performance this quarter clearly demonstrates both the successful integration of our former distributor and our success increasing the number of ThinPrep tests sold and the addition of numerous new products to the TCT infrastructure. We continue to expect close to 20% annual revenue growth from TCT in fiscal 2012.

We saw strong performance again this quarter from our molecular business. We saw double-digit growth in our Cervista HPV line with overall growth in both domestic and international markets, driven primarily by new account growth versus the prior year period. Our GYN Surgical segment reported a $1.7 million decline in revenues of 2.1% year over year as a result of lower year-over-year revenues from NovaSure, as well as a $3.6 million incremental reduction in Adiana due to discontinuance of that product line. MyoSure had a very strong quarter, growing from a business with revenues in the low millions in Q3 of last year to over $10 million in the current quarter. Sequentially, NovaSure sales started to improve with low single-digit growth.

International sales continued to grow, increasing 21% year over year and representing 27% of total Company revenues in the third quarter up from 25% last year. We attribute this to our continued focus on global expansion in recent years. Excluding the $4.3 million negative FX impact, international growth was 25% year over year.

Now for a brief review of the third-quarter performance on the rest of P&L. Gross margins on a non-GAAP basis were 62%, up 10 basis points year over year, up 80 basis points sequentially and at the low end of our guidance range. Despite slightly lower than expected revenue, we are pleased with our gross margin results. The strength in the margins is mainly the result of the increase in sales of our diagnostics product which contribute to higher gross margin in our capital equipment, and also the discontinuous of the Adiana product line which historically had a significant negative impact on margins.

Non-GAAP operating expenses declined $0.3 million or 0.2% to $141.1 million in Q3 and declined $7.5 million or 5.1% from Q2 of 2012. Total operating expenses represented approximately 30% of sales down 130 basis points versus the prior year period and down 150 basis points versus Q2 of 2012. The decrease in operating expenses compared to our guidance included a favorable R&D spend this quarter as a result of the shift in certain projects from fiscal Q3 to Q4. We continue to target opportunities to grow operating expenses more slowly than revenues in an effort to take advantage of the potential leverage in our business model.

Non-GAAP adjusted pretax income increased $13.2 million or 10.3% to $140.3 million this quarter and non-GAAP adjusted net income increased $6.8 million or 8% to $92.6 million. Fully diluted non-GAAP EPS was $0.35 this quarter, $0.01 above our guidance of $0.34 and $0.03 higher than Q3 of last year.

We continue to generate strong free cash flows and we ended our third quarter with cash balance of $906 million, an increase of $193 million from the end of fiscal 2011 and up $51 million sequentially. This sequential increase was primarily due to improving working capital management and continued strong generation of cash from operations overall. We generated approximately $105 million in free cash this quarter.

Now moving on to guidance. We will fully -- we fully detail our guidance expectations in our Q3 12 earnings release and our supplementary PowerPoint presentation, both of which are posted on our IR website. Therefore I will simply highlight our guidance estimates here.

This guidance includes Hologic's current operations and does not include the results of Gen-Probe or the additional financing.

For Q4 2012 ending this September 29, we expect revenues of $485 million representing growth of 4% year over year. Our guidance assumes constant foreign currency rates at the end of Q3 2012. Adjusting to foreign currency rates from one year ago on a constant currency basis, our revenue would be $491 million or $6 million higher and growth year over year would be 5%.

On a non-GAAP basis, we expect gross margins of approximately 62% to 62.5%, operating expenses of $145 million to $150 million, interest expense of approximately $10 million and an effective tax rate of approximately 34%. All of this results in expected non-GAAP EPS of approximately $0.35 to $0.36.

For fiscal 2012 ending September 29, we are reaffirming our most recent total revenue guidance of approximately $1.9 billion which we provided a couple of weeks ago and which represents growth of approximately 6%. On a non-GAAP basis, we expect gross margins of approximately 62%, operating expenses of $585 million to $590 million, interest expense of approximately $42 million and an effective tax rate of 34%. All of this results in expected non-GAAP EPS of $1.36 to $1.38, which implies growth of 7% to 9% year over year.

