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Hologic, Inc. (NASDAQ:HOLX)

February 26, 2013 10:20 am ET

Executives

Glenn P. Muir - Chief Financial Officer, Executive Vice President of Finance & Administration and Director

Analysts

Amit Bhalla - Citigroup Inc, Research Division

Amit Bhalla - Citigroup Inc, Research Division

Okay. Good morning, everyone. I'm Amit Bhalla from Citi's Life Sciences Tools and Diagnostics team, and we're happy to have our next presenting company, Hologic, with us. We have from the company Glenn Muir, Executive Vice President and Chief Financial Officer; and Deb Gordon is in the audience, the Vice President of Investor Relations. Glenn has been with Hologic since October of 1988. He's been CFO since 1992. Hopefully, I've got these dates right, Glenn? Hologic...

Glenn P. Muir

Halloween Day.

Amit Bhalla - Citigroup Inc, Research Division

What's that?

Glenn P. Muir

Halloween Day 1988.

Amit Bhalla - Citigroup Inc, Research Division

Halloween Day. I won't make any analogies. Hologic is a diagnostics and medical imaging company that sells a variety of systems, surgical products and diagnostic solutions for the women's health market. Before we do a Q&A, Glenn's going to take us through a few slides to give us an overview of the company.

Glenn P. Muir

Great. Thank you, Amit. Good morning, everyone. Welcome to the Hologic presentation. And I will start off with just a brief background on Hologic. But first, our Safe Harbor. I may make some forward-looking statements this morning. If I do, please refer to our recent SEC filings for the latest disclosures and risk factors.

Now Hologic is a leading medical company. We have a primary focus on women's health. And on the screen here is a myriad of products that are really focused on treating and detecting various diseases and cancers. Hologic today though, we think it's about growth, and we're entering a phase that we believe will accelerate our revenue. And first of all, if we think about the business though, it's important to see that we have a number of dominant franchises. The businesses that we're in are all niche businesses in medical, and we tend to dominate that area with #1 market share. And I'll get a little bit into that. But what's exciting for us is really the introduction of a number of new products in a number of our different segments that we operate in that I'll try to cover briefly this morning that we think will accelerate revenue in coming years. And then in addition to that, there was a very significant acquisition that we made last summer, acquiring Gen-Probe, and that really has solidified our business in molecular diagnostics. We're excited about that. For FY '13, in particular, it will lead to a number of cost synergies that we talked about before that we are on track to achieve. For FY '13, it's about $40 million in synergies. And then finally is our strong cash flow. Hologic has always been a company with a significant cash flow. We're looking for FY '13 that ends in September for $600 million of free cash flow, which is what we've talked about for the fiscal year.

If we think about Hologic though, our business is broken down into 4 primary segments. The largest is our Diagnostics group with 49% of our revenue. Diagnostics is made up of our cytology group and our molecular group. And our cytology group is led by our ThinPrep product, which is a liquid-based pap test. In the molecular space, we have a lot of sexually transmitted disease assays that are leaders in their market. If we think about our second-largest segment, Breast Health and Breast Health is where our mammography business is, which is a business that is over 20 years old for the company that we've had, and Hologic, I think, is the name that's associated with mammography and recently, digital mammography. It's 34% of our business. GYN Surgical are tools used for things like menorrhagia, excessive menstrual bleeding, to hault it and also the removal of painful polyps and fibroids. And then finally, Skeletal Health, the legacy original business of Hologic, started 27 years ago. Skeletal Health is all about testing for bone density in order to determine if a patient has osteoporosis.

If we look at the type of sales that we make, 81% of our revenue is consumable or service-type business. And our consumable business is very much a recurring revenue type of business with very high growth margins, over 65%. Our service business is really based upon the installed base of capital equipment we have. It's an annuity. It's about 20% of our total revenues, and it's an annuity year in and year out. And then finally, our capital equipment, 19% of our total revenues is cyclical. It has its ups and downs, as any capital equipment will, but we believe we're entering a brand-new replacement cycle in capital equipment that will further accelerate our revenue in future years.

