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Hologic (NASDAQ:HOLX)

Q2 2011 Earnings Call

May 02, 2011 5:00 pm ET

Executives

Steven Williamson - Senior Vice President and General Manager of GYN Surgical Products

Robert Cascella - Chief Executive Officer, President and Director

David Harding - Senior Vice President and General Manager of International

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

Deborah Gordon - Vice President of Investor Relations

Analysts

Joshua Jennings - Jefferies & Company, Inc.

William Quirk - Piper Jaffray Companies

Jayson Bedford - Raymond James & Associates, Inc.

Tycho Peterson - JP Morgan Chase & Co

David Lewis - Morgan Stanley

Thomas Kouchoukos - Stifel, Nicolaus & Co., Inc.

Isaac Ro - Goldman Sachs Group Inc.

Amit Bhalla - Citigroup Inc

Charles Butler - Barclays Capital

Bill Bonello - RBC Capital Markets, LLC

Operator

Good afternoon, and welcome to the Hologic Inc. Second Quarter 2011 Earnings Conference. My name is Anthony and I'm your operator for today's conference. Today's call is being recorded. [Operator Instructions]. I would now like to introduce Deborah Gordon, Vice President, Investor Relations, to begin the conference.

Deborah Gordon

Thank you, Anthony. Good afternoon, and thank you for joining us for Hologic's Second Quarter Fiscal 2011 Earnings Conference Call. I encourage everyone to visit Hologic's Investor Relations page of our website in order to view the PowerPoint presentation related to the comments that Glenn Muir, Hologic's Chief Financial Officer, will be making in his opening remarks. The replay of this conference call will be archived on our website through Friday, May 20. Please also note that a copy of the press release discussing our second quarter fiscal 2011 results, as well as our third quarter and fiscal year 2011 guidance, is available in the Investor Relations section of our website, under the heading Financial Results.

Before we begin, I would like to remind you of our safe harbor statements. Certain statements made by management of Hologic during the course of this conference call may constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements involve known and unknown risks, uncertainties and other factors, which may cause actual results, performance or achievements of Hologic to be materially different from future results, performance or achievements expressed or implied by such forward-looking statements. Such factors include, among others, those detailed from time to time in the company's filings with the Securities and Exchange Commission. We expressly disclaim any obligation or undertaking to publicly release any updates or revisions to any forward-looking statements to reflect any change in our expectations or any change in events, conditions or circumstances on which any such statement is based.

Also, during this call, we will be discussing certain financial measures not prepared in accordance with Generally Accepted Accounting Principles or GAAP. A reconciliation of these non-GAAP financial measures to the related GAAP financial measures can be found in Hologic's second quarter 2011 earnings release, including the financial tables in the release. Please note that today's call will consist of 30 minutes of opening remarks from management, followed by a 30-minute question-and-answer session. [Operator Instructions].

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

Robert Cascella

Thanks, Deb. Good afternoon, and thank you for dialing in to our second quarter conference call. Joining me on the call is Glenn Muir, our Executive Vice President and Chief Financial Officer; Steve Williamson, our General Manager of our GYN Surgical Group; Mark Myslinski, our General Manager of Diagnostics, who recently joined the company; and of course David Harding, our General Manager of our International Operations. Today, I'd like to review the highlights of our second quarter performance, update you on the launch activities of our recently approved Dimensions 3D system, which is our tomosynthesis system, and review the status of some of our key strategic initiatives, including the recent acquisition of Interlace. Glenn will then discuss the quarterly results in greater detail and also cover our guidance for the year, as well as the third quarter. Then we'll open up the call for 30 minutes of Q&A thereafter.

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

Starting with Breast Health, revenues grew 9% on a year-over-year basis. These were primarily fueled by strong service revenues. And in addition, we experienced the significant increase in the sales of both 2D and 3D Dimensions systems, which would indicate the market is transitioning to higher-priced systems, ultimately resulting in a positive ASP impact over time. We believe this conversion will continue to increase now that we have commercially launched our tomo system. Some other factors that influenced our Breast Health business were international sales of Dimensions. They actually grew 169% on a year-over-year basis as customers continue to buy the future benefits of this upgradable technology. Our interventional breast group, the biopsy group, had another record quarter, with revenues growing nearly 13% due primarily to Eviva's higher number of competitive takeaways, and we benefit from a full quarter of revenues from Sentinelle.

Moving on to Diagnostics, Diagnostics declined 1% versus last year. A year-over-year decline in U.S. ThinPrep volumes were the main reason, partially offset by stronger Cervista volume. The soft year-over-year U.S. volume for ThinPrep was due to fewer patient visits compared to a year ago, although test volumes do appear to be stabilizing, which is encouraging. Overall, our U.S. market share for ThinPrep remains strong and we are confident we are maintaining share. In addition, imager adoption continues to increase, with a 3% year-over-year gain.