Turning to cash flow guidance, we anticipate free cash flow for the year of approximately $400 million, which continues to be driven primarily by our operating earnings. As you are aware capital expenditures are not a big part of our business and we are expecting steady CAPEX and depreciation of approximately $65 million each for the year.

And in summary we view our fiscal third-quarter performance favorably. Despite some of the revenue softness, due to the accelerated shifts on 3D to -- shift from 2D to 3D tomo, we remain on track to hit or exceed our placement two-year goal of 60%. Our international operations posted solid year-over-year results as our investments in the emerging markets in the recent years offset ongoing weakness in Europe. The organization remains focused on execution and expense control this quarter driving non-GAAP EPS results that exceeded our guidance. We accomplished all of this in the face of a large potential distraction -- our acquisition in Gen-Probe, showing notable performance from our inspired and focused team. We look forward to both the continued improvement in all of our segments in Q4 and the next phase of Hologic's growth following the close of our acquisition.

Now with that let me turn the call back to Rob.

Thanks, Glenn. So in closing, we are keenly focused on execution. Completing the Gen-Probe acquisition and moving forward with our near-term product rollout plans is paramount to our success. Continuing to drive forward with our other strategic initiatives will ensure our longer term growth expectations.

We look forward to reporting to you next quarter on the close of fiscal 2012 and more importantly a first look at the newly combined business for fiscal 2013. We are confident we have one of the finest product portfolios in this Company's history, particularly with the addition of our expanded Diagnostic line. Although many external challenges remain, Hologic is well-positioned for sustained growth over the next five years.

Thank you for participating on the call. We are going to open it up for 30 minutes of Q&A at this point. Operator, please open up the call.

(Operator Instructions). Isaac Ro, Goldman Sachs.

Good afternoon. Just maybe first off, Rob, if you could comment (inaudible) units on your thoughts regarding the pricing environment not only for capital equipment but as well as consumables. And then secondly just want to clarify on the mechanics for the Gen-Probe numbers this quarter. When will we be getting a look at the second-quarter numbers? It sounded like they may not might not come from November and I wanted to clear that up. Thank you.

Let me start with the Gen-Probe question. That is correct. We do not have June results available for us to disclose today. And those results will be disclosed as part of future SEC filings. And the first one, you are correct, is the November timeframe in a footnote with our 10-K.

And as far as pricing what we are seeing is just really the, I think, the result of a weakening economy in Europe that is certainly putting a lot of pressure on the onward pricing competitions, pricing and so on and so forth. Not a total surprise. The persistence as I commented in my script is one that I think we just have to accept as reality. I don't believe that we are seeing that same kind of downward pricing here in the States although it is really the results quite simply that the tomo product is so new in terms of adoption, that there is not that same kind of pricing as result of more mature technologists.

And elsewhere in the business if you could maybe clarify what you saw in pricing regarding Surgical and Diagnostics that would be great. Thank you.

Sure. On Diagnostics the international business is doing quite well and we are -- although we are certainly being aggressive on some competitive takeaways for both Cervista and on in the case of ThinPrep, these are typically in countries that either we have had little penetration or, in fact, no volumes. So it may be at a lower AUP than what some of our historical pricing might be but it is business that otherwise we have not had. Domestically or with Surgical which is primarily the market that we focus on, there is some price erosion as we went back after market share. And just to put it in perspective, we are talking about something much less than 5%, but we are buying for share at a very, very aggressive rate in order to grow that business.

Tycho Peterson, JPMorgan.

Maybe just to follow up on that last question on pricing. As you go to negotiate HPV contracts, are you able to talk at all about pricing for the Gen-Probe products yet or do you have to wait until the deal closes?

We have certainly not talked about Gen-Probe products at all. That wouldn't happen until we were closed with the transaction.

And then to clarify your comments on pricing in Europe does that creep over to tomo as well? I mean, has [Siemens] gotten more aggressive on pricing? They had been for a while, I guess.