We do have 2 exciting new product cycles. They are -- these are just beginning. And the first one is all about digital mammography. It's our 3D tomosynthesis unit. We're at the very early stages of introducing that technology. It was approved in the U.S. by the FDA under 2 years ago. We've just received a very nice clinical study in the marketplace that we think will help accelerate things. We are first to market. There's no competition out there in the U.S. today, and this is a market that, in the U.S., we have 65% of. So it's a large market for us.

The second product in our Diagnostics group is a piece of instrumentation called our PANTHER unit, which is a highly automated machine that will run all of our assays over time. So we're very excited about this product because it expands our reach in the marketplace from not just the high-volume labs but now targeting for the first time the mid-volume labs in the marketplace with all of our assays.

Let me just talk about Diagnostics. Again, it's our largest segment, and the thing to note is with all of our products in this area, they're essentially #1 products. If I look at cervical cytology, I look at base pap, we have 70% share here in the United States. If we look at CT/NG, chlamydia, gonorrhea testing, a molecular test, we have 60% share here in the United States. If we look at blood screening, we have 70% share, share in the United States. And on our HPV testing, which is a new assay for the company, we are now approaching 20% market share. We expect to continue to grow that and become one of the larger players in the HPV market.

Switching to Breast Health for a moment. In the United States, there's 38 million mammography screens every single year. Of that, we call back 4 million women for follow-up exams. And if we look on the slide here, we can see that, as an example, for every 1,000 women that are screened, we call 100 back. That's 10%. We biopsy 20. We find 4 cancers, and there's 1 cancer that is missed. So we are looking for a needle in the haystack, but that's a big haystack. In a woman's lifetime, 1 out of 8 women will develop breast cancer. The key is early detection.

Our answer to improving the detection and also lowering the recall rate is our 3D tomosynthesis unit. This is a brand-new unit here in the United States. It is a replacement unit. Today, in the United States, there's 12,000 mammography systems. 11,000 of those are digital today. Those 11,000 digital systems have been put into the market in the past 10 years since 1992. We have 65% of that installed base today. Those are our customers. Those are who we're looking to replace with this better technology. 3D is significantly better than 2D. It improves sensitivity, and it improves specificity. Our FDA claims are an improvement in both of those.

There's been a recent study that was published that really supported the clinical efficacy of the 3D tomo system, and that's the Oslo study. It's the first large-scale, peer-reviewed, perspective study out there, almost 13,000 patients. It's very recent. It was just published online in January. It has not yet hit print. But the performance is outstanding, I think better than people would have expected. There -- the Oslo study found that 3D tomo compared to 2D digital improved cancer detection by 27%. It improved invasive cancer detection by 40%. So that's a huge increase in the sensitivity of the equipment itself. At the same time, there was an improvement in specificity. The Oslo study found a 14% decrease in the recall rate. Here in the States, we're finding a 20% to 40% increase -- I'm sorry, decrease in the recall rate. So those are outstanding statistics. I compare that, looking back to the 2D world that we entered 10 years ago, where 2D was essentially equivalent to analog. Yes, we have the DMIST study in 2005 that in a subset of women, it was significantly better. But for the most part, it was approved on the basis of equivalency. That's not what we have this time around. 3D is significantly better in all respects and has approved claim from the FDA for that.

Finally, just in summary then, if I could, I think, number one, for this company is to deliver on 3D tomo. It's an extremely large market out there. We're talking about 11,000 systems. We're talking about a $4 billion market opportunity here in the U.S. alone. We are the only company with 3D tomo in the United States today. In addition to that, when we think about our Diagnostics franchise, we have a dominant position. We're 1 of the largest molecular companies with revenues in that segment alone of over $1.2 billion. We're well positioned for sustained growth with some of the new product cycles that I talked about. And then I think, finally, we do drive significant cash flow. We are going to use that to continue to deleverage the company and with that, expand our EPS going forward.

Let me now end the formal remarks.

