Hologic, Inc.

Good afternoon and welcome to Hologic's second quarter fiscal 2020 earnings conference call. My name is Bryce and I'm your operator for today's call. Today's conference is being recorded. All lines have been placed on mute. I would now like to introduce Mike Watts, Vice President, Investor Relations and Corporate Communications to begin the call. Please go ahead.

Thank you, Bryce. Good afternoon and thanks for joining us for Hologic's second quarter fiscal 2020 earnings call. With me today are Steve McMillan, the company's chairman, president, and chief executive officer, and Carlene Oberton, our chief financial officer. Steve and Carlene both have some prepared remarks, then we'll have a question and answer session. Our second quarter press release is available now on the investor section of our website. We also will post our prepared remarks to our website shortly after we deliver them. Finally, a replay of this call will be archived through May 22nd. Before we begin, I'd like to inform you that certain statements we make during this call will be forward-looking. These statements involve known and unknown risks and uncertainties that may cause actual results to differ materially from those expressed or implied. Such factors include those referenced in our safe harbor statement that's included in our earnings release and in our filings with the SEC. Also during this call, we will be discussing certain non-GAAP financial measures. A reconciliation to GAAP can be found in our earnings release. One of these non-GAAP measures is organic revenue. As a reminder, we're defining organic revenue as constant currency revenue, less the divested blood screening and sinusure businesses, as well as the acquired supersonic imagined business. Finally, any percentage changes that we discuss will be on a year-over-year basis, and revenue growth rates will be expressed in constant currency and less otherwise noted. Now I'd like to turn the call over to Steve McMillan, Hologic CEO.