Turning to our Molecular business, we're gaining traction and have posted over a 30% increase when compared to a year ago. In fact, Cervista revenues increased nearly 80% on a year-over-year basis and we experienced strong sequential growth. There are a couple of reasons for this success. Without our automation product, we focused on lab decentralization and have continued to take share with small- to mid-sized labs. And despite customers knowing there is one and likely two new competitors entering the market, we're having great success winning new accounts with our Cervista and this is primarily due to the quality of our assay and the ability for us to leverage our market presence. We remain confident that Cervista sales growth will continue to accelerate during the second half of this year as we win new accounts.

Finally, as an update on our high throughput automation, I'm pleased to announce that last month, we filed with the FDA our PMA supplement for our HTA product. This product will allow us to more effectively compete for higher-volume labs. Since the filing is a supplement, we believe approval is possible within a 180-day timeframe. However, we caution you that, as always, the FDA can take more time as it deems necessary and quite a few filings, as you're most likely aware, do get delayed. In any event, we are excited about this development and the market expansion opportunities that it presents to our HPV franchise.

The GYN cervical business, year-over-year revenues grew 6.5%, primarily fueled by increased adoption of Adiana, plus the contribution of our MyoSure product, which we acquired from Interlace in January of this year. NovaSure sales were fairly flat on a year-over-year basis as positive ASP trends were offset by softer procedure volumes. We also experienced a sequential decline in our fiscal second quarter, which historically is a softer quarter for NovaSure as resetting of deductibles occurs. The ASP trended upward and that was primarily as a result of a favorable customer mix in that business unit.

A bit more color on Adiana, we continue to increase the number of physicians trained. Currently have trained over 1,500, with thousands in our queue and we are realizing competitor wins on a routine basis. We are encouraged that our reorder rate remains strong at around 70%. I'd also like to share a couple of other positive points with Adiana. We are experiencing improved commercial efficacy when compared to our clinical trial. As we expected, our yields are certainly improving and we are well along in the development of next-generation technologies. Overall, our GYN Surgical business continues to be an important growth driver for fiscal '11 and beyond in both the U.S. and international markets.

On Skeletal Health, revenues grew 7% year-over-year and again, benefited primarily from growth and demand for our bone densitometry systems. We believe this demand will continue to increase slightly throughout the second half of this year. I think it's also important to mention, last month, we received FDA clearance to include advanced body composition assessment in our bone densitometry systems. This was a new body composition reporting tool focused on obesity management and is also a great assessment tool in the sports and fitness communities. We believe that this will have a positive impact on this product line over time.

Turning now to some key points of interest, I'd like to provide you some details on the FDA approval and commercial launch of our Dimensions 3D system. As you know, the Dimensions 3D received approval on February 11 of this year. We're very proud to be the first company that has an FDA-approved product in the groundbreaking technology for both screening and diagnostic indications. Moreover, this product was approved on the basis that it's superior to 2D digital mammography. We launched the product in the U.S. immediately following approval. Our sales force was well-prepared for the launch, and we had already begun to provide comprehensive physician training. Since approval, we have successfully upgraded a number of domestic systems to Dimensions 3D and are extremely pleased with the early uptake so far and the high level of excitement and enthusiasm from our customers and potential customers. In fact, we are hearing that a large number of customers want the product as soon as their capital budgets permit so that they can remain competitive within their local communities.

Although very positive early indicators, I want remind to everyone that the adoption of tomo will take time. And as we have said, we are not expecting a rapid ramp in system sales this year. Regarding a bit about reimbursement for tomo, we are focused on both a short-term plan and longer-term strategies, and we are optimistic we will be well served by both. Short term, we are focusing on private payer education, to get them excited about the clinical benefits of the technology and its potential cost savings. To this end, we hosted a private payer panel meeting last month for educational purposes. Longer term, we continue to have discussions with the American College of Radiology, other relevant professional societies, DMS [ph] and advocacy groups to develop the best solution for our customers and the patients they serve. Importantly, the ACR-issued interim guidance that breast centers should reference a miscellaneous code for the 3D portion of the procedure. Our managed care teams will be working with our customers to help guide them through this initial process. Over the near term, providers will need to work with their respective payers to agree on reimbursement levels until such time as a more permanent solution is in place. As we have stated in the past, we believe reimbursement will not be an obstacle for many early adopters who are accustomed to purchasing new technologies.

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

Moving on to some brief updates on our strategic initiatives, starting with the recent acquisition of Interlace. As you know, we acquired Interlace in January and we've been extremely excited about this product line, the integration efforts, and very enthusiastic about its potential. Interlace's technology is the MyoSure Hysteroscopic Tissue Removal System for uterine fibroids and polyps. These are painful and debilitating for women, causing abdominal pain, heavy menstrual bleeding and even sometimes impaired infertility. We believe the addressable annual market for MyoSure approaches $300 million to $400 million in the U.S. alone, and believe that we will own a significant share of this market in five years. MyoSure fit extremely well within the GYN surgical portfolio, alongside NovaSure and Adiana, and it is another tool in the toolkit for our GYN surgeons. We remain on track with our expectations that MyoSure should achieve just less than $10 million for the balance of fiscal '11.

Also on the M&A front, in late February, we announced the signing of an agreement to acquire an international medical products distributor and in January, we signed an agreement to acquire a small medical equipment manufacturer. The closing of both acquisitions are subject to regulatory approval and other conditions. We will look forward to provide you with additional details on these potential acquisitions when they close. I will state, however, these acquisitions are completely in line with our tuck-in strategy to add to our existing verticals and they also allow us to broaden our presence in key markets.