Question-and-Answer Session

Amit Bhalla - Citigroup Inc, Research Division

Thanks, Glenn. So let's start with just a bigger-picture question first and specifically, talk about the value proposition of some of your key products and the strategic direction of how the company's evolved against the backdrop of a health care system where you're seeing decreasing price and the need and demand for increasing quality.

Glenn P. Muir

Yes. So the value question is an interesting one, and I think it kind of fits into the question on where innovation fits in. Hologic has always been a company that's prided itself on its R&D capabilities. The reason we're #1 in all the markets that we are today is because of our R&D, because of our innovation, staying at the forefront and continuing to invest in niche products. You have to be specialized in today's market. Our R&D runs anywhere from between 7% and 9% of our revenues. We'd expect that to continue going forward. But I think, Amit, the market is changing, and it's not just about innovation for innovation's sake. It's not about a better mousetrap anymore. I think the equation of value is more important to the extent that your products have to have proven clinical outcomes. So clinical outcomes becomes important, as well as operational efficiencies. So it's becoming a combination of those 2 factors. And I think the value proposition for Hologic, maybe for tomo as an example, is for our patients. The clinical outcome for them is all about earlier detection because earlier detection saves lives, and that's what we've proven. That's what we're about. For the physician, for the radiologist, yes, they're looking to save lives, but it's about clinical efficacy. They're concerned about workflow, automation, throughput and for them, lowering that recall rate on something like tomosynthesis and not having to bring that patient back in because it's important. So I think the model's changing as we go forward, and products have to fit better into this entire value proposition.

Amit Bhalla - Citigroup Inc, Research Division

So let's continue along the lines of tomo, and if I remember back to 2004, 2005 when you rolled out 2D digital, this discussion of workflow was key. It was a very important gating factor in the market adopting 2D at the early stage. When you look at 3D today, how have you been able to address that early and drive adoption quicker than you may have with 2D?

Glenn P. Muir

Yes. Well, that was an exciting period back in 2004, 2005. We had the DMIST trial came out in 2005, the Digital Mammography Imaging Screening Trial, and that really kicked off a lot of interest in 2D. And Amit's right, there was a lot of clinics and hospitals eager to get their hands on 2D to promote that they had digital capabilities. But at that point in time, what they had in their breast center was analog equipment, so primarily our M-IVs. And that analog equipment required chemicals and film and storage and processing and light boxes and everything that went along with it. So that time around, it was all about room readiness, getting that facility up to speed with the digital footprint and infrastructure to be able to handle all the digital images. I would say that this time around, we've greased the wheels a little bit. That infrastructure is in place. It's not as simple as a plug and play, but it's very similar. There's some additional image-reading requirement for the 3D, but the system itself simply can be put in into a 2D slot with the digital infrastructure. So to a certain extent, I think the entire utilization or ramp up of the equipment could occur faster than in the 2D world because people are already digitally enabled. At the same time -- and I alluded to this -- the DMIST trial found that 2D was significantly better in a subset of women. The 3D today, the FDA claims, are for superiority. The improvement of the 3D image and what the radiologist gets over 2D today is far greater than what they ever got with the 2D over the analog. That was almost a minor improvement looking back compared to what they get to 3D. And we've heard time and time again, many radiologists say that what they've been looking for, for the past 20 years is this 3D capability. We just had to get a couple of steps to get there.

Amit Bhalla - Citigroup Inc, Research Division

So when we think about the 3D adoption curve today, we see kind of 2 pieces governing this 3D adoption curve. Number one is the need for clinical data, and we're starting to see that with Oslo. But what we've also picked up on and I think others have seen this, too, is that word of mouth and the competitive nature of breast health centers wanting to be at the forefront of technology has also been also been a driver in 3D tomo growth. How do these 2 factors play out going forward?