Thank you, Mike, and good afternoon, everyone. Let me start by stating the obvious. This is an unprecedented time for the company, our shareholders, and the entire world. Therefore, we're going to structure our remarks differently today. First, I'm going to discuss three strategic topics related to the COVID-19 pandemic, then hand it over to Carlene, who will cover our results and outlook. Rather than keep you in suspense, here are my key points up front. First, Hologic was performing exceptionally well until late March. continuing the strong momentum that has been building over the last few years. Second, as COVID-19 spread and threatened global economies, we moved quickly to mitigate the risk with a focus on cash so that our healthy fundamentals would be intact on the other side of the pandemic. And third, as one of the world's leading molecular diagnostics firms, this is a unique moment for us to live into our purpose by providing solutions for the most important issue facing the globe today. So while we are scaling back in some areas in the short term, we are simultaneously boosting investments in our diagnostics business to respond to the world's needs, which will make us a much stronger company on the other side of this. Obviously, it's our employees who are making this possible. and we want to take a moment to thank them. I am so unbelievably proud of the engagement and commitment we've seen inside Hologic in the face of these challenging times. Countless employees from all our divisions have volunteered to help with our COVID efforts, offering everything from new business ideas that keep customers safe to their own hands and feet for the packaging line in our San Diego plant. A special thanks goes out to our diagnostics team under the leadership of Kevin Thornall. In so many ways, the work of countless current and former employees over the years has positioned us to have a massive impact when the world needs us most. But I'd like to specifically highlight Marcus Burrell's project managers, Morris Exner's development team, Matt Friedenberg's instrument group, Kathy Chester's regulatory team, Dave Tyler's manufacturing organization, and Keith Gantner's commercial team. Someday you'll look back on this as one of the highlights of your professional careers, mainly because the world has never needed you more. We'll catch up on sleep when we reach the other side, which we will. With that introduction, now let me turn to those three key points. First, We were performing exceptionally well until late March, continuing the strong momentum that's been building over the last few years. This is important because women's health needs are not going away due to COVID-19, and we'll still be a market leader on the other side of the pandemic. Our growth strategies will continue to pay off. We'll keep leveraging our strong U.S. commercial positions in breast health, diagnostics, and surgical. We'll keep growing internationally across all our franchises. We'll keep investing in innovative research and development that drives new product growth. And we'll keep boosting our growth rate through tuck-in acquisitions. As we said in our earnings release, organic revenue growth was 5.2% through the end of February, and we were on pace for another beat and raise quarter. Three areas drove our growth in the second quarter. First, global molecular revenue increased 14.2%, the highest growth rate since 2012. This included only about $3.4 million of assay revenue related to our COVID test. Excluding this, the business still grew more than 12% as we continue to layer additional tests, including now our COVID assays, onto our Panther installed base. Make no mistake about it, our molecular diagnostics business is on a roll on a global basis. Second, sales in our European region grew by a whopping 20.8% for the second quarter, excluding the divested Cynosure business, an outstanding performance by Jan Verstrecken's team. Diagnostics led the way in the quarter, driven by cervical cancer co-testing in Germany and viral load testing in Africa. But breast health and surgical also posted low double-digit growth. Third, U.S. surgical was incredibly strong for most of the quarter, up 14.7% in the first two months, building on recent acceleration and on pace to be an exceptional quarter. For the full quarter, U.S. Surgical still managed to grow 3.1% despite a significant decline in March. Now let me turn to our second key point. As COVID-19 spread and threatened global economies in March, we moved quickly to mitigate the risk with a focus on cash. Our primary goal was to ensure that our healthy fundamentals would still be intact on the other side of the pandemic. I'd like to highlight several actions in this regard. First, our efforts to strengthen our balance sheet over the last several years prepared us well to face the COVID crisis. For example, several years ago, we established a $1.5 billion revolving credit line with a very attractive interest rate and covenants that are usually seen only with investment grade companies. As the pandemic rapidly spread, we moved quickly to borrow $750 million from this line of credit, both to prepare for lower future cash flows and to pay off our $250 million accounts receivable securitization program. We wanted to act early and be at the front of the line with our bank partners. We also suspended our share buyback activities in March. Before then, however, we completed our previously announced ASR, and also repurchased 5.9 million shares for $267.6 million, which we believe will be an excellent investment over the long term. Second, we moved quickly and decisively to reduce operating expenses through a combination of actions, hopefully temporary, that were specific to each division, function, and geography across the company. Based on the needs of each business, we eliminated temporary employees and contractors, furloughed employees, and temporarily shut down or shortened work weeks at several of our manufacturing plants. In other areas, we implemented broad pay reductions. We cut salaries for me and the board by 50%, for our global leadership team by 25%, and for other salaried employees by roughly 10%. At the same time, we made conscious decisions to preserve 401 matches and actually supplement the compensation of those salespeople who would normally receive 100% of their pay through commissions. Our goals were to keep our good people, reduce outright layoffs as much as possible, and be in a position to emerge quickly on the other side of the pandemic. In total, these and other actions should help us temporarily reduce operating expenses compared to the second quarter run rate by almost $40 million in the third quarter. Going forward, we intend to continue managing discretionary spending closely while still taking care of our employees and funding future growth initiatives, such as boosting capital expenditures to ramp up our COVID manufacturing capacity. Which brings us to our third major topic. As one of the world's leading molecular diagnostics firms, this is a special moment in time for us to live into our corporate purpose and become a much stronger company in the process. Building on the success we've had over the last several years in placing Panther instruments around the world, we are in a unique position to help fight the coronavirus by providing the molecular testing that's needed to preserve human health, as well as reopen our economies. And our efforts could provide a significant positive offset to pressures elsewhere in our business. When the genetic sequence of the SARS-CoV-2 virus was published in January, our scientists immediately jumped on it, just as they did when H1N1 influenza and the Zika virus emerged in the past. Our focus then was on speed. We wanted to get a test to market as soon as possible. With support from BARDA, we were able to secure emergency use authorization for our assay in about two months. We chose to develop a PCR-based test for a few reasons. First, it was faster, as we leveraged the open access software that was previously written for the fusion module. Second, we sell PCR-based tests for influenza and other respiratory viruses that run on the fusion side of our instrument. These viruses can cause symptoms that resemble COVID-19 disease, so we wanted to give labs the capability to test a single patient sample for multiple targets. Third, there was a clear regulatory pathway for assays based on PCR, which is the backbone of most existing respiratory tests and the first couple of COVID assays. Today, we have all come to understand that a real key to controlling the disease and getting people back to work is delivering fast, highly accurate test results on a truly unprecedented scale. Let me focus on that word, results. Many investors have asked us why U.S. testing volumes are still limited, even as the diagnostics industry is producing more tests. One reason is is that many of these tests are run on manual or semi-automated systems, putting a tremendous strain on lab technicians who were in short supply to begin with. Some of these systems require reagents from multiple vendors, which have been limited. In addition, while point of care tests have an important role to play against the pandemic, they can't be done in high volumes. In fact, high volume testing has been concentrated in a relatively small number of labs, which can lead to longer turnaround times and backlogs. For all these reasons, we quickly dedicated enormous resources to develop a second COVID test to run on the base Panther system using our proprietary Aptima technologies, including transcription-mediated amplification, which is an alternative to PCR. Our lab customers already use these aptimate technologies to perform tens of millions of molecular tests a year for sexually transmitted infections, cervical cancer screening, and virology. There are two major advantages to this approach, which is again being supported by BARDA, this time with about $13 million. First, because our supply chain has been scaled, to produce massive numbers of Aptima tests for other infectious diseases. We can now redirect these manufacturing resources to produce large quantities of coronavirus assays. Specifically, we expect to provide our lab customers about three million Aptima tests next week. Yes, three million. And are planning to produce at least one million tests a week. starting in late May. Customers using our Aptima assays do not need to perform additional sample preparation steps or buy other commercial reagents for nucleic acid extraction. This should help reduce competition for raw materials and further increase global testing capacity. Finally, to help alleviate shortages of commonly used sample collection swabs and transport media, we have validated our Aptima multi-test swab specimen collection kit, which is used today, mainly for STD testing, for use with both the Aptima and Panther Fusion SARS-CoV-2 assays. Second, our Aptima tests run on the world's largest installed base of high-throughput systems. More than 1,800 Panthers are in use globally, compared to about 200 of the much newer Panther Fusion platform. You can do the simple math. This is almost a tenfold increase in our ability to leverage our industry-leading installed base of high throughput instruments. This means that more hospital, public health, and reference lab customers can apply the power of full automation to coronavirus testing. This automation reduces hands-on time and the potential for manual error and helps reduce the labor bottlenecks that have emerged given the unprecedented volume of COVID tests needed. So our lab customers will be able to deliver more results when and where they are needed. Adding a COVID assay to the Panther menu provides a unique opportunity to turbocharge the strategy we have been pursuing in molecular diagnostics for years. COVID testing will help us place more panthers, both in the United States and overseas, and also drive higher assay utilization on the systems that are already in the field. And it will accelerate the positive change in diagnostics that we've previously discussed as we move from being the leader in STDs to a much stronger position as a broad-based molecular diagnostics leader with strong customer partnerships. Before I turn it over to Carlene, let me conclude by saying that in these unprecedented times, our purpose, passion, and promise remain steadfast. Our purpose is to enable healthier lives everywhere, every day. Never has that been more relevant than today as we battle a global pandemic. Our passion is to become global champions for women's health. Obviously, women are affected by COVID-19, but when the pandemic is under control, demand for our market-leading products and services will come back. Early detection of diseases like breast and cervical cancer will always be important. And our promise is rooted in what we call the science of sure, providing highly accurate differentiated products, which has never been more important than when combating a public health crisis. As difficult as the current environment is, I have never been more energized about our chance to play a major role in the toughest issue facing the world today, while knowing that our efforts today are also strengthening us for the future. Now let me turn the call over to Carlene.