Now, for an update on direct-to-consumer awareness. In January, we formally kicked off our efforts in all targeted markets with advertisements appearing in many leading women's magazines, online websites, television spots and social networks. As you may recall, our campaign calls to action for target patients to call or go online to request a brochure. Such requests are tracking more than 13x the run rate from a year ago. We believe we are reaching thousands of women with our most valuable message. In addition, we are hearing from physicians that patients are coming into their office and asking about the NovaSure procedure. As I previously stated, there is a significant unmet demand waiting to be addressed. Our DTC campaign is intended to drive penetration into this large market opportunity. We expect to see a return on capital beginning in the third quarter of this year, and much broader benefits over the life of this program, which incidentally will carry into next year as well.

Finally, our focus on international expansion. We are making good progress on all fronts. Our international results continue to improve, with year-over-year revenues increasing just over 10% this quarter. Markets of emphasis for us include Asia Pac, China specifically, the Middle East, Latin America and Eastern Europe. We are building infrastructure, sales resources and management strategically around the globe and have begun to build our sales team to support surgical and molecular products to fuel share gains abroad. In addition, we continue to search for acquisitions in different parts of the world to expand our distribution and manufacturing capabilities. Our approach has been to first sell what we have, sell existing products for existing markets, then expand with existing products into new markets and finally, new products into new markets as a result of the acquisitions that we are making on a routine basis.

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

Glenn Muir

Thanks, Rob. Consolidated revenues grew 5% year-over-year, exceeding our expectations and largely due to the 9% growth in our Breast Health segment, led by the strength of our recurring service revenue stream, plus solid growth in sales of our breast biopsy lines. In addition, we benefited from the inclusion of MRI coils from the Sentinelle acquisition last summer. Our Dimensions line now represents 47% of all digital mammography base system revenues versus 37% last quarter and 14% last year. This shift to the Dimensions platform is all 2D as 3D tomo in the U.S. was negligible this quarter. Since our approval in mid-February, our focus has been on quoting and taking orders. In fact, we issued over 600 quotes in the first two months. Interest is high but it will take time to translate into sales. As such, we are still expecting meaningful tomo 3D revenue pickup to start in fiscal 2012.

Switching to our other segments, two of our newer products, Adiana and Cervista HPV, both continued to steadily increase and contributed to this quarter's solid top line results. Overall, our second quarter's geographic revenue mix was approximately 77% domestic and 23% international. And our mix of disposables plus service versus capital equipment sales was 76% and 24%, respectively. Foreign currency translation provided less than $600,000 of top line revenue benefit and had a minute impact on our revenue growth.

Turning to the rest of the P&L, our gross margins on a non-GAAP basis were 60.9%, down 50 basis points from last year, due to the increase in lower margin service revenues and a product mix shift within disposables to lower margin products. This slight decrease was as expected and at the high end of our guidance range of 60% to 61% and due to the better-than-expected overall revenues. Regarding operating expenses, our non-GAAP expenses continue to be well-controlled and totaled $138.8 million, an increase of 10.7% compared to last year, and we're slightly below our guidance of $140 million to $145 million. This expected increase over a year ago was primarily due to the increased sales and marketing expenses for our NovaSure DTC campaign and the inclusion of our recent acquisitions of Sentinelle and Interlace. Otherwise, operating expenses would've been essentially flat with the prior year. Our R&D efforts continue to be a focus for our investment dollars, and as a percentage of sales, were 6.8%, up slightly from last year.

Our non-GAAP earnings exclude certain items that are fully detailed in our earnings release. However, one item that I would like to highlight as a gain, recorded as a credit to our operating expenses of $84.5 million related to our agreement to sell our rights of the Makena assets to KV Pharmaceutical upon FDA approval. We received FDA approval during the second quarter, transferred all of the existing Makena assets to KV and in return, received a cash payment of $12.5 million, with future milestone payments to follow. Since this was a one-time transaction that we consider to be outside of the ordinary course of our business, we've excluded this gain from our non-GAAP earnings, as well as from the cash flows from operations. Absent the non-GAAP item, our adjusted pretax income this quarter was $119.5 million versus $118.7 million in Q2 of last year, and our non-GAAP adjusted net income increased 3.8% to $78.9 million. We reported fully diluted non-GAAP EPS this quarter of $0.30 versus $0.29 a year ago, $0.02 ahead of our guidance. We exceeded our guidance as a result of the strength in sales this quarter, as well as our continued efforts to control operating expenses.

Turning to the balance sheet, our cash balance totaled $573 million, up approximately $56 million from $517 million at the end of fiscal 2010, primarily due to the continued strength of the cash we generated from operations, and to a smaller extent, the cash payment we received from KV Pharmaceutical, as well as an increase from stock option exercises. The cash generated was partially offset by the cash we used to acquire Interlace Medical in the second fiscal quarter, as well as two federal tax payments that totaled $54 million. Our plans for use of cash remains focused on investing in our current technologies and operations, potential tuck-in acquisitions, including the two we are in process of closing, and preparing for the possible redemption of the first tranche [ph] of our $1.725 billion of convertible notes beginning in December 2013.

