Hologic Inc (HOLX) 2013 Q3 法說會逐字稿

Good afternoon, ladies and gentlemen, and welcome to Hologic, Inc. third-quarter fiscal 2013 earnings conference call. My name is Kelsey, and I am your operator for today's conference. Today's conference call is also being recorded, and all the lines have been placed on mute.

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

Thank you, Kelsey. Good afternoon and thank you for joining us for Hologic's third-quarter fiscal 2013 earnings call. The replay of this call will be archived on our website through Friday, August 23, and a copy of our press release discussing our third-quarter results as well as our fourth-quarter and fiscal 2013 guidance is available in the Overview section of the Investor Relations section of our website. Also in that section is the 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 actual results to be materially different from any future results implied by such statements. Such factors include those referenced in our Safe Harbor statement in our third-quarter fiscal 2013 earnings release and in the Company's filings with the Securities and Exchange Commission.

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 opening remarks from management followed by a 30-minute question-and-answer session. We will be limiting each participant to just one question, so please feel free to go back into queue, and if time permits, we will be more than happy to take your question at that time.

I would now like to turn the call over to Jack Cumming, President and Chief Executive Officer.

Well, thank you very much, Deb, and thank you all for joining us today. Joining me here in Bedford is Glenn Muir, our Executive VP and CFO; Dr. Rohan Hastie, our Group Vice President of Diagnostics; and David Harding, our Group Vice President of Women's Health.

It has now been just over two weeks since I returned to the role of CEO at Hologic, and I have spent this time meeting with many of our key members to better understand the challenges Hologic faces today and the many opportunities ahead.

But first, I would be very remiss if I did not think Rob Cascella, our former President and CEO, for his many years of service to Hologic and for his leadership. I worked with Rob for more than a decade and appreciate his many contributions to the Company, our customers, the senior team, and the Board. Rob was instrumental in Hologic's efforts to grow its footprint in the women's health industry and position itself to succeed in the rapidly growing molecular diagnostics market.

For myself, obviously, I am truly excited to return to the Company as CEO. I say return, but as many of you know, I really never left. Since 2009 I served as Global Strategic Advisor, primarily focused on our international business. During this period I spent considerable time meeting with Hologic's key clinical opinion leaders and important customers around the world, which has given me a unique perspective on our business. I intend to use this experience to foster more innovation, improve our execution, develop a more balanced plan for uses of our cash, and increase shareholder value.

Hologic's success is rooted in our team's acute focus on delivering the most technologically advanced medical products the industry has to offer. My recent meetings with associates from all our operating groups have reaffirmed this foundation is stronger than ever. During this call, Glenn will take you through the operational and financial details for the quarter. But first, I want to quickly outline some of my near-term priorities.

Although our third-quarter results were in line with our guidance, right now Hologic is not where we want it to be. However, we have best-in-class products, which means we certainly can modify our approach and focus our energy and our resources for better performance. It is my over-arching objective to restore investor confidence -- first, by setting appropriate, realistic expectations for financial and operating performance; and second, by focusing the organization on the high-level execution required to achieve these expectations consistently.

To this end, as you have seen in our press release, we have lowered Q4 expectations to a level I believe is more achievable based on current domestic and international market dynamics. We appreciate there is investor frustration that comes with lowering guidance. However, based on what I have learned through my review of the businesses to date, our new guidance represents a realistic range for our fourth quarter.

Meaningful changes cannot be effected overnight, but I believe we can make significant progress over the near term, and I have a focused set of goals I will be driving our entire organization toward achieving. So here it is -- what I want to accomplish in the short term.

First, I am focused on conducting a strategic business review to ensure our resources are aligned with the best opportunity for the Company's long-term success. We have a very strong platform to leverage, and my priority is to optimize the value of Hologic's existing assets and capabilities to improve returns and drive organic growth. As part of this strategic review I will concentrate on maximizing revenue synergies from the Gen-Probe acquisition in addition to the cost synergies we previously communicated.

Second, I intend to bolster our senior leadership team with new associates that can assist in developing creative solutions to enhance revenue and accelerate new product development. We will look for individuals to complement our current team, bring fresh perspectives to the Company, and better position Hologic for the future. With that said, we already have strong leaders within this organization, and I'd like to announce two key management changes.

As I said earlier, joining me on the call today is Dr. Rohan Hastie in his new position as Group Vice President, Diagnostics. Dr. Hastie has been with Hologic in a variety of senior-level roles in our diagnostics business, including his recent responsibilities as General Manager of our diagnostics franchise. Previously, Ro had a senior role in our molecular business, and prior to that in our corporate development group. Ro joined Hologic from the consulting world, where he worked for the strategic advisory firm, PA Consulting. Ro has a Ph. D. in molecular genetics.

Also on the call is David Harding, who will be transitioning from his role leading the international team to now serve as Group Vice President, Women's Health. Prior to driving international growth, David managed the Interventional Breast Solutions business; and prior to that, he served as a principal at McKinsey. I am confident both Ro and David are the right leaders to take their respective business units forward with consistent execution.