Yes. We're fast and I think that is a correct statement. Siemens has been heavily discounting their tomo unit. I think what we're seeing is a lot of the earlier sites have now bought tomo. So we are into sites that are on the edge of whether they want to invest in it and, consequently, they are negotiating much more aggressively as a result of that. So clearly it is impacting tomo.

But because the European market is representing a much smaller percentage of tomo -- of total tomo sales, it is having a lesser impact on the business.

And then, you had sequential increase in NovaSure. Can you talk about your thought on that product line? You have backed off the DTC, right so can you talk a little bit about what is driving that?

I think it is a couple of things. We shifted the focus of DTC to really follow up on those women that had responded to our awareness campaign. So it is really conversions that we are focusing on and having very routine exchanges with women that were asking for additional information.

The other element that has created a positive movement in the product line is simply with the comment that I made earlier, we had 30 incremental people that were brought on at the beginning of the year. Those people are now fully trained. They are not being burdened by all of the confusion over the discontinuance of Adiana and, as a result of that, we are seeing a bit of an uptake in terms of market share gains in the States.

Okay and then the last one and I will hop back in the queue. Can you talk about the sustainability of growth for the service business for Breast Health? Is that really a function of rolling out tomo, there is more service upfront or just talk about the dynamics there.

Realistically, the service business will continue to grow and until there is an inflection where tomo units really take off. Because as we have talked about in the past, as we sell more tomo units and trade out Selenias, the tomo unit is under warranty and the Selenia was in under a server contract. There will be a gap in service revenue when there is a much sharper uptick in a number of tomo units that are being sold.

What the good news would be is that we are replacing the a $40,000 or $50,000 service contract with the sale of a $400,000 tomo unit. Following that one-year warranty we went back to a service contract revenue as well.

Ross Muken, ISI.

Vijay in for Ross. Thanks for taking my question. So I want to dig in a little bit on the 3D tomo uptick and just looking back to when you launched 2D, could you compare and contrast how was the 3D update progressing when you compare it with the 2D launch? And you also mentioned the clinical trial data by the [CRN] and reimbursement rates next year. How are those factors going to impact adoption?

Sure, I will give you a couple of data points on the difference and I think it will be compelling for you. So in 2003, we introduced Selenia and globally we sold 57 units and it is a product that had reimbursement and there was an established market for it. Today, we are talking about in the first 18 months of selling tomo here in the States that we are targeting a number that is going to be 350 or 360 units based on the statistics that we gave out earlier. So the adoption and uptake of a relatively new technology without reimbursement we think is very compelling.

The clinical trials, as I said in my opening comments, we think will be a further validation of the technology. Meaning that these are prospective high-volume studies with, we think, very compelling results relative to improvements in both sensitivity and specificity. So, we think they will help tremendously and we obviously are anxious to get those in a published state so that the world can see the results.

Sure, so -- and then on Gen-Probe I know that you guys probably aren't going to comment. But one point that you mentioned on in your prepared remarks caught my attention, and the revenue synergy is looking even more attractive than originally expected. So I just would like you to make that comment sort of first delta, intermittent delta coming from.

We are just seeing more opportunity for we to have very complementary selling activities. I think there's a lot of effort over the last couple of months have gone into product rationalization, product rollout strategies here in the States and abroad and we are, quite frankly, we are just very, very encouraged by that. And that was the basis of that comment.

Brian Weinstein, William Blair.

Good afternoon. I am curious about the overall sales cycle in the US for Dimensions and for tomo. Are you seeing that the cycle from the time you first initiate with a potential user is narrowing, staying the same, getting wider, and what are the macro trends that -- are there broader macro trends that are influencing that? Thank you.

Yes, I will make a comment and Peter Soltani can answer that as well. I think in general that sales cycles are lengthening. People are obviously much more fiscally oriented around tough economic conditions and as a result of that we are seeing people really wanting to make certain that they obviously have units that are going to be installed and they are going to generate revenue right away, that there is some near-term reality to reimbursement and so on and so forth. So, it would be difficult for us to say that even tomo wouldn't be impacted by that. We are just seeing a lot more resilience in that product than not.