Regarding free cash flow, we generated approximately $67.3 million this quarter, which was down from the first quarter due to the larger tax payments we typically make in Q2. Because of this, our cash flow in Q2 is usually the lowest for the year. These cash flows were comprised of approximately $81.9 million of cash flow from operations, with capital expenditures of $14.6 million. The free cash flows do exclude the cash payment received from KV Pharmaceutical, which is consistent with how we have treated previous cash payments under this agreement as they are not considered to be part of our normal operations.

Now, moving on to guidance, which includes our recently approved Dimensions 3D mammography systems and our recently acquired businesses, and excludes any future revenue or earnings from anticipated acquisitions. For the third quarter of fiscal 2011, which will end on June 25, we are expecting revenues of $443 million to $448 million. Year-over-year, this reflects growth across all four of our reporting segments and represents an expected growth rate of 5% to 6%. Compared to this past quarter, we are expecting the largest sequential growth to come from GYN Surgical and our NovaSure product line due to the recently launched DTC campaign. We expect gross margins of approximately 61% to 62% on a non-GAAP basis, increasing slightly due to higher revenues and a more favorable product mix. We expect non-GAAP operating expenses, primarily excluding amortization expense, to increase slightly on a sequential basis from Q2 to $140 million to $145 million or approximately 31% to 33% of revenue, primarily resulting from the increased sales and marketing expenses for the launch of our Dimensions 3D product, the inclusion of the Interlace Medical expenses for the entire quarter, as well as the other investments we're making in our business.

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

For fiscal 2011, which ends on September 24, we are increasing our revenue guidance to a range of $1.76 billion to $1.77 billion. This is up from $1.73 billion to $1.76 billion and represents growth of approximately of 5%. This guidance reflects our expectations that Breast Health will grow in the mid-single digits, including the contributions from the recently approved Dimensions 3D system. Diagnostics will be flat with the prior year. GYN Surgical will grow in the low-double digits and Skeletal Health will improve slightly. We are increasing our gross margin guidance to 61% to 62% for the year. The key driver to future margin improvement is the expected increase in revenue. We expect non-GAAP operating expenses to be in the range of $545 million of $555 million, up approximately 9% to 11% from fiscal 2010. This increase reflects our ongoing commitment to R&D at an approximate rate of 7% of revenues, the additions of Sentinelle and Interlace for the year, expenses associated with our NovaSure DTC initiatives and sales and marketing expenses associated with our recently approved 3D Dimensions.

We are expecting interest expense to be approximately $40 million, excluding $73 million of non-cash interest expense related to our converts. And our non-GAAP EPS increases to a range of $1.24 to $1.26, up $0.02 from prior guidance. The incremental increase in our revenue guidance is offset by slightly higher operating expenses from the prior guidance we've given. Our tax rate guidance of 34% and share count guidance of 264.5 million remains unchanged. Looking at cash flow, we are also reaffirming our free cash flow guidance of approximately $450 million. And in summary, our positive traction continued into the second quarter. Our market seems to have stabilized. We are seeing positive market share gains and we're especially pleased with the early positive response to our recently approved Dimensions 3D tomo. As our fiscal 2011 guidance implies, we are looking forward to delivering improved growth this year on the top and bottom line, and to generate continued dollar cash flows from operations, as well as maintain our discipline at the expense level.

And with that, let me turn the call back to Rob.

Robert Cascella

Thanks, Glenn. Well, in summary, we're obviously pleased of the overall performance and our solid year-over-year growth in many of our businesses. Our results were strong across the board in Breast Health and we're thrilled to have the Dimensions 3D product approved. Obviously, I'm very excited to be able to go to market with that technology. Surgical, again, grew strongly on a year-over-year basis as Adiana adoption is accelerating. We're excited that we have formally kicked off our DTC marketing campaign for NovaSure and look forward to near-term revenue gains on that product as well. And in addition, the MyoSure product rounds out our surgical product portfolio. Diagnostic is admittedly challenged by difficult U.S. trends for ThinPrep but Cervista continues to gain traction. In addition, we continue to generate considerable cash flow, as Glenn indicated, which is enabling us to fund our long-term growth initiatives. And finally, we are delivering on objectives of solid organic growth, making strategic tuck-in acquisitions and growing our international presence.

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

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

Question-and-Answer Session

Operator

[Operator Instructions] Our first question will come from Bill Quirk with Piper Jaffray.

William Quirk - Piper Jaffray Companies

First off, Rob, very strong start of the year in terms of first-half results. Obviously, the Breast Health business is growing well and you've added the MyoSure business since you initially gave as guidance. I guess I'm thinking here about the overall incremental numbers of about $20 million. It just seems that everything kind of started really well in your favor, that it's fairly conservative numbers, is there something we're missing here? Is Diagnostics a bigger drag on the business than you have initially expected?