Third, I am reviewing our current capital allocation strategy and our future plans for capital deployment. This will be among my top priorities as CEO. While we won't have all the answers immediately, Glenn, the Hologic Board, and I are focused on the best uses for the strong cash flows generated by the Company, particularly with respect to opportunities to return cash to shareholders in addition to repaying debt. As part of this review, the Board has signaled they intend to implement new executive compensation plans to ensure that management's financial incentives are closely aligned with an efficient and optimal distribution of capital going forward, and I fully support this important initiative.

I am devoted to this Company and its success, and I believe we can fine-tune this organization, which will allow us to set appropriate and achievable expectations of financial and operating performance, improve our execution, and increase our market share while being as transparent as possible with our investors.

I now would like to discuss the results of the quarter. In summary, as we preannounced on July 18, third-quarter revenues were $626 million. Adjusted earnings per share were $0.38, slightly ahead of guidance we issued last quarter.

Breast Health segment revenues increased year over year and sequentially, driven primarily by the growing demand for our 3D Dimensions Tomosynthesis system. Overall, 3D demand gained momentum, fueling record quarterly placements and revenue since the product's launch a little more than two years ago. While one quarter does not make a trend, and the hospital capital spending environment remains challenging, we can certainly be encouraged by these results.

In the US, the clinical data recently published on our 3D Dimension system is having an impact. During the quarter a US study published in the American Journal of Roentgenology, led by Dr. Stephen Rose, found the use of Hologic's 3D mammography system resulted in a 37% drop in recall rates, as well as a 35% increase in overall cancer detection rates and a 53% increase in invasive cancer detection rates.

We believe the Rose study, in addition to others, such as the Italian STORM trial, published in May in The Lancet Oncology; and the Yale study published in Radiology last week will support the broad adoption of tomosynthesis.

For fiscal 2013 we remain on track with our previously-stated goal to more than double our installed base of tomo systems in the US, which means we expect to finish the year with over 700 systems in the field. On the reimbursement front we remain focused on our objective of obtaining payment and coverage for tomo from both Medicare and private payers.

We are progressing toward our stated goals, and I'd like to be clear about our strategy around reimbursement for tomo. First, we're continuing our efforts to secure payment and a code from CMS. CMS has discretion to issue payment for new technology. However, the exact timeline cannot be guaranteed and is entirely in their control.

As we updated you last quarter, we had our initial meeting with CMS in April, just prior to the Rose data being published; and following this meeting, we continued to maintain an ongoing dialogue, including high-level staff at the Deputy Administrator level. We will continue to respond to inquiries from the agency and look forward to the ongoing discussions with CMS as we progress through the balance of the year.

I will be personally visiting Washington in a few weeks to actively join in these discussions. Please keep in mind, this progress is completely at the discretion of CMS. On our November earnings call I will update you on our progress.

Secondly, and very importantly, our private payer strategy will have a significant impact over time, since approximately 60% to 70% of mammography screening patients have private insurance, while the remaining 30% to 40% of patients are covered by Medicare and Medicaid. And to that end, we are highly focused on pursuing private payer coverage today, and we are making definite progress. Our health economics team continues to appeal to payers through outreach to physicians and patients through presentations and discussions with medical directors at the payers.

In the meantime, as we have shared in previous quarters, we have several hospital systems already covering and paying for tomo because of the clinical benefit to the patient and the cost benefit to the payer. Our strong tomo sales in the third fiscal quarter demonstrate the strength of this commercial plan, and we continue to believe the growing body of published clinical data will help build demand for the technology.

Now I'd like to update you on key developments in our Diagnostics segment. In June we announced a strategic alliance with Quest to more broadly offer testing with our APTIMA family of products, as well as to codevelop and promote diagnostic solutions to improve women's health.

We believed we earned this Quest business because we're able to offer best-in-class assays and menu consolidation on a leading-edge, automated instrument platform. One of the key factors in Quest's decision was their interest in having a women's health partner who can help them access this growing market, and they clearly value Hologic's strategic focus in this area.

Although Quest has long been one of our largest lab customers, we historically have garnered a relatively small portion of Quest's chlamydia and gonorrhea test volumes, and virtually no HPV test volumes. Our strategic alliance with Quest is significant for our business on many fronts.

First, it brings us the opportunity for substantial market gains in CT, GC, and HPV and trichomonas testing, along with associated revenues. Second, it represents a strong endorsement of our relatively new APTIMA HPV assay, which is clearly differentiated from competing tests on the basis of comparable sensitivity yet superior specificity. And lastly, it is a tangible example of the revenue synergies we expected to generate from our acquisition of Gen-Probe, as we clearly believe this is the type of alliance that neither Gen-Probe nor Hologic could have achieved as a standalone company.

More broadly, while we continue to see headwinds in our cytology franchise due to continued interval expansion, the PANTHER System remains a prime driver of growth for our Diagnostics segment. We have begun to successfully build PANTHER into the platform of choice for mid-size molecular labs, and as a result we have secured a number of new account wins in the past two quarters and have taken market share from our competitors, a trajectory we believe will continue.

Over time we will continue to expand the menu of assays that run on PANTHER, as we recognize menu consolidation is an important element of its appeal, in addition to its superior automation capabilities. On July 23 we announced FDA approval for use of our APTIMA HPV on PANTHER. The next assay we plan to introduce on PANTHER is HPV genotyping, for which we expect to receive FDA approval by the end of the year.