Peter, you may want to add.

Sure. The other thing that I would add is those customers who may have budgeted this after this past year to get a 2D unit are hearing about the positive clinical outcomes and are rethinking the investment in what would essentially be an obsolete product. So that is also adding to a bit of a delay. They may have put off purchasing a 2D unit until they can budget to get a 3D unit at some point later in the year or for next year.

And then as you think about what your customers are telling you as far as the volumes that they are seeing, what kind of an average increase are they seeing in total volumes once they bring on the tomo unit at this point? Do you have any information on that?

Yes, it is going to be different for the different types of sites that are buying it. If it is a site that is in the business of breast imaging for profit, mammography if you will, then they are spending more advertising dollars and they are out garnering market share in their local communities. To what extent that occurs, I couldn't really respond. I think other sites are buying it as we had stated earlier -- those early adopters -- because of the strength of the technology and are not as interested in marketing the differentiation of this product versus a 2D system. So, it really is all over the map and lots of it has to do with the profile of the customers that we are selling to.

Amit Bhalla, Citi.

Good afternoon, everyone. On Breast Health and Dimensions, specifically, can you talk a little bit about what the actual install times are right now and where you think they can go? And just secondly, what is the underlying cancellation rate for Dimensions systems? Obviously you are not seeing -- it doesn't sound like you are seeing an increase in cancellations, but there is always an underlying cancellation rate. What is that for this type of product?

I will take the cancellation rate one. I'm not sure that we have any cancellations or maybe I don't understand the question but people that come in to purchase a unit are actually quite anxious to get the unit in.

With respect to the installation cycle time from an installation standpoint, from our perspective, from the things that we have to do it is a comparatively fast process so we can get things turned around, depending on the location -- geographic location within a couple of weeks frankly. The delay really comes in with the site itself and their own internal logistics of getting a multitude of radiologists trained.

So they typically don't want to have just a couple of radiologists trained at a site that might have 10, 15, 18 radiologists that would typically be a mix of full-time mammographers as well as some part-time mammography readers. They will tend to want to get everybody trained before they have the unit installed at their location and that is sort of the variable that we have been dealing with.

And, Peter, what is that roughly? Are you talking like two or three weeks? Are you talking a month or two months?

Yes, that can be a couple -- it could be up to a quarter depending on again what the dynamics are around the site itself. So I would say two to three months might be a bit of an extreme, but it can be a significant amount of time. And there is an expense for this site as well. And in some cases, we can do -- weekend WebEx training. In other cases the site may elect to send the physicians to an off-site and (inaudible).

Okay and then, Rob, my reimbursement -- my follow-up is on reimbursement. I think you said in the past 65% to 75% of sites are getting reimbursement on the first try. How has that changed over the last quarter?

Yes, sure, and we are seeing a fair amount of consistency relative to the success of sites that are submitting, as well as in the amount which we believe we are still averaging somewhere around $50. So that has been a very consistent process.

Rich Newitter, Leerink Swann.

I just wanted to start off with the GYN Surgical segment. It looks like MyoSure had a very nice uptick and I think you said it was over $10 million this quarter. Can you just give us a sense of is this what a run rate -- are we approaching a run rate for this product? How should we think about modeling this seemingly successful product launch?

Yes, no, well it is it is very successful and I would say that from a market potential we think this is a $200 million to $300 million product line. Relative to its trajectory, it is a lot like the NovaSure launch in the early days, relative to the success in the market and the growth parameters around that. So, without giving you a specific number, I would certainly say that it is -- we are expecting double-digit growth from this product line for at least the foreseeable future, 2013 and beyond.

Great. And maybe just a follow-up with one on the tomo side of the business. Can you help us just -- with the timeline of the data publications that are going to be coming likely in the second half, can you help rank which might be the most impactful, or are all of these going to be more or less viewed together once a decision is being formulated in the first half of calendar 2013 for reimbursement? Or is there really the Oslo study is the big one and the rest are just going to be there to support that?