Thank you, Steve, and good afternoon, everyone. In my remarks today, I'm going to provide an overview of our divisional sales results, walk through the rest of our income statement, briefly touch on our overall financial condition, and discuss some expectations for the future. Unless otherwise noted, my remarks will focus on non-GAAP results and percentage changes will be on a year-over-year basis and constant currency. Let me start by summarizing our second quarter results. Revenue of $756.1 million declined 7.1% due to the divestiture of Cynosure. Organically, we grew 1.1% despite the impact of COVID-19 pandemic late in the quarter. EPS of 57 cents was below our expectations, commensurate with a decrease in revenue. but basically flat compared to a year ago. Now I will provide some more detail on our divisional revenue results. Diagnostics became our largest division in the second quarter by growing a strong 8.3%, despite a substantial decrease in demand in late March. Cytology had a good quarter internationally, driven by Germany's decision to adopt co-testing for cervical cancer screening. But the primary growth driver was molecular, as it has been for many quarters. International sales were exceptionally strong, based in part on the continued uptake of viral load assays in Africa. The U.S. business performed very well, even when you exclude sales of our COVID assay on Panther Fusion, which were only 3.4 million in the quarter. In breast health, underlying trends were solid, and the division performed well through most of the quarter. However, gantries, accessories, and 3D upgrade volumes were substantially impacted as a result of COVID-19 disruptions late in March, as our customers focused on responding to the pandemic and our field service engineers weren't allowed to install new products. Given these factors, global breast health sales of 307.8 million decreased 3.7%. Excluding 5.8 million of sales from supersonic imagine, global sales decreased 5.4%. In surgical, Steve already pointed out that the team was crushing it through most of March, especially in the United States. However, like most companies, we saw a significant impact to demand in late March as elective procedures were postponed. Despite this, the business still grew 3.6% for the full quarter based on the excellent momentum we had in January and February. Overall, in terms of geography, domestic sales of $574.9 million were down 1% on an organic basis. and down 6.6% on a reported basis due to the Cynosure divestiture. Outside the United States, reported sales of 181.2 million decreased 8.6%, but revenue increased 8.4% organically, reflecting the strong foundations we have built for sustainable growth. As Steve noted, this growth was primarily driven by our European and Canadian franchises, Not surprisingly, sales in Asia-Pacific were negatively affected by COVID, especially in China. Moving on to our P&L for the second quarter. Gross margin of 61% was actually flat compared to the prior year period, as benefits from the sign of short divestiture were offset by lower sales due to the COVID-19 pandemic, unfavorable product-sales mix, and to a lesser extent, the strong U.S. dollar. Total operating expenses of $222.5 million decreased 18.4% in the second quarter, which was primarily driven by the divestiture of Cynosure. In addition, the decline in equity markets reduced expenses associated with our deferred compensation plan, as the liability is marched to market. Finally, as Steve said, we did begin to reduce discretionary costs in late March as the negative effects of COVID-19 became more clear. As a result, operating margin of 31.5% increased 380 basis points. Overall, our profitability remains very healthy. Net margin of 20% increased 100 basis points compared to the prior year period, with the benefits I just discussed partially offset by a higher effective tax rate. This resulted from an unfavorable divisional and geographic mix of income, primarily as a result of the COVID-19 pandemic. All this led to non-GAAP net income of $150.9 million and non-GAAP earnings per share of $0.57, commensurate with our lower than expected revenue. Finally, ROIC was 12.5% on a trailing 12-month basis, an increase of 20 basis points over the prior year, Adjusted EBITDA was $248.3 million, which decreased 2.3% compared to the prior year. Moving on, I'd like to briefly discuss our overall financial condition as we navigate through these uncertain times. The COVID-19 pandemic is a vivid reminder of how and how fast unforeseen events can change our economic environment. But even in this context, Hologic's financial position is strong, because we have put a heavy emphasis on debt reduction and cash flow generation over the last several years. Maintaining a conservative liquidity posture is even more important during these challenging times as we focus on taking care of our employees, ensuring our products remain available to our customers and patients, and investing in critical COVID-19 diagnostics testing. At the end of the second quarter, our leverage ratio stood at 2.6 times, and we had approximately $800 million of cash and equivalents. The actions we have taken to reduce expenses, which Steve discussed, have put us in a strong position to weather a wide range of potential outcomes that may emerge over the coming months related to COVID-19. Before we open the call for questions, I would like to discuss our expectations for the second half of fiscal 2020. As a reminder, we withdrew our formal financial guidance when we preannounced quarterly revenue earlier this month. To state the obvious, the market environment is very fluid and unpredictable today. Our future results will be highly dependent on what the virus does and how successful global containment efforts are. But I want to clearly emphasize that we believe we are well prepared for either extreme scenario, a strong recovery or a prolonged downturn. That said, to give you a sense of the magnitude of the effect that COVID-19 has had on our business, we expect organic sales in our fiscal April to be down 45% to 50% from the prior year period, excluding sales of our COVID test on Panther Fusions. which we'll come back to in a second. We are planning for our base business to be down by a similar percentage for the full quarter, again, excluding our own COVID assay sales, since April sales probably benefited a little from our strength through most of March. By planning for a significant downturn and being ready for it, we believe we've prepared appropriately for an uncertain time. By division, we believe that surgical will be the hardest hit by COVID in the short term. In April, for example, global surgical sales are expected to be down about 85% compared to the prior year period. We believe this business will begin to improve soon based on both the clinical need and the desire of our hospital customers to shore up their finances by addressing pent-up demand. In breast and skeletal health, April sales will be down more than 30% compared to the prior year period. Recurring revenues such as service should compensate somewhat for a steeper decline in capital sales, reflecting the diversification strategy that we have been pursuing for several years. We have recently seen access restrictions loosening somewhat, so we are optimistic that conditions will improve gradually going forward. The pace of this recovery, however, is uncertain as it's hard to predict how long a general economic downturn will affect capital investments by customers. While recovery could take a while, it's worth emphasizing that our breast business has become far less capital dependent in recent years as we increase service and other recurring revenue across the full continuum of breast healthcare. In diagnostics, sales of our core women's health tests have fallen significantly as routine screening has been put on hold. April sales as a result are expected to be down about 45%, excluding sales of our Panther Fusion COVID assay. It's worth noting that the strength we've seen internationally in areas like viral load testing should slightly offset the negative impact of COVID on our women's health assays. Our own COVID test, especially the new TMA assay on Panther, could represent a significant positive offset to the pressures we are experiencing in our other parts of our business. We know that in the near term, demand for our COVID assays is very high, as testing is essential to get people back to work and reopen economies. And as we said in our press release, the combination of our large TMA manufacturing capacity with our Panther install base can help labs deliver test results when and where they are needed. We could generate $150 million or more of COVID sales in our third fiscal quarter. In the future, we believe that significant levels of testing will continue to be needed worldwide, but it's impossible to predict the exact quantity and duration at this stage. So from a revenue perspective going forward, we will continue to watch the interplay between recovery in our base businesses and COVID test volumes. We are hopeful that most of our businesses will get back to normal in the first half of our fiscal 2021. But if not, we believe we have significant offsets in terms of our own testing volumes. But if our base franchises gradually improve over the next several quarters and COVID revenues remain high, there's at least the potential that our results could be exceptionally strong. We are making plans to significantly increase our manufacturing capacity to prepare for this possibility. Before we open the call for questions, let me conclude by saying that even in these uncertain times, the fundamentals of our business are strong, as is our financial condition. Although COVID-19 will continue to negatively affect most of our business, Our efforts to develop and manufacture molecular diagnostics tests to fight the pandemic could represent a significant offset that will help us emerge a stronger company in the long run. With that, I will ask the operator to open the call for questions. Please limit your questions to one plus a related follow-up, then return to the queue. Operator, we are ready for the first question.