Turning to our GYN Surgical segment, total revenues were up slightly year over year, excluding Adiana in both periods. MyoSure was the strongest performer in the third quarter, with double-digit growth compared to last year. And on a sequential basis, the strong MyoSure results were offset by continued pressure on the NovaSure side of the business, which Glenn will discuss in more detail.

And with that, I would now like to turn the call over to Glenn for a detailed review of our financial performance in this quarter. Glenn?

Thank you, Jack. Before I begin, some of you may have seen in the 8-K that was filed today that I have resigned from the Hologic Board of Directors. As you know, it is considered best practice for a Company's Board not to include the Company's CFO, and the Board and I agreed that this made sense for Hologic, as well. I will continue to serve as CFO.

I will begin tonight with a review of our third-quarter results, including a detailed update on our segment results, our balance sheet, and cash flow profile. I will then discuss fourth-quarter and full fiscal year guidance. Unless otherwise noted, my commentary on third-quarter changes will be on a year-over-year basis.

Third-quarter revenues increased 33.2% due to the addition of Gen-Probe, and to a lesser extent, due to a record number of placements of our 3D Tomo systems. Foreign currency had a negligible impact on revenues.

On a pro forma basis, revenue growth was 2% compared to the prior year when adjusted to include Gen-Probe for Q3 of last year. Legacy Hologic revenues were up 2% and Gen-Probe revenues were up 2%, as well. All of the aforementioned growth rates exclude divested businesses, such as LIFECODES and Adiana, in both quarters.

Now, turning to the segment results, starting with our largest segment, Diagnostic revenues of $297.4 million represented 47% of total revenues this quarter, increasing $138.7 million, or 87%. Keep in mind that Diagnostics revenues no longer include LIFECODES, which historically contributed approximately $10 million to $12 million per quarter.

Within our legacy Diagnostics business, our overall ThinPrep revenues declined approximately 6% year over year as a result of the continued adoption of extended screening intervals in the US and lower international pricing. However, worldwide ThinPrep volumes were up sequentially and year over year.

In the US, ThinPrep experienced a modest recovery on a sequential basis, posting revenue and volume growth compared to Q2. On a year-over-year basis, US ThinPrep volume declined almost 5%, a continuation of the trend we have seen in fiscal 2013 of volume declines in the range of 4% to 5%.

Our China business showed signs of recovering from the effects of our sales channel restructuring during the second quarter. ThinPrep volumes bounced back nicely; however, due to our now greater reliance on distributors, average selling prices have declined materially, which impacted our overall ThinPrep results. As discussed last quarter, the purpose of the restructuring is to provide broader coverage into multiple market tiers in provinces as we introduce our expanded product portfolio.

And lastly, in our legacy Diagnostics business, the Cervista HPV was an area of growth, growing almost 20% year over year.

Now, turning to Gen-Probe, as I mentioned, Gen-Probe's pro forma revenues increased 2%. In the third quarter of last year, Gen-Probe received a one-time $5 million milestone payment from Novartis. Therefore, we exclude this one-time payment and view the business as having grown almost 6%, allowing us to more clearly analyze Gen-Probe's growth and to assess its performance.

Clinical diagnostics product sales grew over 9%. These results were driven by low single-digit growth in CTGC; high double-digit growth in trichomonas; and triple-digit growth in APTIMA HPV. These results reflect only a modest contribution from assay sales associated with our recent PANTHER account wins and have yet to reflect incremental sales from our recently announced strategic alliance with Quest, aside from a small amount of equipment sales.

Our PANTHER installs continued to increase, and we are on track for 1,000 installations by the end of fiscal 2015. Since most have been installed in the current fiscal year, and considering the lag time in ramping up volumes, we have not yet seen the real revenue contribution from these systems. Blood screening product revenues were essentially flat on a year-over-year basis, which is within the range of variability we expect for this stable, highly profitable business.

Now, moving on to Breast Health, revenues of $230 million represented 37% of total sales and increased $18.6 million, or 8.8%. Product sales increased 10% on the strength of 3D Tomo shipments, and service revenues increased 7%. Our Dimensions product lines -- that is, both our 2D Dimensions and our 3D Tomo -- represented 79% of worldwide digital mammography product revenues and 66% of units sold this quarter.

As noted in our release, Tomo was the primary driver of total segment growth this quarter. On a dollar basis, for the first time 3D Tomo revenues outpaced our 2D Dimensions and Selenia revenues as our worldwide 3D systems sales this quarter doubled year over year.

While it remains too early to call this quarter the inflection point, we were pleased with the strong 3D Tomo performance this quarter. This much is clear -- the commercialization of 3D Tomo remains on a strong growth path, fueled by the recent clinical publications and the efforts of our sales and marketing teams to raise awareness. This growth is evident in our backlog, which is up 23% sequentially for all 3D Tomo systems.

Overall, we continue to be pleased with the strong demand for 3D Tomo, evidenced by increasing quote activity, whereby most quotes now include 3D Tomo and supported by the improving trends reflected in our third-quarter results.

GYN Surgical revenues of $76 million represented 12% of total sales and declined $1.8 million, or 2.4%. However, excluding $2.2 million of Adiana in the prior-year period, GYN Surgical sales were actually up almost 1%, reflecting a low single-digit decline in domestic sales and growth in low double digits internationally.