Glenn P. Muir

Yes. So we did see, looking back to the 2D world the last time we went through a replacement cycle, when we went from 11,000 analog systems to 11,000 2D digitals, it was very similar. We saw that many hospitals -- same clinics that acquired the 2D capabilities promoted the fact that they had digital in order to drive demand to their facility. Now we haven't -- we've begun to see that but on a much lower scale because we've only begun to sell the 3D in the U.S. So we talked about, when we got FDA approval, less than 2 years ago that there'd be an early adopter pool of systems. Looking back on customers, we felt there'd anywhere between 500 and 700 systems that we could place in an environment that preceded anything, any clinical trial evidence or any additional reimbursement for the exam itself. And we're entering or we're approaching that 2-year mark, and we're right on track with that early adopter pool of between 500 and 700. But that's clearly not what we're after. We're after the 10,000 systems out there, so we're entering that next phase. We think it started because of the Oslo study itself, which really supports the clinical efficacy with results that are far greater than people would have thought. The next step now will be to hopefully get some kind of added reimbursement. Reimbursement is available today for the 3D exam, but it's at the 2D rate. So we believe that clinical data was the #1 most important piece of getting adoption but that an increase in reimbursement could help accelerate maybe to a greater extent even in the 2D to 3D sales going forward.

Amit Bhalla - Citigroup Inc, Research Division

So with the -- you speak to your customers and you get a pulse of what their expectations are for reimbursement. So what's your sense of what a floor for an additional add-on payment would be in the reimbursement?

Glenn P. Muir

Yes. So in the old days of the analog, the reimbursement was $85. And it's funny, at that price, hospitals, they were all complaining that their breast centers were losing money. I mean, $85, they couldn't make a go of it, and now today, at the 2D, they're receiving $135 and no one complains anymore. But what's interesting is irrespective of the reimbursement rate and even though they thought they were losing money, every hospital and clinic out there has to offer mammography. So I think irrespective of any kind of reimbursement, mammography is critical for a hospital to offer to drive patient flow, primarily the women, to that particular hospital. So today, we're at $135. Do you need more? Well, you don't need more for 3D. It would be nice to get more because it would help accelerate things. We work with private insurers today, private payers, and many of our customers, approximately 70% of them, will actually submit a miscellaneous code for reimbursement. And we're seeing today anywhere between $30 and $70 of incremental reimbursement for the 3D optionality alone. That's a pretty significant amount when you consider that, on a daily basis, a normal mammography center could do 20 to 25 scans per day. So $30 times 20 is an extra $600 per day alone for the same exam that they were previously doing. So it's a significant amount of incremental money. We don't believe you need reimbursement anywhere near that level to make it pay for itself in the marketplace. But the higher the reimbursement, obviously, the greater it will push people to replace an aging 2D system earlier. In any case, if we're here 10 years from today, we'll be talking about a market that's not 10,000 2D digital systems as it is today but 10,000 3D tomo systems. That's the way the market will go. What reimbursement will do is maybe help shorten the time frame for us to get there.

Amit Bhalla - Citigroup Inc, Research Division

So is there any updates in terms of the timelines for reimbursement? I know you've -- what you said on a recent conference call, but with the Oslo in your hands now and more data coming, it would seem that you can engage the payers earlier and have a better discussion faster.

Glenn P. Muir

Yes. Oslo is key because it does really show the clinical efficacy, and that is -- Amit's right. That's what we're using when we go to the private payers. But reimbursement for us is a three-pronged approach, and number one, we've reached out to professional societies to work with them to approach CMS for a normal CPT code. That's number one. That could take some time. It could take a couple of years. So in addition to that, number two, we are taking the data directly to CMS in order to apply for a temporary code, a G-code, to be used for 3D tomo, which, by the way, is what 2D is reimbursed at today, so it's not unusual for this. We believe we're in position to get a G-code by the end of the calendar year. So we're accumulating the data now to take to CMS to go down that path. And then the third prong is what we're doing everyday, which is to work directly with the private payers to show them the benefits, both of the improvement in detection and also importantly for them, the reduction in recall rate because if you can reduce that recall rate by anywhere from 20% to 40%, you're not bringing that woman back. You're not doing a follow-up diagnostic. You're not doing an ultrasound. You're not doing an MRI, and there's a lot of savings in the system by focusing on true positives as opposed to false positives.