Yes, if you'd like to ask a question, please signal by pressing star 1 on your telephone keypad. If you're using a speakerphone, please make sure your mute function is turned off to allow your signal to reach your equipment. A voice prompt on the phone line will indicate when your line is open, and please state your name before posing your question. Again, press star 1 to ask a question. And as a reminder, please limit yourself to one question and then one follow-up question. We'll pause for just a moment to allow everyone an opportunity to signal for questions. All right, we'll now take our first question from Tycho Peterson. JP Morgan, please go ahead.

Hey, thanks. Steve, congrats on getting the new COVID test out. You highlighted the large installed base. I'm just curious about how you think about COVID driving incremental panther placements, particularly on the hospital side, given the push toward more on-site testing. And then for the follow-up, you know, I assume serology is not a focus given the divestiture of the blood screen business, but I'm curious if that's something you would consider.

Yeah, thanks, Tycho. And by the way, Tony and the rest of the guys at the warehouse are busting their butts right now. So, and part of it is on Panthers. We have, as you can imagine, getting a significant increase in interest in Panthers around the world. And, you know, I think everybody's realizing just what an incredible platform it is. So, you know, as a reminder, folks, we've been placing about two to 250 Panthers a year, you know, generally in that call it 20-ish a month. We are also scaling capacity right now for Panthers. They're much longer lead times, but we're having significant additional requests, particularly as well, frankly, from departments of health, some of the additional labs from hospitals, but it's across the board and including even the largest reference labs. So it's almost across the board, people wanting to get even more access to capacity. On the serology piece to your second part, yeah, don't expect us to really do anything there. We're not sure we bring anything to the party in that game. We're just putting all of our resources in the molecular world that we know so well. Thanks, Tiger.

Okay.

All right. We'll now take our next question from Patrick Donnelly at Citi. Please go ahead.

Great, thanks. Steve, maybe to follow up there, talking about the significant increase in interest in Panthers, I guess there's a bit of a debate out there. Does this pandemic fundamentally change kind of the diagnostics market? On the other side of this, you might see a broad increase in testing. I guess what's your guys' view on the diagnostics side? Do you feel like you're getting out in front of customers you didn't have the opportunity to before and you could get integrated with some new systems and all of a sudden on the other side of this, Hologic was great during COVID. Now, why don't we use them for a bunch of other testing? What's your view for the diagnostics businesses as we get to the other side of this one?

I'll try to answer this one real simply because it's an incredibly insightful question, Patrick. We've never had more calls from people wanting our products. And I mean this on a very global basis, right, to various regions within European countries, particularly, frankly, all across Europe, but also wildly in the U.S., You know, we've literally been in touch with virtually every governor's office. You know, it seems like half of Congress, obviously, you know, with the White House Task Force on a daily basis, the Department of Defense. It's been mind-blowing in terms of the interest, really, just since we launched the PCR assay. And Kevin Thorne, all our commercial teams and our European teams, even the Asia-Pac teams, you know, right down to the prime minister in New Zealand. I mean, we've got everybody reaching out to us, and it is elevating our profile to a very different level than anything we've ever experienced. And there is zero doubt in my mind that's absolutely creating a tremendous runway for us coming out of this.

Okay. And then maybe just a quick follow-up on the breast health side. I know you talked about, obviously, the volumes are very hard to predict there, and the recurring revenue is a bigger piece of the business for you guys now. I guess, how quickly do you think this could come back again on the other side of COVID? I mean, do you expect women to be a bit reluctant to come back into the doctor's office, or do you think things could ramp pretty quickly?