Robert Cascella

No. I think that -- it's a great question, Bill, and I think we're taking a fairly conservative attitude, as we always have, and really taking it on a quarter-by-quarter basis. As Glenn indicated in our guidance, we believe that Diagnostics will probably end up flat on a year-over-year basis with growth in Cervista and our international business outweighing some of the erosion in the domestic business, which we believe is also stabilizing. I think that we have some unknowns with tomosynthesis in terms of market adoption, so we're being cautious about that. And we all would like to see great strides with our DTC success. So we're being cautious about that as well. So I think what you're reading in the numbers is one about cautious optimism and I don't think there's any hidden fact in that.

William Quirk - Piper Jaffray Companies

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

Robert Cascella

So miscellaneous code carries no financial amount to it. What typically happens is if a provider uses the miscellaneous code, then there's a correlation to an existing exam that, that provider then uses when submitting for reimbursement. It's a crossover or crosswalk to an existing code of some amount. So let's assume for a moment that there is a similar imaging encode that perhaps reimburses that $50 or $75 to payroll and make a decision as to whether or not that is fully reimbursed or some percentage of that additional code was then reimbursed. So the miscellaneous as a standalone does not have an economic value to it.

William Quirk - Piper Jaffray Companies

So at this point, is this two related thereof [ph]?

Robert Cascella

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

Operator

Our next question will come from Bill Bonello from RBC Capital Markets.

Bill Bonello - RBC Capital Markets, LLC

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

Glenn Muir

Thanks for the question. The strategy is to continue to benefit from the iconic nature of the ThinPrep brand in the laboratory and work off the sort of molecular space that we have, which gives us a great substrate to bring new products. The new products are in the STD arena, specifically CT/NG, as well as the automation. I think as you heard Rob say, we're pleased to get that submission to the FDA and now just eagerly await their approval so we can get that automation into the marketplace, allowing us to expand our reach in that market.

Bill Bonello - RBC Capital Markets, LLC

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

Glenn Muir

Well, I think I'd like to add a little bit to your first question as well and I didn't want to overlook international, but we also see strong growth coming from the international markets. And that's really broadly based across the three product lines. In terms of other products, it's just a little early to shed any light on that but I will tell you, we have a robust process in place to understand where the best opportunities are that we can leverage our position. So more to follow on that but at this point, just a little too early to share anything.

Operator

Our next question will come from Thomas Kouchoukos with Stifel, Nicolaus.

Thomas Kouchoukos - Stifel, Nicolaus & Co., Inc.

Just I guess looking at the Surgical business, it sounds like you're expecting a decent pick up in the back half of the year. I understand the seasonality in this quarter. Could you parse out, maybe as you look forward, what the components of growth there. I'm curious to know what you expect Interlace to do for the remainder of the year. And also, it sounds like Adiana picked up sequentially, if you could give some color on the performance there as well?

Steven Williamson

Sure, overall -- Tom, this is Steve. Thanks for the question by the way. Overall, when we look at Surgical, on the growth for the rest of the year, I think we're primarily focused on direct-to-consumer advertising. All our leading indicators look really strong there. I think Rob touched on that quite a bit. And the process that patients will go through once they see an ad, they go through getting a brochure, pressure and then by the time they see a doctor and actually have that procedure done, I mean that can be anywhere from three to six months. So I think over the next couple of quarters, we'll start to see the benefits from the advertising dollars that we spent. And that's really going to be the key driver. From a MyoSure perspective, MyoSure, we're looking about $10 million in sales from that product over the remainder of the year. If you look where we were last quarter, we had a small sales force that did a limited release of the product. At the beginning of this quarter, the first week, we actually trained our entire sales force, our productions ramped up, our reps were all trained, we're integrated systems and we're moving everything into our Marlborough facility right now, so that will all be accomplished by the end of year. But I think that will play a decent part in the revenue growth over the course of the year. And then finally, Adiana, I kind of want to take a step back and position Adiana for where it is right now. If you look at the product, we have about 15% to 20% market share in our first year of launch and this is a product that would bring on hundreds of new customers each quarter. We've got higher reorder rates and we continue to see our key customers reordering. So that includes Mayo and Cleveland clinic. But this is really a huge market opportunity for us and as we launch our next generation products that Rob had mentioned, which are currently in development, then we believe it will not only take more share but we'll be able to grow this market over time. So I think there's a lot of upside growth potential for Adiana in the long run and I think all of three products will contribute for the rest of the year.

Thomas Kouchoukos - Stifel, Nicolaus & Co., Inc.

Okay, great. And then just a quick follow-up, in the diagnostic space, you touched on the impact of intervals on your pap test business and also how that might translate to HPV as well?

Glenn Muir

I would say that what we experienced last year in terms of a fairly dramatic decline in the second half of the year had a lot to do with the economy and unemployment. When we look at the results of interval expansion today, we think that the trend is certainly much more linear, not as severe, and probably impacts the business on an ongoing basis at a rate of maybe 2% to 3%. And that's not what we're experiencing this year because we're in a recovery. So I think although we recognize that we're going to see interval expansion, we don't feel that the decline is going to be more severe than that over the near term.

Operator

We'll take our next question from Isaac Ro with Goldman Sachs.

Isaac Ro - Goldman Sachs Group Inc.