Amit Bhalla - Citigroup Inc, Research Division

The last 2 questions I have on the tomo business is number one, is there anything that you can take out of your European tomo experience, because it's been on the European market for a few years, that you can address in the U.S.? And secondly, what's your thoughts on competition? Because you have the market to yourself for now, but that won't always be the case in the U.S.

Glenn P. Muir

Right. The European market's interesting. Amit's right. We were in Europe before we had FDA approval here in the U.S. But we have to remember the European market's half the size of the U.S., and they haven't, from a digital perspective, gotten to the point that we've gotten to, 90% of the market digital today. They're only halfway there today. So they have not -- and a lot of this is cost reasons -- gotten to the same point as we've gotten to. So 3D has been sold over there to the leading hospitals or research organizations or private clinics that offer 3D tomo and promote it. What's important in Europe is the new functionality that we've introduced called C-View, which is a low-dose option to our equipment that's been very successful in Europe. It's an option that's available here in the U.S. We've not commercialized yet. We probably won't commercialize it until the end of the year because we don't need to. And it's an option for the future that we could charge for. So we haven't done anything with that as it stands today. The entire market, if there are 12,000 systems in the U.S., the entire rest of world is another 12,000. Half of that is in Europe. The other part of it is in some emerging countries. And we have different options in emerging countries. We have a significant investment in China today. We've actually developed a low-cost system called Serenity for the Chinese market. We have a sales force and have begun pushing that product itself.

Amit Bhalla - Citigroup Inc, Research Division

Competition?

Glenn P. Muir

Competition, in the 2D world, we did have competition. In the U.S., it was Hologic and GE. We have 65% of the installed base. They have the remainder. They're not yet on the U.S. market with 3D tomo. It looks like they're a year away. They will be there at some point in time. I think we're very confident that we will retain our 65% customer base as we go forward. And it's really a question of how long a GE customer can wait before they adopt 3D tomo, and we believe, over time, we'll begin to capture some of their products as well. It's very unclear what kind of performance they'll get out of their system. Remember, we got a superiority claim for both sensitivity and specificity, very difficult to get. So it's not clear that they'll even have that kind of superiority claim on their system. The other competitor we see in Europe, in any case, is Siemens, and they're at least a couple of years away in the U.S. So for the moment, anyway, we are the only company offering 3D tomo.

Amit Bhalla - Citigroup Inc, Research Division

So let's switch over to the Diagnostics business. And you've been with the company back to the Lorad days, and you've added on, over the last few years, diagnostic capabilities with Cytyc and the recent Gen-Probe acquisition. I wanted you to step back and just assess for us what has been the biggest challenge of getting into the Diagnostics market and what has been -- what has been the areas of diagnostics that have gone better than you expected.

Glenn P. Muir

Yes. So we've been in the diagnostics field for the past 6 years now. We saw it as a way to branch out within women's health but really to take advantage of some of the international infrastructure that we have. I mean, we fully appreciate it. In today's environment, you have to be a significant player in niche markets and have to really invest the R&D. So for us, wanting to be a global company and continue to expand the revenue base, we did have to broaden the product portfolio. Diagnostics was really an easy move for us to make. It was complementary to a certain extent with what we were offering in the health care system today as we look at various cancers specifically pointing towards women's health. What the acquisition in 2007 did for us was to bring us some cytology capabilities and a platform that we can build off of, which is the liquid-based pap system. And we've added assets at that -- to that framework in the past 6 years, the latest being the acquisition of Gen-Probe on August 1, so last summer, which added additional molecular capabilities into our basket. Now what we see with acquisition of Gen-Probe is not -- the rationale for the acquisition was not on the cost synergy side, which I know I did talk about and there's a big focus, but really has more to do with the revenue synergies that we see going forward. A lot of the primary products that Gen-Probe had were in the sexually transmitted disease area. Those are products that can be tested and are tested out of our vial. So when the OB/GYN or primary care physician takes a sample from the woman using our ThinPrep preserve solution as the medium, as the culture, that then can be sent to the lab that can be used for both the liquid-based pap test for cervical cancer and then also these other tests, that's really the platform we're trying to build off of. So the combination of Gen-Probe allowed us to combine sales forces at the lab basis to expand our reach into labs. We had 2 very good sales forces, which we combined and consolidated. But it also allowed us to use 150-person sales force that we have that's a marketing detail force at the primary care level to promote the use of ThinPrep and to promote the use of that vial for all these other molecular tests. So we really believe that over time, this distribution in the United States will begin to take hold and we'll see increases on really both sides, an increase in the pap business and an increase in the molecular from it. And that's only in the United States. On the international side, Hologic had a pretty robust international platform in the diagnostic area it sells, Gen-Probe did not. Their international sales were all related to their blood screening business. They were not related to their clinical diagnostics. They were all made by Novartis. So what we bring to the table is to be able to take their assays, their assays for CT/NG, for HPV, for Trichomonas, and the new assays under development and to bring those on an international basis.