Yeah, you know, it's still an evolving piece, Patrick. I think, you know, frankly, our orders were positive in the quarter. We had a tremendous breast health orders quarter. I do worry, and having lived through the 08-09 downturn, where I know a lot of the hospitals and the radiology suites, they want new capital. I'm sure in a month or two, as things start to settle back down, you know hospital CFOs are going to go back through their capex with a fine-tooth comb and do some of those get pushed out. I think if we're a betting person, I think breast health will probably be a little slower to come back. because of that. Now, the positive for us is, remember, we don't really get paid on a, even as the patients take a little time to get back in, you know, we've got the capital sales and then the recurring revenue in a lot of cases, really from service and those kinds of things. So it probably won't go down quite as deeply, but it'll probably be a longer road back.

Yeah, I would just add to kind of remind folks that the U.S. gantries, the U.S. capitals, only about 21% of the total divisional revenue at this point in time.

Great. Thanks. Very helpful. Thanks, Patrick.

All right. Well, now I'll take our next question from Brian Weinstein at William Blair. Please go ahead.

Hey, guys. Is that a door I just heard slam?

I'm sorry.

Go ahead, Brian.

It is. It is a door. Congrats on the progress that you guys made with this new assay. Should we be thinking about an ASP similar to what you saw in Fusion on a worldwide basis here? And then I think Harleen was kind of talking about this a little bit, the ability to manufacture. Should we be thinking about this level of manufacturing even when core Aptima kind of comes back, or will there need to be some sort of a tradeoff there?

Great question, Brian. And, you know, I think as we – look forward. Certainly, you know, some of this will be volume dependent, but we've been building our capacity to be able to serve, you know, even as the core business comes back to also be able to meet these demands. So it's, you know, we're looking at our total capacity to be able to deliver on this.

Yeah, and I would just say, you know, we have, as Steve made, made meaningful investments in capital to do that so that we don't have to make those trade-offs.

And then on that ASP, around 25, is that how we should be thinking about it?

Yeah, I'd probably go just a little below that, probably when you think about a global weighted ASP.

Okay. And then a follow-up question here. I know you mentioned not being involved in serology, and that makes sense, but is there an opportunity here for you to participate in viral load? We're seeing much more literature about viral load being used to determine kind of where somebody is in the course of the COVID-19 infection or maybe even using viral load to try and determine how severe that infection might be. Is the team working on anything there? Is that an opportunity for you guys, given your presence there?

It's not a focus at this point. We've been so locked and loaded on trying to realize this major testing opportunity, which we think is going to be, you know, the single biggest thing need to really get people back to work and everything else. But like everything else, as we get this out the door, you know, and as the science continues to evolve, our team will be looking at the areas that do make some sense for us. And that one clearly will be closer in, but nothing under progress at this point, or nothing under development at this point, to be honest.

Okay, great. Thanks for taking the questions, and congrats again.

Oh, thank you, Brian.

All right, we'll now take our next question from Doug Schenkel at Cohen. Please go ahead.

Good afternoon, Steve, and I'll echo what others have said. Thanks to you and the team for moving so quickly with more solutions in the midst of the pandemic. The first thing I want to touch on is, and this has kind of been alluded to in some of the other questions, there are clinical labs that we've talked to and we've read about that have talked about molecular systems being hard to get, you know, and oftentimes being on back order. We know you've been placing around 200 panthers per year, you know, and that's separate from the pandemic. I guess the question is, what is capacity for panthers, and for that matter, fusions to add on to existing panthers? And then I guess that's really the first part. I guess another question is, is it possible, I just don't remember, is it possible to run Panther infusion assays simultaneously? So why don't I pause there on those questions.

Sure. And the second part, yes, you can run Panther infusion simultaneously. In terms of supply, I think part of the reason, frankly, that Dr. Birx and the government are, you know, so excited that we're a little bit of the cavalry coming to the rescue here is we already have the systems everywhere. We're the only, you know, we're the only folks that have high throughput systems in all 50 States. So while, you know, there were a lot of tests that were approved and suddenly people are scrambling for equipment. I think we feel pretty good that, you know, we've already got this massive installed base that's been building over the last six, seven years, as opposed to this mass scramble. Now, you know, Can we supplement it? Are we getting additional requests? Yes. But fundamentally, we can ship 3 million tests next week, and the capacity is already there to be able to produce, you know, to be able to run those.

Yep. Yeah, no, that's a great point. Okay, thank you for that. And then, I know there's been some other questions about adjacencies that you might be able to move into to do more than you're already doing, which, again, is great. But I guess one thing I'm wondering is, you know, as we think about reopening in the U.S. and broadly, there's a lot of talk about the need to not just run a lot more tests but potentially to move closer to point of care, especially when it comes to things like testing you know, using molecular test as part of getting folks back to work for some employers. Is there any opportunity for you guys to do something there? I mean, I know it would be Herculean to move quickly on, like, a smaller Aftima-based system for use in smaller labs, but I'm just wondering, is there anything that was maybe already going there that could be expedited to allow you to play a bigger role in that need?