MyoSure continued its impressive performance with high double-digit year-over-year growth and low double-digit sequential growth. We continue to see MyoSure as the growth engine of our GYN Surgical business, especially as the recently introduced product line extensions gain popularity and international adoption grows. So we continue to believe the MyoSure outlook remains strong.

NovaSure continues to see pressure from lower-cost alternatives as well as the ongoing economic challenges faced by patients related to less frequent office visits and higher out-of-pocket expenditures. We do not expect these dynamics to change in the foreseeable future. However, we are developing programs to mitigate them by capitalizing on recent clinical data supporting the superior cost effectiveness of endometrial ablation in comparison to hysterectomy. Approximately 100,000 hysterectomies are performed in the US each year to treat abnormal uterine bleeding. In addition, we continue to see opportunities for growth outside the US, where NovaSure experienced growth in the high single digits year over year.

Now for a brief review of third-quarter non-GAAP performance and the rest of the P&L. Our gross margins were 62.4%, up 40 basis points year over year from the inclusion of Gen-Probe coupled with the increase in 3D Tomo sales. However, gross margins were down 20 basis points sequentially and slightly below our guidance, due primarily to the product mix shift to lower gross margin capital equipment products.

Operating expenses increased $43.8 million or 31% to $185 million, representing 30% of sales in both years. Sequentially expenses were down 5%, and were $5 million or 3% below the low end of our guidance range, and also included $5.4 million of Medical Device Tax.

Our expenses were lower than guidance due to our continuing successful effort to manage expenses and drive operating leverage. For purposes of sequential and year-over-year comparison, I would again remind you that operating expenses associated with LIFECODES are no longer in our number. We are pleased with the results of our expense management efforts in all areas of our business and now are on track to exceed $65 million in our first-year cost synergies from the Gen-Probe acquisition.

As a result of our successful efforts to reduce costs, net income of $103.2 million was slightly ahead of our expectations and resulted in EPS of $0.38 this quarter, above our guidance range of $0.36 to $0.37.

As of June 29, our cash and equivalents totaled $964 million, up $398 million from the end of fiscal 2012 and up $212 million from the end of the second quarter. This reflects continued strong operating profitability, which in addition to focused working capital management resulted in strong free cash flow generation.

Our total debt obligations stand at $5 billion. In order to further improve our balance sheet condition, last week we announced we entered into a refinancing amendment that reduced the interest rate on our term loan B by 75 basis points. In connection with the refinancing, we also amended the restrictive covenants in our credit agreement to increase our capacity to repurchase shares and issue dividends.

We also voluntarily prepaid $200 million of the term B. In connection with this prepayment we will incur a one-time charge to earnings in the fourth quarter of approximately $6 million to write off the related deferred financing cost and debt discounts.

Regarding capital allocation, we believe we are starting a new chapter at Hologic and are heading in a new direction. With the acquisition of Gen-Probe, we now own a strong platform with access to growth opportunities that are unique to Hologic and our industry. Our focus right now is on operational execution.

We have generated strong cash flow over the past 5 years, and we expect this to continue. We are reconfirming our operating free cash flow guidance of $600 million for the fiscal year as previously defined. Our primary near-term focus continues to be on paying down debt.

As we have stated in the past, our goal is to reach 2.5 times net leverage by the end of fiscal 2015, which would return us to the same level of leverage we had prior to the acquisition of Gen-Probe. Today we are at 4.3 times, and we are on track to achieve our goal.

Our next priority is exploring ways to effectively deploy capital to create shareholder value. We are currently undergoing a full analysis of an optimal capital structure for Hologic, with the intent of starting to return cash when possible. That is why last week we amended the covenants on all of our term loans in order to allow greater flexibility and more opportunities to deploy cash. We are planning to provide more detail on our November earnings call.

Turning to guidance, our guidance expectations are fully detailed in the earnings release and our supplementary PowerPoint presentation, both of which are posted on our IR website. Except for fourth-quarter revenues, our guidance is on a non-GAAP basis and also assumes currency rates consistent with the average rate during Q3 of fiscal 2013.

For the fourth quarter we expect revenues in the range of $615 million to $625 million, representing year-over-year growth of 2% to 4% on a reported basis. On a pro forma basis, this represents a revenue decline of 1% to 3% compared to the prior year when adjusted to include Gen-Probe for all of Q4 of last year and excluding LIFECODES.

We are updating our revenue guidance to reflect what we expect to be a more moderate growth rate in both the uptake in 3D Tomo systems in the US and assay sales on the new PANTHER installations. At the same time, we continue to strongly believe in the growth potential for 3D Tomo and PANTHER, but right now it is still very early in the adoption cycle for both of these new products. Therefore, we are tempering our previous expectations.

We expect gross margins of 62% to 62.5%. We expect operating expenses of $175 million to $180 million or 28% to 29% of revenues, down year over year even with the inclusion of a full quarter of Gen-Probe's operating results, and also down sequentially from Q3, due to cost-saving initiatives and increased Gen-Probe synergies.

In addition, we expect Q4 operating expenses will include approximately $5 million in additional G&A expense related to the Medical Device Excise Tax.