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

Glenn Muir

Yes, good question, Isaac, and I think that it is definitely stimulating sales of Dimensions 2D because the reality of tomo is now in the market. So the customers that were on the fence about buying a Selenia or some other manufacturer's product are buying a Dimensions product today. I don't think that the stragglers that are at the very end of this level of market maturity are the primary targets, although there are some of those that are interested in buying Dimensions even though they are late to the digital conversion. It is primarily accounts that are interested in having leading-edge technology. These are people that already have digital and want to buy a tomosynthesis unit or want to replace their units with product as tomo capable. And I think we're seeing that domestically but I think we're also seeing that on the international front as well.

Isaac Ro - Goldman Sachs Group Inc.

Got it. And then just secondly on the Diagnostics market, can we parse out a little bit about the contribution to growth this quarter that you got from Cervista? And then regarding ThinPrep, are there any signs in your mind regarding share loss or price deterioration in the U.S.?

Glenn Muir

I'll answer those, please, but second part first. With respect to ThinPrep, we feel very confident that it is not a share loss, either here or abroad. In fact, there's a lot to-ing and fro-ing in that market but all of the market data that we've seen, we are maintaining share. With respect to Cervista and our growth, we have not given specific numbers but what I have done is try to express that on a percentage basis and on an annual basis, or year-over-year basis, it is growing at a very compelling rate, at which 80% over the second quarter of the prior year. Admittedly, that's off a small base. So we are garnering a lot of interest, but I think up to this point, we've been focused at the low- to mid-tier labs. And I think with the introduction of our HTA product, I think it broadens our market opportunity as well.

Operator

We will hear next from Tony Butler from Barclays Capital.

Charles Butler - Barclays Capital

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

Glenn Muir

That's great. To respond to the first question, I think that not only Hologic, but I think some of our contemporaries in the imaging field are seeing some relief on capital budget. I think even in the MR/CT markets and so on and so forth. So we are seeing, certainly not 100% recovery, but we are seeing dollars freeing up. It is much more about the fact that tomo was a mid-year approval, budgets did not reflect this investment, so there's a lot of scurrying around on the parts of our customers to either find money for tomo, look for some alternative financing or wait for the next budget period. With respect to profiling who these customers are, surprisingly, it is a lot of for-profit imaging centers that are looking at tomo as a way to have a competitive advantage in their marketplaces. So from a regional or community perspective, they want to be first, they want -- some would like exclusivity, which obviously is not possible and believe that there is -- not only is this clinically powerful, but it is also a marketing benefit for them to have it. Now on the flip side, all of the researchers look at this from the advancement in the technology, but quite frankly, those are going to be the guys that have a much tougher time getting budget dollars. So if we look at the 300 -- or the 600 quotes, I should say, it's really difficult to profile other than to say that I would take a guess that probably 50% to 60% of those are going to be sites that clearly our for-profit imaging centers that are looking to the benefits of the technology, believe they can get near-term reimbursement and the balance are the university settings, early adopters that are buying it because they also wanted to research in addition to commercial cases.

Operator

We will hear next from Jayson Bedford with Raymond James.

Jayson Bedford - Raymond James & Associates, Inc.

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

Glenn Muir

Jayson, it's Glenn. Yes, the 47% was based upon revenues. So it is true that what we're seeing in the Dimensions line is -- what we expected was a higher ASP for Dimensions over the Selenia product. So this is, I think, a positive as we look to the future on how it will impact our gross margins, is that the Dimension line, especially the 3D, has a much higher gross margin than the Selenia line at the lower end. So this quarter, we had 47% of the revenue was Dimensions. Last quarter, in Q1, it was 37% and the quarter before that was 14%. So it's been a pretty significant shift to the Dimensions line itself.

Jayson Bedford - Raymond James & Associates, Inc.

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

Robert Cascella

Yes. And I think that you refer specifically to the notion that if somebody bought a 2D Dimensions recently, they would probably be likely candidates to now upgrading to 3D capability. And I think the reason why we thought that probably would not be the case is that if a site was just now converting to digital, would that really be a likely site to now, in addition to just recently converting to digital, go 3D mammography? It seems not likely to it. Now having stated that, we have some very attractive leasing programs on tomo upgrades and some other financial packages that do make it look appealing. I think the issue maybe one of reimbursement at that juncture but I think we today, if we would still stick with our earlier opinion, that the majority of Dimensions 3D that are going to be sold are going to be sold as completed systems.

Operator

Our next question will come from Tycho Peterson with JPMorgan.

Tycho Peterson - JP Morgan Chase & Co

Just following up on Isaac's question earlier about the competitive dynamic. Are you able to quantify what percentage of your orders are competitive wins in tomo? I mean, obviously, GE or Siemens don't have a 3D system out yet, but to what extent you're swapping out computer platforms?

Robert Cascella

It's pretty -- I mean, right now, we're still early in this process, Tycho, it's difficult to get our arms around it. I mean, I think in another quarter or two, we'll have a pretty good handle on it. I mean, you're right in saying that there's not a lot domestically in terms of competition because no one else is FDA approved. Internationally, there is a product that Siemens is selling. I think they're competing primarily on price because at least today, we feel that the product probably has a lot of development things that need to get on with it. But in trying to dissect our quotes, if you will, I would say that, obviously, that this product having tomo gives us a great reason to motivate an existing Selenia user to trade in their product and it is also a reason for us to now go into competitive accounts with the product that others don't have.