Amit Bhalla - Citigroup Inc, Research Division

And so what has been the tough part about getting it? What surprise -- the tougher parts about getting into the diagnostics industry?

Glenn P. Muir

Well, I think, it's a different business to a certain extent in that it is, I wouldn't say tougher, but it's a more recurring revenue stream than we have in the mammography side, which is capital equipment. So it has, to a certain extent, balanced out our revenue growth to a certain extent. You're not going to see the kind of acceleration that's possible, for example, against a product like the 2D or the 3D tomo because you're going through a brand-new product cycle and the price point of capital equipment. So you're not going to see an acceleration in revenue in diagnostics as you could in capital equipment, but you get a more steady revenue source. I don't know if there's anything particularly tough that I can point to, Amit. I think we're very comfortable with the assets that we pulled together and the direction that we're taking the company. Diagnostics is now 49%. It's -- half of the company is focused on Diagnostics today. It's an extremely important part of the business where we have leading market shares with new assays that are coming out. We just had recently approved our Trichomonas on the PANTHER, our HPV genotyping on TIGRIS. We're looking for HPV on PANTHER later this year. We have viral load down the pathway to come out. So it's a number of assays that are coming out today to help promote and to push the revenues forward.

Amit Bhalla - Citigroup Inc, Research Division

Okay. If there's any questions in the audience, just raise your hand. We'll get the mic to you.

Unknown Analyst

Are you pretty much done with [ph] your acquisitions [indiscernible] ...

Amit Bhalla - Citigroup Inc, Research Division

So the question was on acquisitions.

Glenn P. Muir

Yes, acquisitions. So yes, we think we have the assets that we require going forward for at least 3 years. Our focus today -- and we've talked about this -- is to deleverage the company. So the acquisition of Gen-Probe was made with debt. We acquired $3.5 billion of debt for the acquisition itself. It increased our leverage ratio from 2.5 to 5.0. Our goal the next 3 years is to bring that leverage ratio back down to 2.5 debt to EBITDA. So that's our focus. Now that being said, there's always a little bit of IP or some small technology company that we fold into our operation. But a true M&A acquisition is not in our 3-year horizon.

Unknown Analyst

But whether it's Gen-Probe or any other stagnant business [ph], what do you consider to be a success financially?

Amit Bhalla - Citigroup Inc, Research Division

So a question just on success measured financially.

Glenn P. Muir

Yes. So success and we talked a little bit about this when we acquired Gen-Probe on the return on investment that we were looking for it, and we were looking for a low-double-digit return. I know at that point in time, we went through some of the measurements to get there, the cost synergies and some of the revenue synergies to get there. But our cost to capital at the time we did Gen-Probe was about 8%. So it was -- our hurdle rate was 9%, and we were a couple percent above that. We look for a return on all of our investments, but it is a measurement period that looks out a little bit longer than 3 years. I mean, we're looking out 5 years, and we're placing the company for the future, what kind of strategic sense that it makes and to ensure we stay #1 in the markets that we compete.

Unknown Analyst

[indiscernible] I'm sorry, yes, $1.20 [indiscernible] ?

Amit Bhalla - Citigroup Inc, Research Division

Hold on. I'm just trying to make sure I get the math properly. If you spend $10, you're hoping to get $1 to $1.20 back over 5 years?