We are expecting interest expense of approximately $59 million. We anticipate our interest expense will decline $3 million from $56 million in the third quarter, due to the lower outstanding balance of the term loan B coupled with the new lower interest rate. Offsetting this decrease will be a $6 million write-off of certain deferred financing costs and debt discount from our voluntarily prepaying $200 million of the term loan B last week. This is a one-time charge, of which $4 million of it is noncash.

We're using an effective tax rate of 32% and diluted shares of approximately 274 million. And our diluted EPS is in the range of approximately $0.36 to $0.37, which also includes $0.01 reduction for the prepayment of the term loan noted above.

Based on our adjusted guidance for Q4, our new fiscal 2013 guidance is for revenues of $2.505 billion to $2.515 billion, down from our previous expectation of $2.53 billion to $2.55 billion. For gross margins we are modestly lowering our guidance to approximately 62.5% from our previous guidance of approximately 63%. The key reasons for this are the reduction in revenues for the year coupled with a slight mix shift to capital equipment.

For operating expense we are lowering our guidance to approximately $755 million, which is 30% of revenues. We are increasing the cost synergies relating to the Gen-Probe acquisition to over $65 million and now expect $17 million to $18 million related to the Medical Device Excise Tax.

We are also expecting $223 million for interest and other expense when factoring in the incremental net interest charges I previously discussed. And diluted shares outstanding of 272 million, and an expected effective tax rate of 32%.

And finally, we are reducing our EPS guidance to a range of $1.46 to $1.47 from $1.54 to $1.56, which results in EPS growth of 6% to 7% over last year. This reduction factors in the lower revenue guidance coupled with reduced operating expenses. As a reminder, this guidance includes the expected $0.05 dilution from the Medical Device Excise Tax which, if excluded, EPS growth would be 9% to 10%.

In closing, while we are pleased third-quarter financial performance met our expectations, we have taken a more measured view of what to expect in the fourth quarter. Importantly, despite the top-line challenges we recently have faced, our profitability remains solid, as the organization has focused on proper expense management and maximizing cost synergies from our Gen-Probe acquisition. We have also taken advantage of the favorable market environment by improving our balance sheet condition and financial flexibility, both of which should help drive future earnings growth.

We are committed to deleveraging the balance sheet and focusing future capital allocation away from large acquisitions in favor of returning capital to shareholders. In short, we are working hard to improve shareholder value.

With that, I will turn the call back over to Jack.

Thank you, Glenn. Today's Hologic platforms and products are unique to the industry, which together will drive organic growth and strong free cash flows. While in the past we have focused our cash flows on fueling growth through transformative acquisitions, our clear direction going forward will be on maximizing the value of our existing assets and technologies.

We intend to utilize our free cash flow to pay down debt, and we are evaluating ways to distribute capital to shareholders, as we have spoken of on this call. I look forward to updating you on our progress in providing additional details on our new vision for the future of Hologic on our next call.

Lastly, I'd like to thank our incredible team of highly passionate associates. Making a difference in the lives of women is what drives us. It permeates every aspect of the Company and is the fabric that binds us together. I want to thank them again.

And with that, we will ask for questions.

(Operator Instructions). Amit Bhalla, Citi.

This is [Nick Nolean] in for Amit. First, let's talk about guidance for fourth quarter. It seems like you are lowering by $30 million at the top. You said it was a mix between 3D Tomo and PANTHER pull-through. Can you talk about the mix between both of those back forward? And how is that going to impact 2014 and how we think about guidance going there?

Well, we can just -- I'm sorry, Jack.

Let me just make a statement. Look, as we discussed in the call, we are seeing good results in our key growth products, which is 3D Tomo and PANTHER. But having said that, as we sit here today, we don't have the acceleration in growth rates necessary to achieve that prior guidance.

And we're seeing pricing pressures in Diagnostics as well as pressure in the ThinPrep business due to testing intervals. And based on the trend, I believe our revised guidance represents what I think is a realistic expectation for the fourth quarter. Do you want to add more color?

No, Jack, that's right. Nick, let me see if I can help fill that in a little bit. I think our Q4 guidance is meant to provide a more realistic view, especially after our Q3 results. As you know, our Q3 results, even though we were within the range of guidance that we had provided, it was at the low end, and that is not what we were expecting. So we did do a full reset for Q4.

If we think about the decrease going into Q4, there's really three pieces to keep in mind. And a third of the decrease does relate to the 3D Tomo project itself. And we had embedded in our original guidance a much greater acceleration for Tomo at the back end of the year, the back half of the year. We were expecting a bit stronger adoption, thinking that the clinical studies would be a little bit further along.

And as Jack said, we're getting tremendous feedback on Tomo itself. I think it was just slow to materialize in the back half of the year.

The other third, really, as you mentioned, does have something to do with PANTHER, really the pull-through of assay sales on the PANTHER itself. And to a certain extent, we were expecting a faster ramp-up as labs began to adopt the PANTHER itself. We had a record PANTHER placement quarter. We are well on track for the 1,000 PANTHERs we are expecting. The assay pull-through was a little bit slower than we had originally felt it would be.

And then, finally, the last third, Nick, would relate to the ThinPrep. I think the interval expansion is having a bit more of an effect than we originally assumed that it would have during the year. At the same time, we're seeing much in the way of competitive takeaways on that ThinPrep product. But nonetheless, the market decline is high single digit on the Pap product itself.