Tycho Peterson - JP Morgan Chase & Co

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

Robert Cascella

On the synthetic 2D assay development project and obviously we would require FDA, we are using that from a clinical point of view in Europe, but we still have a ways to go on that product. The 5000 is really a bit of a strip version of our higher-end Dimensions product. And if you recall, what we did with Selenia was we bracketed the market with ultrahigh end, mid-tier and low end. We're doing that same thing with the Dimensions products. So we have a much more economical acquisition console without a lot of the bells and whistles of the 8000. However, it does leave the factory tomo ready. So it's still a tomo upgradable product.

Tycho Peterson - JP Morgan Chase & Co

And then just last one, has 2D pricing in the U.S. remained relatively stable? Obviously, Siemens is moving into the market. Just talk to pricing dynamic there and what you're expecting?

Robert Cascella

Yes, I would say that we have not seen significant, if any, meaningful erosion. The market is such today that the low-end products are really at a very, very low price tag. We are competing with the likes of GE and Siemens at the low end and Fuji, so I don't see that there has been much more erosion domestically. I think internationally, there continues to be downward pressure. And it's probably because there is more competition there. And differently than the United States, where we own the installed base with a 60% to 70% market share, it's a bit more fragmented o-U.S. So we are finding that there are some competitive takeaways. But I don't see it as predominant. Not yet here in the states. I think that obviously changes when more vendors got approval of tomosynthesis and we'll be taking the fight to 3D mammography. And I think we will start seeing some price erosion at that point.

Operator

Our next question will come from David Lewis with Morgan Stanley.

David Lewis - Morgan Stanley

Rob, I wanted to come back to one of your comments on DTC. You mentioned that you're seeing significant interest from a marketing perspective after the dollars are getting spent, but as I recall, when Cytyc tried this program several years ago, they saw a similar effect but what they didn't see was pull-through of actual procedures. So I wonder if you could talk through in those regions where you're seeing the hits to whatever median site appropriate. Are you actually seeing increased procedures and what is your level of confidence you're actually going to get the pull-through that Cytyc in the past did not get?

Steven Williamson

David, this is Steve. I'm going to jump up in there if I can. I was actually at Cytyc when we had done the direct-to-consumer advertising campaign. There were a lot of things that we did differently with that campaign than we have done here. A lot of it was done for a month's time in small select markets. So we didn't really have enough -- we didn't put enough room behind it. And I think that's why we didn't necessarily see that long-term payoff. So we had a lot of lessons learned. We spent a long time really putting -- doing our diligence on this before we went out with our national campaign. And then specifically, you're talking about in these markets. We do continue to hear about markets where physicians are calling us, they're talking about major procedure dates that they have coming up where patients have come in asking for the procedure. But again, it really comes back to our leading indicators right now and we'll expect that revenue to come on the back end. But to give you a kind of an idea what I mean on the leading indicators, in the past, over a timeframe, although one quarter timeframe, we might get 3,000 requests for brochures. Since we launched this DTC campaign, we've had over 40,000 requests, so we talk about this 13-fold increase in patient brochure request. Well obviously, not every one of those patients will have a procedure, but it is a good indicator that we are making more patients aware of a solution for this problem and it's in target with what we're expecting from the past.

David Lewis - Morgan Stanley

Okay, very helpful color. And just one quick follow-up maybe for Rob, speaking just to reimbursement expectations, Rob, it sounds like you're still expecting the significant demand to come from for-profit centers. In terms of expectations, what you'd like incremental reimbursement to be? I feel like the consensus expectations sort of call for a $40 to $50 incremental reimbursement. It feels like expectations have sort of fallen over the last four- to six-month period. Can you sort of update us on what you think is a successful level of reimbursement and what is a less successful level of reimbursement?

Robert Cascella

Well, I think what we have thought was then a $25 or $30 reimbursement would be terrific. I mean, in terms of the average cost of this upgrade and obviously this being applied to every screening patient that a given center was about to do a procedure on. But I would say that, yes, I think that initially some of the external resources that we used thought that a $40 or $50 reimbursement would be appropriate. I don't think we ever got above $50 though, David. So I mean -- I think it would be -- I think, hard given that the incremental for 2D mammography, film-based mammography, with $50 to go to a digital platform and that was a product that had an ASP that was 5x what the analog predecessor was. We're talking about $125,000, $150,000 software upgrade on a $300,000 or $350,000 gantry. So it would be difficult to try to justify that $50 again for that incremental increase.

Operator

We'll hear next from Josh Jennings with Jefferies & Co.

Joshua Jennings - Jefferies & Company, Inc.