Yeah, Doug, I think, again, the best thing we have going for us is already the installed base that we have out there. You know, it's hard to underscore to people over a thousand of these systems in the United States. So let's just take an example, Northwell Hospital, or, you know, the more than 400 of these that are already in hospitals. One of the key areas to keeping our health care workers safe is making sure that they're all tested on a regular basis. So, you know, picture this. Most of the hospitals that already have these, employees at the end of the day could all be tested. The test can be run overnight, and in the morning they know if somebody shouldn't show up for work. The same can be true in so many decentralized areas, even companies around, not necessarily via us, but there's going to be labs all over the place, very close, that will be able to run these things. So it's as You know, it's back to, you know, it's not point, you know, let's be very clear, we are not point of care, but we are able to run a whole bunch of tests in a very local geography. So, you know, to a large degree, again, if somebody wants to do a drive-up, you know, a drive-through, you know, pop-up thing, there's generally a Panther not too far away that they should be able to access through either a hospital lab, one of the reference labs, or even a the departments of health within their states. So again, do we wish we had even more? Yeah, but it's already an incredible installed base that, again, nobody else has had. When you look at the marketplace, you've got point-of-care on one end, and you've got the massive systems in a centralized reference lab at the other end. What you have not had is the ability to have high-throughput testing close to the patient to be able to deliver those results where and when they're needed, not a week later.

Understood. Okay, thanks again.

Thank you, Doug.

All right, we'll now take our next question from Ivy Ma at Bank of America. Please go ahead.

Hi, congrats on the new test, and thank you for taking the questions. So first question is we've seen estimates from anywhere, you know, just on the broadcasting market, the need for like anywhere 500K molecular tests a day and up to millions a day just throwing around in the news these days. So just wanted to get your thoughts on what sort of capacity expectations or need expectations you are eventually planning for since there are plans to make investments to increase that by the fall. So first part of this question is just on what you think the ultimate testing need will be and how long the duration of that is. And this goes into a question about where you think your ultimate market share would be. Thank you.

Sure, Ravi, I'll start backwards. In terms of market share, we're not really focused on that the way we typically are because I think we're all rooting. It's a unique time in the world where I think we're less about competing against each other and more all trying to race to create enough capacity to help not just this country but help the world get back to work, which kind of gets back to the first part of your question. You know, there are so many unknowns. You know, come the fall, are we running 500,000 tests a day? Are we running 200,000 tests a day? Are we running 3 million tests a day in the U.S.? You know, it's just so hard to know at this point in time. We are planning to continue to invest in capacity. Candidly, one of the biggest rate-limiting steps for us is our very unique cap system. which is what makes our system so highly automated. We're building more CAP machines. These things typically take 18 months to build. We've got people working around the clock to try to build them and call it a six-month time frame. So, you know, we want to be prepared to bring on even more capacity later in the fall ahead of the next flu season in the Northern Hemisphere because we do believe, you know, the way we look at it is Next year, when there's any outbreak of flu or anything, as soon as somebody coughs, we're going to want to be testing them just for regular flu as well as for COVID. So we want to have even more capacity online by the fall, but don't really want to get into giving specific numbers.

Great. I appreciate sharing the color. I know there's a lot of unknowns around this. So just to follow up on serology, There's clearly a lot of serology testing capacity in the U.S., maybe more than that is in molecular. So I'm just curious how you see the market demand evolving going forward in terms of the split between molecular and serology testing, especially when we're thinking more about getting people back to work. Thank you.

At the end of the day, we view there's going to be a massive need for diagnostic testing, because at the end of the, you know, even in a serology world, first off, there's so many unknowns with serology, as you well know, you know, just because you may have some antibodies and it may appear, you know, are you really immune to a, there's just a lot of uncertainties to it, and it's still gonna be, you know, only a percentage of the population. At the end of the day, what is going to be critically important to getting people confident to go back into the workplace to get back to where we can have everybody back in school, have people traveling on airplanes again, has got to be a robust testing real-time capability. And that plays to our strength. That's where our focus is. And again, how big the serology market becomes on that end, we don't know. But we frankly think there's enough for us to play in in the area that we know a lot about. So thank you.

All right, thank you.

All right, we'll now be taking our next question from Raj Dhanoi. Jefferies, please go ahead.

Hi, this is Anthony for Raj, and I'll second and third the congratulations here. It's unbelievable work you guys have done. Maybe, Scott, Steve, just a question on something you mentioned in your prepared remarks, just in terms of the availability of viral transport media and swabs. As you scale on Panther, the SARS-CoV-2 test on Panther as opposed to fusion, how much of a limitation is that? Is there an opportunity for Hologix to actually bundle there? And then the second quick follow-up would be just, Any thoughts on the Boston Scientific announcement today on the sale of their intrauterine portfolio to Minerva? You know, what are the implications for NovaShore? Thanks again and congratulations.