Hopefully that wasn't too much color on Q4. As it relates to FY 2014, I think that is going to be something we would be more comfortable talking about at the November call.

Okay, I appreciate that. If I can sneak one more in, maybe on Tomo -- what is the reimbursement update there? What is the latest timing assumptions? Has that changed at all?

And talk about the dynamics with the premium pay. What are you expecting to get paid on the premium? And is there any potential that they that may not be a premium pay? Thanks.

Well, if I worked for CMS, I'd probably have the best answer for you. The reality is that we don't know.

I can tell you on a today basis that through private payers, there's a range of anywhere from $30 to $70, and that's from a pretty broad cross-section of major insurance companies across the country. Where CMS goes, I can't tell you that, but there is a lot of data that they can look at because of discussions with payers, with discussions at women's groups, etc. The timing, again, it's really in their hands.

I will be going to Washington, as I said in my script, and talking with the stakeholders that have certainly helped us, and that is the women's groups. There are congresswomen and -men and senators on both parties that are firmly behind us, because they've looked at all these clinical papers and they see the benefit to it. Obviously, we're optimistic, but I just can't put a date in it on what I have today.

Isaac Ro, Goldman Sachs.

If I could ask a two-parter -- on the first part, just given your earlier comment there on the ThinPrep, what is your operating assumption in the current utilization procedure environment for the growth rate on a global basis for ThinPrep?

And then the second question would be on the financials. Can you put some gating factors around your expectation on capital -- on cash use going forward? And specifically, should we assume that share repurchase or anything of that nature will be mutually exclusive to debt service? In other words, you are going to pay down the debt to your target before you do anything on the repurchase? Thank you.

Well, we will let Ro answer the first one on ThinPrep. And you were correct on the second one, but go ahead.

This is Ro. So, yes, in answer to the question on ThinPrep, obviously the majority of the market is here in the US. And right now I think we're seeing adoption of intervals occurring at about a high single-digit, low double-digit rate year over year for the market as a whole.

I think when you look at our business that we're not seeing a rate of decline to that extent right now, and that is primarily due to share shift that we are seeing. We are actually taking some market share away, both at the physician level from the physician selling efforts, but also at the lab level we are trying to do it. We are getting market share there. So we're not seeing rates quite that high right now.

In terms of the international markets, it really does depend on where you are. There are headwinds in certain of our markets -- for example, Belgium, Holland, the United Kingdom -- where you're seeing more of an adoption of HPV within the cervical cancer screening guidelines, where previously you may have had a reflex test onto cytology, where we would have double dipped, if you will. Now that has been taken up by HPV.

But then there are other markets in the world where the growth opportunity is tremendous. So for example, Latin America, Japan, and places like that; noticeably China, where we see a lot of growth for those markets where the conventional Pap is the test of choice for cervical cancer screening right now.

Thanks, Ro. And Isaac, maybe I could answer the second part of your question on the cash use, share repurchase, and the net debt -- whether it is exclusive or whether you can do both.

And it's a great question. And I wish I could be a little bit more specific, but that is what we are currently running an analysis for for the Board. That is exactly what we are looking at. Our first priority is continue to rapidly deleverage the Company. And what we believe is that there will be a point in time, and that is what we're analyzing, that we can in fact be returning capital to shareholders.

I'd like to believe it could be earlier rather than later, but we do have to finish the analysis. I think what is important here, though, is it's a commitment on our part, really, not to do acquisitions. I think that is what the signal here is. And for us to find better ways to use our strong cash flow, because I think that is what is really important to Hologic and something we've always had is very strong cash flow.

Tycho Peterson, JPMorgan.

Just wanted -- as we think about the portfolio review, I'm just wondering if you can talk a little bit about how you are approaching that process, your willingness to maybe sell businesses for less than the acquisition price you had originally paid for them? Maybe just talk about how you are thinking about the portfolio review and any sense of timing on when you might communicate things?

Well, I don't think that we want to sell anything that -- for less than we paid, and we have not certainly made any decisions with that regard. Tycho, we are going to look -- there's going to be full-blown presentations by the key leaders in the businesses.

Obviously, today we made an announcement, installing Ro and David to run our two core businesses. And they are going to assemble their team this week, next week. They are putting together their strat plans, which were already in progress for 2014.

And we're going to tick and turn every one of the numbers, and we're going to look at the R&D pipeline, and where it's going; what is commercially the most viable products to invest in. Obviously, we look at OpEx.

But we're looking at where we can drive revenues over the course of the next 3 to 5 years -- what we've done right; what we could have done better. So it's going to be a full analysis of every product that we have and what its value is as part of our entire portfolio.

And then in your comments earlier, you also addressed realigning management comp. Should we just assumes this factors in a higher component on ROIC, or any specific color you can provide on that?

I really can't. This has been -- the Board has handled this themselves for the past year. And we have a meeting with them in September where this is going to be reviewed. They have brought in outside experts to work with them on this. And at that point in time we will be going through this with them. But everything is going to be aligned, as I said in my talk.

David Lewis, Morgan Stanley.

Jack, it's pretty clear that change is the theme of this call, and you are clearly a key part of that change. And one thing that strikes us is that you had the CEO title, but you have a shorter contract than your peer CEOs. You don't have Board representation.