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

Robert Cascella

Sure. It's interesting. I think that everyone wants to be first in their -- on the block with a new technology. I think it's a little early for us to see the effects of this yet, but all that we can do is look from an analog or data point of all of this was the conversion of film to digital. There were, literally, cities around the country that did not convert until one main site within that city, in fact, did convert and then like dominoes, everyone realized that they were going to lose business if they did not. We believe that over time, that will happen with tomosynthesis. We think it will clearly take time for that to happen. And what I mean by that is broader adoption, a more stable and permanent reimbursement. So that's why we are being realistic in terms of what we think this trajectory is. And then when we initially said we think there's 500 to 700 accounts that will buy this kind of a product without reimbursement or without permanent reimbursement, we still believe in that number. But we're talking about 9,000 MQSA sites and in order to get that kind of traction, we're going to need these two other elements of clinical validation and reimbursement in place for that to happen. But once that starts, that takes away the argument as to why you wouldn't buy it and then it becomes a competitive dynamic as to why you have to buy it.

Joshua Jennings - Jefferies & Company, Inc.

And then if we could just shift over to the international side, I think this is the first time I've heard the metrics about this year-over-year increase in international sales at 10% this quarter. I just wanted to know, is that accelerating from previous quarters and where do you expect that to go? And then also just on international side, one, if you had growth in ThinPrep procedures internationally and two, on the Dimensions revenue, 47% of those mammography system revenues, can you break that out in terms of at least per trends and from that 40% -- 7% level in terms of the base, most of that growth coming from the U.S. or is that also coming on the international side?

David Harding

This is David Harding. Thanks for your question. We are seeing very good growth across virtually all of our lines of business on a year-over-year basis on the international front. Recently, that has been led dramatically by our Breast Health business. And now, we're seeing something like about 50% of the overall units being sold, either Dimensions 2D or 3D. And getting a lot of competitive bang for our buck out of that new product, which is really allowing us to gain new market share in a wide variety of marketplaces. Our Breast Biopsy business is growing very strongly internationally as well. So across the board, Breast Health is quite strong. As for ThinPrep, we saw modest growth on a year-over-year basis, good growth coming from our Cervista business. Admittedly though, on a relatively small base, ThinPrep was steady and we saw good pockets of growth in emerging markets while some of our more developed markets have in fact experienced some interval expansion. So it's taking down those numbers there. But overall, we feel very bullish about the future growth prospects for ThinPrep and the rest of our diagnostic products. Surgical has been an extremely strong performer on a year-over-year basis, solid double-digit growth in virtually every market where we play. And finally, on the Skeletal Health business, we had a remarkably strong business led in large measure by some real strength in China this past quarter. So, we're feeling very, very good about overall international growth rates and we are seeing it pick up, in general, from what was a more difficult time in the last several quarters previous.

Operator

And we'll hear the next question from Amit Bhalla with Citi.

Amit Bhalla - Citigroup Inc

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

Robert Cascella

On the lead times, there really is not a significant lead time difference on this product. So we're quoting depending on backlog, 30 to 45 days. So it's nothing extraordinary. I mean, we build through a build plan, we think we know what our expectations are for the next quarter and so on and so forth. So it is not a -- we're not struggling like in the old days with Selenia where we had manufacturing issues. That is not the case on this product. I mean the biggest gaining item on tomosynthesis is really training because it is, in addition to clinical applications training, synthesis training, we are also doing physician training. So we are literally teaching radiologists how to interpret tomo images. And that's not we. That is, our clinician partner is teaching or they are teaching physicians or radiologists on how to interpret these new 3D images. So that is a significant commitment on our part. And in fact, it's probably much more of a gaining item than service or production.

Glenn Muir

And Amit, it's Glenn. If we think about the guidance for a moment, it's obviously a moving target as we move forward in the quarter and we do have a little bit more clarity and what we increased for guidance this quarter was number one, the revenue side of things and number two, the gross margin side of things as we see a pickup to our higher-priced product mix. At the same time, we also increased what we think our operating expenses will be. So that brought down the overall EPS a little bit. But what we had, I think, clarity on mostly was in the Breast Health segment. And if the play between the Sentinelle MRI coil and also the new Dimensions product line. So we're seeing some increases on the Dimensions 2D as we would expect and then beginning on the 3D side. But if we think about those 600 quotes, and we're quoting, we can deliver those as quickly as possible, that's really not the issue. When we quote delivery time, it's really the customer, when they'll have room readiness, when they'll have their physicians and technicians trained, when they'll have it in their budget, when they're ready to go. So as we think about guidance for the next two quarters, we still have really just a very small minimal number for the 3D tomo. It's really driven by the 2D Dimensions and we're really expecting 3D tomo to kick in, in the 2012 timeframe. That being said, that is the piece that helped the Breast Health move up to the mid-single digit when we look at it in totality.

Amit Bhalla - Citigroup Inc

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

Robert Cascella

I think there's a variety of different alternatives in that the use of a miscellaneous code with the ability to then cross correlate it with an established code is certainly one that will likely be used by more than those that are going to a patient pay. But having said that, there are some centers that are looking at this from a patient-pay perspective for just the tomo portion of the exam because they believe that there is obviously a strong attraction to a technology that can clearly be marketed as superior to 2D digital mammography. So it is a little bit of a mixed bag relative to what their preferences are in billing.

Operator

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

Robert Cascella

Thanks very much.

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