Sure, I can take that one. I think the studies should get published before the end of the calendar year. The way that I would look at them is that they are all going to reinforce each other. So, regardless of which one perhaps gets published first, they are all very compelling.

Of course, in the case of Oslo the key point is really the sensitivity whereas with some of the US screening studies we will get a good view of both sensitivity and specificity in a typical screening practice. So, they are really going to reinforce each other is my view -- our view.

And you don't think region will dictate what is more important? Is it the studies might carry a little more weight or does it not matter it's just pure outcome?

Yes, so the one observation that I would offer you with respect to the Oslo study is that it does have participation with folks from UPMC. So there is at least some American involvement and it will be published in the US peer review journal.

Jayson Bedford, Raymond James.

Good afternoon and sorry for the background noise here. In digital mammography can you just break up the growth in the US versus OUS?

For tomo or for digital mammography?

Digital mammography.

Well I think 2D digital, I don't think we are seeing growth in 2D digital at this point. I think we are seeing a switch between low-rent, legacy Selenia products and now higher-end 2D Dimensions products. But the overall -- that overall business is simply a replacement business at this point except for some markets outside of the United States. So the growth in that business is coming from the adoption of 3D mammography.

Okay, so pardon me, maybe just mammography US versus OUS growth.

Yes, well, year our mammography growth was down a little bit. This was a soft quarter year-over-year and it -- Europe for us was fairly steady and as was the US. I mean what we're doing is we are entering a period prior to the launch of the 3D. So I think it was just down a little bit year over year in both. I wouldn't say it's US or outside the US.

Okay, that's fair. And lastly for me, have you made any infrastructure changes to your business in anticipation of the Gen-Probe deal whether it be salesforce cuts, shedding some R&D programs, et cetera?

Sure. All of those things are part of the integration process. So there's been a fairly detailed effort around product rationalizations, product roadmaps. Obviously the salesforce rationalization in terms of right numbers and focus and specialties. So we are clearly right in the midst of that and ready to implement upon closing.

Bill Quirk, Piper Jaffray.

Good afternoon, everybody. Rob or Glenn, you mentioned earlier in the call that your sales reps aren't yet talking about Gen-Probe's products and obviously that makes sense because we are still a couple of days from closing the deal but from a logistics standpoint can you just walk us through what we should be thinking about in terms of the selling team? Have they are been cross trained, are we going to go through that here over the next couple of weeks? And then do you get concerned at all that the team gets all the new Gen-Probe products to sell that they take their eye off the core Hologic portfolio?

Yes, those are really good question. The training really commences with following closing and there are a series of programs that will be offered that are pursuant to some of the sales meetings that are taking place and so on and so forth. The team will be -- obviously there is a combined laboratory sales team and also complemented by our physicians team, our physician team. So we have great representation here in the States. There was the same kind of resource rationalization in Europe and so on and so forth.

So, I think we have a little bit of training to get under our belt right after the acquisition, but we feel very positive about these teams staying very focused. Your comment about do they lose focus on some of the legacy Hologic products. Obviously we have business managers that are focused specifically on that to assure that that doesn't happen. We also have made it a comp structure which doesn't allow that to happen because they -- obviously, they in order to get rewarded at their highest level they need to have the right kind of products mix that they are selling as well. So we think we are addressing it with management in our comp structure.

Got it. And then just as a follow-up just thinking a little bit about the leadership structure within Diagnostics you mentioned you are moving both cytology as well as the (inaudible) molecular products to under Carl's guidance. Can you talk just a little bit, Rob, about how much I guess independence is the Diagnostic team and division going to have? How do we think about, I assume obviously, Carl will be reporting directly to you, but if you could just talk to that? Thanks.

Sure, but Carl is going to be a general manager of one of our franchises for our business units just like David Harding and Peter Soltani that are here in this room with us today. So we certainly want there to be a fair amount of autonomy, but they are going to be measured by a series of objectives that will be set mutually established at the beginning of the year with targets across product lines, profitability, talent management and so on and so forth.