So can you help us understand and shareholders understand how those various dynamics make sense in light of the need for strategic change? And frankly, in light of the time it may take to create that change? And I had one follow-up.

Okay. So David, are you offering to be my agent? Is that what you are saying?

I'm always available, Jack.

Okay, thank you. Well, I've been here for almost 12, 13 years, and every year it is a one-year contract. So it's no different this year than any other year. So I'm pleased with that. If I do well, then I'll be here for the year after that. But it is certainly you are here at the Board's will.

I think that there is going to be a lot of -- there's no doubt there's going to be a lot of work ahead of myself, and David, and Ro over the course of the next year. And we are going to do our best to get our arms around the business and make sure our dollars are spent judiciously in what is going to give us the biggest return on our investment.

We're going to add people to the team, which is going to help us. Certainly the Board wants succession planning in place for all major managers, including myself. And that is going to be addressed for this year.

So I think we're going to be in good shape. Again, I'm here to do the job, and as long as the Board is pleased with it, then I will continue.

Jack, that is very clear. Then maybe just a follow-up question. In your prepared remarks, this commentary of management has come up several times. You talked about bolstering management, but it did sound from your remarks that it was more incremental, more associate-driven hiring. Does this mean no material senior-level hires? And how are you sure that is the right decision -- just because you've been there only two weeks?

Exactly the opposite. We're looking to bring in -- we have -- we've got some great products here. And to make them even greater with the team that we have, to bring in some very creative, innovative people, especially in the technology area. So those are senior people.

As we go through the portfolio, as we understand where the drivers are for our business, it will be, again, people on the senior team that will be added from the industry; it will be outside the Company. Certainly we look within the Company, and we will promote from within, because that is what every company wants to do. And we will fill some of those slots.

But we're going outside, and we want people with a different perspective from like industries that can add something, and give us a new slant, and help us bring products to the market more efficiently, help us in the downstream marketing of these products. And so it has to be senior people.

Vijay Kumar, ISI Group.

A lot of moving parts on the call. Jack, I want to get back to the earlier question that Tycho asked. And your answer was interesting in that you said you would not consider selling any assets less than what you paid for.

Now, I just want to go back to the comment, because maybe the market conditions when you made these deals were different; maybe the growth assumptions were different. It's a different market environment now. I just wanted your thoughts and how you view valuation in the current (technical difficulty).

I don't know if that was you breaking up on the phone, but to answer your question, first of all, the Board and the Company has made no decisions on divesting any of our products. What they have asked for is a full review. In the full review you obviously are establishing value and how that fits into your product portfolio. That is number one.

Number two, where are we going to go over the next 3 to 5 years drives some of those decisions. But we would not announce to the Street anything that we were going to divest, if in fact we ever did; nor we would announce until we were going to do an acquisition.

That's what all companies do, unless they are going to hold an auction. So consequently, this Company is not entertaining any of that. We're looking at each product and its contribution to the Company; how it fits to the overall portfolio; and how it's going to fit with the overall portfolio over the next 3 to 5 years.

I don't want anyone in our Company thinking that we are going to sell out a division from them, and I certainly don't want that to be a Street assumption. We're going to look at everything, and we're going to then determine where it fits in our strategic objectives.

Shaun Rodriguez, Cowen and Company.

So the Quest deal clearly got a lot of focus, I think primarily initially in the context of assessing HPV dynamics. But as you noted, there's a lot of potential outside of that.

So can you speak more specifically about the opportunity within chlamydia, gonorrhea, what the incremental share potential is within that customer in chlamydia/gonorrhea, and maybe what the timelines for when this might materialize would look like?

It is Ro again. So obviously, this is an important partnership for us, and we're very, very happy that we signed it and we're working with Quest. We didn't actually have that much CT/NG revenue in Quest. They did do some of it. They did very little of our HPV. They did a little bit of our Cervista testing, and obviously they do ThinPrep.

But with this agreement right now the hope is -- it is a 5-year nonexclusive agreement -- that the hope is that the majority of the chlamydia/gonorrhea will be migrated over to our platforms, and then the majority of our HPV testing will be carried over as well.

For CT/GC you can expect that to probably occur and start to see material contribution from that next quarter. HPV will be a little bit slower than that, just because of the time it takes to validate HPV test. It takes longer to migrate an HPV test over than it does for chlamydia/gonorrhea. So HPV will take a little bit more time in that regard.

And in trichomonas, Quest did very little trichomonas testing with us. So we hope that will start to contribute materially again next quarter. So it will take them time to ramp up. I will tell you that we are working very hard. Our service organization is working very hard in getting instruments installed and getting ready to get the switch on over there at Quest.

Okay, thanks. So this is a related follow-up. So that sounds like a pretty good opportunity for you guys, but I guess the other related question would be, how should we think about the impact on pricing for this relationship, if it does expand beyond HPV as you just described? How should we think about the pricing impact over the next, call it, 18 months or so as they get fully ramped?

I won't speak about the specifics of the Quest engagement, but I think if we look at the market in general, I think our peer groups have alluded to this and spoken about this as well. There is no doubt that CT/GC pricing is coming under pressure in the market right now, which is a very little surprise considering the number of vendors that are chasing that business. So I think that CT/GC AUPs will come under some pressure.