Glenn P. Muir

Per year, return on investment.

Amit Bhalla - Citigroup Inc, Research Division

Starting in year what? Year 4, 5?

Glenn P. Muir

Measured over that 5-year period, so that's a long-term goal. The short-term goal is very much focused on our EPS, right? Gen-Probe was accretive to Hologic in Year 1, in FY '13, so we have our return on investment criteria coupled with the immediate effect of growth on EPS. So there was a pretty significant accretion when we did the Gen-Probe deal. We talked about $0.20 of EPS accretion in the first year.

Amit Bhalla - Citigroup Inc, Research Division

Question in the back.

Unknown Analyst

Can you talk about how the rollout of the TIGRIS has gone and if Quest and LabCorp are receptive to placing it right now or if they we have to wait a certain period of time, whether they have a commitment with your main competitor? How many salespeople you have on the ground, that kind of thing?

Glenn P. Muir

Yes. No, that's a great question. So the TIGRIS has been out for 10 years. That's our high-volume machine that's in the Quest and LabCorp. So the new system is PANTHER, and we just recently began shipping that within the last 6 months here in the United States. So we, clearly, are focused on the big labs for them to add the PANTHER capability as well, the LabCorp and the Quest. The bigger lab it is, the longer it takes to get them to convert over to a system. So we're not there yet on that size lab. Where we are on PANTHER though and I think our initial sales have all been to existing customers that had lower-end Hologic automation. So they had current low-end system of ours that were aging and needed to be replaced. So the initial PANTHER systems didn't really generate or have not yet generated really incremental revenue, as we're satisfying our current customers. That's about to change as we get through the early customers and now can go after some of the market that's available to us out there. So we'll begin to see those type of sales as we go through the rest of FY '13. So we talked about, at the last call, there being a little bit over 200 PANTHERs in the marketplace, so it's early on. Our goal is to sell or to -- I'm sorry, to place 1,000 PANTHERs by the end of FY '15. So that would be within a 3-year window to place 1,000 PANTHERs, which is about double the number of TIGRIS units there are in the marketplace today. It's for a different-sized customer. We're really after that midsized customer. The beauty of PANTHER is the automation time itself, the workflow. The throughput is significantly better than what's available in the marketplace today, coupled with random access. So all of the tests that we're talking can be placed on the platform at any point in time. It doesn't have to be batched, and it can be random as to what's being tested. So it's a phenomenal system in the marketplace. It has gotten rave reviews from current customers.

Amit Bhalla - Citigroup Inc, Research Division

One last question in the back.

Unknown Analyst

Yes, I'm just wondering, what is the all-in price of the new 3D systems versus the old 2D systems? And also, what's the kind of average life of how long these units work?

Glenn P. Muir

Yes. So the average life in the analog world, it was anywhere between 7 to 10 years. That was our replacement cycle. When we moved to digital, we always believed it'd be shorter, maybe 5 to 7 years because of how technology moves in the digital world. It hasn't really played out that way. We are in that 7- to 9-year time frame. So if you don't -- if you have a 2D today and you don't move to 3D, you will replace that unit anyway in 7 to 9 years because it just has a life mechanically that ends. So you're going to replace it with another unit that will cost you between $250,000 and $300,000. That's the cost of a 2D unit today. For the 3D capability, the optionality to have 3D, you have to add $100,000 to $150,000 on top of it. So I'll sell a new 3D today for $400,000 to $450,000 or we have the ability to sell it on our new Dimensions platform as 2D today with a software upgrade, where you'll get the $100,000 to $150,000 we get later on. That software is preloaded at the factory, so that unit goes out the door 3D capable but not turned on. So down the road, we have the ability to turn it on and to essentially get 99% gross margin on that system.

Amit Bhalla - Citigroup Inc, Research Division

Great. Well, with that, we're out of time for this session. Thanks a lot, Glenn, for your time.

Glenn P. Muir

Great, Amit. Thank you.

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Source: Hologic's Management Presents at Citi 2013 Global Healthcare Conference (Transcript)
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