So I would expect to remain as involved in that business as I do with the other businesses in Hologic, but clearly the general managers that are running each of these has the strategic responsibility, the day-to-day operating responsibilities and so on and so forth. So, we feel like we have the right kind of team in place and we also have some very strong Hologic people that will be assuming the roles within that combined franchise as well.

So we think we have the right kind of balance between legacy Hologic products as well as the newer Gen-Probe products.

Anthony Petrone, Jefferies.

Thanks, gentlemen. One on the revenue synergies, Rob, that you had mentioned. I am wondering if that represents upside to the initial $0.20 target that you put out around the close of the deal or if there are other offsets there? And then a clarification on tomo. Are all the sites that you have seen currently are those single unit purchases or do you have sites actually purchasing multiple units? And one if I can sneak in for guidance. I know you haven't said anything for fiscal 2013, but Glenn, can you provide any outlook how you are thinking about the med tech tax for next year?

Sure on the revenue synergies, I don't think we are in a position to talk about whether or not it will increase our numbers for 2013. I think we are in the process of putting all of that together as a combined business. We'll talk about it after Q4 when we give guidance for 2013. As far as tomo, Peter, you will have a good sense of that. In terms of multiunit versus single unit customers.

Well, again, there is going to be one challenge that we are going to face in the sense that unlike the conversions from film to digital, which was the equivalent with standard of care, tomo presents an improvement over standard of care. So sites will typically want to budget and have to make a wholesale migration especially if they have multi-committee units within their systems. So it's just something that we will have to see how it develops over the course of the year.

And I think the point behind that is quite simply that sites that have five, six, 10, 15 units want to convert entirely to tomo. They don't want to face a product in like they did with 2D. So there's great revenue upside to it but there's also logistics issues associated with it. And we are seeing sites convert with multi-units and we are seeing obviously a lot of sites that are single units sites also converting. So it is a mixed bag.

Lennox Ketner, Bank of America.

One quick one for Glenn. Just in terms of your guidance for 2012. I know you [were reiterating] the $1.9 billion that you gave on July 11, but that was obviously a little bit lower at the low end of your range -- your initial range. And I am just wondering if you can just frame for us what is driving that lowered guidance given that you are still expecting to hit your tomo targets for the year? Is that the right way to think about it? Just that that is due to the pressure you are seeing in Europe or how should we think about what is driving that?

Well, I think a little of that goes back to the initial guidance from a year ago. It is $1.9 billion to $1.925 billion for the year. But we do have to appreciate that this quarter -- this June quarter, we were a bit softer than we expected though. We are off by a good $10 million. So I think we have to understand that as part of the total. We don't make that all up in Q4 although we have a pretty significant increase in Q4 as tomo really takes off, as we begin to reflect some of that.

In addition to that, we do have some FX that hit the revenue line which was a bit more than $10 million for the fiscal year. We didn't really talk about it, but I would throw that in there.

And then I think when we gave that original guidance of range, we did have Adiana in for the year. And as you know we discontinued that in April. So we lost another, a good $10 million there as well. So I think the $1.9 billion is very realistic based upon where we will be on Q4 and the uptake that we are seeing in Breast Health.

And then maybe I could just answer Anthony's question on the med device tax because it does come up from time to time. And we have not put out any kind of guidance for FY 2013. But the way to think about it is we will be paying our fair share, our 2.3%. If we look at our fiscal 2012, really as a proxy maybe, and think about the $1.9 billion, the way I would think about it is 73% of our revenues are US-based. That is what would be covered under the tax. We would get to take off service that would come out of the equation.

In addition to that, it is not the revenue price we sell at, but a manufacturing selling price. So in essence, I think it comes down to 60% to 65% of our total revenue. $1.9 billion we would apply 2.3% against. So if it was up like [2012], we were talking about, it would be the low to $25 million for the med device tax. That is the way you would calculate it. For our fiscal 2013, it does only affect three quarters. Because our fiscal year starts October 1 and the tax starts on January 1. So we would only be in there for three quarters of a year.