I think from the flip side and the positive side for us is now having PANTHER, chlamydia, gonorrhea, and PANTHER HPV, I think we're going to target that mid-volume market segment, where AUPs tend to be higher anyway. So I think any offset that -- we should like to see a little bit of the offset from the AUP compression in those higher volume labs that is purely, purely driven by competition.

Rich Newitter, Leerink Swann.

I just wanted to start off, maybe Glenn or Jack, either of you, can you give us a little bit more behind the tempered 3D outlook for the fourth quarter? It sounds like you had your record quarter. Maybe help us understand -- is it a little bit more on the hospital spending or capital spending environment that maybe got a little bit more cautious with respect to your outlook, or more just on some of the catalysts you were looking for? And is there anything with reimbursement that factors into that?

I will let David answer this.

Yes, thank you. So I think while we are still very bullish about the overall Tomo growth pattern, there are a couple of things that happen as we increase our overall Tomo sales level. First of all, we begin to reduce our service revenues. So for each new Tomo system that is sold, those obviously go on warranty and reduce our service revenue. So a lot of the reduction in overall Breast Health revenues going into Q4 is a close function of the reduction in service revenues and not necessarily an indicator of declining Tomo sales.

That being said, the capital spending environment in hospitals across the US and internationally is under great pressure. We certainly see that in a lot of international markets, as well. And in addition to that, Q4 tends to be a challenging quarter for the international markets, where places like Europe, the Middle East, and other places tend to go on extended holidays. So there are a number of things driving that. But I would say the vast majority of the challenge that we're facing is really along the service revenue side.

And reimbursement has not played any role in that at all.

Okay. And then just maybe looking to your fiscal fourth-quarter call, Jack, it sounds like you will have had a little bit more time to regroup, potentially, the Board to make some decisions. Can you give us a sense of what we can expect? Is that the call where we might get a detailed longer-term plan for debt paydown, what the capital allocation priorities will be, and the timelines for all of those? Or adjusted timelines?

Certainly. Especially when it comes to capital allocation. That will certainly be one of the highlights of the fourth-quarter call.

We also, with our guidance that we're going to give you at that point in time, we'll be able to give you greater insight into the markets. Looking forward, depending on what the headwinds are -- it's only a couple of months from now, or actually a month and a half -- what's going to be happening. We are all facing, lots of different companies, the same headwinds.

Luckily, we have -- and it shouldn't be minimized. We had a very strong quarter in Tomo. We had a good quarter in PANTHER. We continue to see that. So those are really the highlights.

What is offsetting it is when you get AUP pressure and volume reduction in the ThinPrep area just because of the extended interval. But we will get a better look at that. And we will give you some better insight on that call.

Jayson Bedford, Raymond James.

I'll just keep it to one question here. The cost structure exiting the year here will be $175 million, $180 million on the OpEx line by your guidance. It's obviously down quite a bit since the beginning of the year. Are there any big expenditures planned in fiscal 2014? Or could this level even come down further? Thanks.

Glenn?

Well, we weren't really prepared to talk about FY 2014, Jayson. But I think we've reset a new base for the Company. I think the expectation would be for growth in FY 2014.

Expense growth off the fourth-quarter level?

Expense growth off the Q4, yes.

But are there any big expenditures, or just in --?

Well, I think we've done -- as we talked about, on the cost side, I think throughout all of FY 2013 we have been very successful in driving down costs with our internal cost initiatives, and then second of all with the Gen-Probe synergies. And at this point in time we're now over $65 million in Gen-Probe synergies. So we have been successful in driving a lot of costs out of that business.

It is unlikely going into FY 2014 there's anything else to drive a lower expense rate, but on the converse, there's really no big expenses that we're looking at other than the normal operating increases.

Yes, and you might see some things in the classic with SAP and Oracle. As you buy a company, there's some benefits and then there are some spikes. And we're looking at that right now to see where that's going to be. We could see a blip in that for next year. But that's the only major one that I see right now.

Anthony Petrone, Jefferies group.

Just one on clinical diagnostics and one on Breast Health. I think, Glenn, you referenced low single-digit growth in chlamydia and gonorrhea in the quarter, and it sounds like there was some pricing pressure. So I'm wondering if that step down was all pricing pressure? And if not, is there something else going on there in the quarter that we should be aware of?

No, it is all pricing pressure that we're seeing out there. We are holding well on our volumes. We do see a little bit of AUP uptick when we place PANTHERs over our older DTS systems, so that is positive for us from an AUP perspective. But volumes are holding steady for us as a business. The major effect is the decrease in AUP.

Maybe just a quick follow-up there. In terms of Quest, how many systems actually do you expect to be placed with that contract over time? Is it a substantial number of systems? Or are the systems largely in place, and we will just see an uptick in reagent volume as we move forward with that contract?

No, I can't give specific numbers, but there will be a considerable number of instruments there, as one would expect with Quest being 25% of the chlamydia/gonorrhea testing market within the US. There will be a commensurate number of new instrument placements to service that volume.

And I should add, actually, that is really what is happening this very moment, is those instruments are actually being placed across the Quest network of testing.

And ladies and gentlemen, we thank you so much. That is all the time we have for questions today. And this concludes our Hologic third-quarter fiscal 2013 earnings conference call. Have a good evening.

Thank you.