Okay, thanks. And then just one follow-up, if I could. It's on this ThinPrep business, I believe you said it was down around 3% in the US which is consistent with what you have talked about in the past in terms of the long-term outlook. How should people be thinking about that going forward? Just at the end of their longer term models do you feel like down low single digits is the right way to think about the US ThinPrep business from a longer term perspective?

Yes. We had commented before that we thought there was going to be a fairly consistent 2% to 3% separation on a year-over-year basis for at a minimum the next three years. Maybe slightly beyond. But we do think that at some point and where that is is, obviously, I'd guess that we struggle with as well that as there is increased adoption to new guidelines that that accelerates that erosion. We just think that there is a lot of inertia behind the path and, as a result of that, we are focused on that 2% to 3%. But we do think at some point and let's call it four or five years out that there is an accelerated erosion that is the result of guideline adherence.

Jeremy Feffer, Cantor Fitzgerald.

Good afternoon. Any early word from insurance companies on adopting the women's preventative health services mandate in the ACA?

No, we would only hope in many respects. But we were certainly caring a lot of talk about it, but there's also a lot of confusion about what exactly means and what exactly does survive. So we believe that many of our products are well-positioned because of being prevention, wellness, and so on and so forth. But that is not anything that from a private pay perspective we are seeing traction on.

And just to be clear with a marker would mammography would be covered under that, correct?

Yes.

Jon Groberg, Macquarie Capital.

Just two for me. Just a clarification. I think at the end of your fiscal second quarter you also had really good order growth you were talking about with tomo. And now you have enough orders. Can you maybe talk -- and the hundreds that you talked about. Can you talk about from the time that someone places an order to when it gets booked? Just average that it is today, how that change for maybe a quarter go and what you expect that to be over the next few quarters?

It is hard to put a number on it because it varies. There are sites that will have -- I mean, for example, a site may be getting an additional second or third tomosynthesis unit in which case don't have any barriers relative to training or in which case things can proceed fairly quickly. Other sites that are really just getting going that might have a larger number of folks to train will clearly take longer. So it is really a range. I would say sort of the extreme is maybe an entire quarter's worth.

But there isn't a good average number that I could really give you that would make sense.

I was looking for an average. I recognize that there was a range but overall the instruments so was curious if that was something that kind of if you expected that to continue to elongate given what you are seeing? Or if that -- if kind of where we are at now you think is more of the steady-state?

Yes, a great way to look at this I think is that this is the rollout of the new capital equipment cycle and generally what all of us that sell capital equipment want is a bigger backlog so we have better visibility and can manage things like installations more effectively. It is just early on in the introduction of those products so we are all operating here at Hologic with a fairly thin backlog relative to where a quarter's requirements are and, consequently, we are -- you are a bit more susceptible to a customer delay which could range to give you the range that you had asked for, we could ship a tomo unit tomorrow if a customer ordered it today. Or that customer may say, I want to have all my rats trained so why don't you ship it in two months when I get everybody pulled together.

So unfortunately there is a very broad range and our answer is, let's accumulate as much backlog as we can so we get better visibility on the quarter and we have much better planning capabilities as a result of that.

Okay and then, Glenn, on the -- I think you actually gave your target on the ROIC for Gen-Probe, 13% if I heard correctly. Can you just talk about the timing of hitting that number and also if that assumes just kind of the disclosed cost synergies that you have disclosed so far? Or if you are assuming more maybe a bit more aggressive on the cost synergy side?

No, it would include a bit more, including some revenues synergies. So what we talked about in the past is if we only include the cost synergies that we gave guidance to the $40 million in the first year and the $75 million by year three. We felt over the 10-year planning period which we used to calculate our return on a discounted cash flow basis, we would be at 9%. But once we factored in some of the revenue synergy that we haven't disclosed that we are now looking at in some of the models that we created, we feel we can get up to that 13%. So it is over that extended planning horizon.

That's helpful. Thanks.

We thank you, ladies and gentlemen, that is all the time we have for questions today. This does conclude Hologic's third-quarter fiscal 2012 earnings conference call. Have a good evening, everyone.

Thank you.