Sure. Thanks, Anthony. Say hi to Raj for us, too. You know, as it relates to the swab, you know, the magic that we referenced, obviously, is we've qualified our Aptima swab to be used along with us. So the great part about it is we basically have, to some degree, it's a closed system. We can ship the swab and the vials together. Boom, they test, use our swab, and they're ready to go. So we're providing the customer with effectively a complete package. And I think that's going to dramatically streamline. I think it's hard for people that aren't close to these to fully understand the incredible workflow efficiencies that come from using the Aptima system you know, all the way through. So that should be a huge advantage for us. On the Boston news with Minerva, I think, you know, we continue to feel really good about what our surgical business is doing. As we mentioned, it was up 14.7% through the first two months of the last quarter. Our surgical business has just really had, you know, an incredible turnaround and strength over the last couple years. Clearly, Boston was not – they're an incredibly successful company, and having a challenge in that space with those products, I think our team is quite happy to see whoever's out there and continue to fight. So we think we've got better products and a better sales team. Thanks, Ian. Thank you.

All right, we'll now take our next question from David Lewis at Morgan Stanley. Please go ahead.

Good afternoon. Two testing questions for me, one for Carlene and one for Steve. So, Carlene, I just wanted to net out some math here for the third quarter. If I just assume capacity for a second here, we have roughly, you know, $45 million of fusion sales, maybe $75 million in that bolus Panther order. You get to 1 million tests per week at the end of May, so that's kind of a million tests a week in June. That's another, obviously, kind of 100 million. And then if I just adjust that ASP below 25 and assume kind of a 20%, 30% cannibalization rate on the core platform, does that kind of get me close to 150 million? Anything, you know, materially off in that math?

Yeah, I would say that the million per week is an average. So, you know, this product is built in lots, so we may not actually ship a million each week. But, yeah, that probably gets you pretty close.

Okay. Okay. And then, Steve, you know, I think getting Panther out there can't be underestimated from sort of public health perspective. I want to maybe just sort of share your thoughts. There's been significant barriers to testing, reagents, nasal swabs, and then general protocols and infrastructure, I would sort of call it. And yet, you know, five days ago we had 300,000 tests a day, and then yesterday we had 200,000 tests. So reagents are coming on, but the test numbers are... haven't gone in the right direction. As you think about the infrastructure and these barriers that have been addressed, I just wanted to share your thoughts with us about do you think all the barriers have been addressed out there and what are some of the outstanding barriers that are sort of creating this disconnect between capacity and then usable test? Thanks so much and great work on this.

Sure, David. Thank you. And I think the way to think about the barriers that you're getting to is I think one of the biggest barriers, let's face it, just in normal day-to-day activities has been people who feel like they should be tested actually getting tests. And so I think they've, you know, all of the states, all the hospitals, all the doctors have been fairly restrictive in allowing people to get tested. You know, you've had to fight through hoops and everything just to get a test because the supply was so constrained. So I think one of the magical things that may start to happen right now is as people start to get more comfortable that the supply is really starting to ramp up, I think we will start to see a little bit more of the loosening of the gauntlet that a patient has to run through to get tested. And I think as we start to open that up, to me the magic of that will be we'll start to get truly more tests out there You know, the ability of the people on the front line just to administer the swabs. But I think, again, in our case, we're going to have the swabs. You don't need, you know, separate transport media. When it gets to the lab, you don't need somebody to extract it from the transport media, put it into, you know, another vial. So there's an incredible, and I think you understand as well, you know, there's an incredible efficiency on that side. So I think it's like everything, even in another week, things will start to go out. You know what? We know that, you know, Dr. Burks and her team, you know, are in touch with all the public health labs, letting people know we're coming. There's incredible excitement there. I think those things will, I think, help to finally unlock. You know, it's not going to be the unlock. It's, you know, but I think the progress there will really start to see coming in a big way. Great. Very clear. Thank you, Steve.

Operator, I think we have time for maybe two more questions if we can be quick.

Yes. We'll now be taking our next question from Dan Leonard at Wells Fargo. Please go ahead.

Thank you. So I'll just ask one. Steve, you've talked a lot about the Aftima test for COVID. As we think about 12 months down the road, your fusion is about 10% of your Panther total installed base. Does that ratio meaningfully change post this pandemic? Do you see yourself having a much higher proportion of fusions, or is all the excitement around just the traditional Panther, not to minimize it, but just some curious thoughts on that equation?

Sure, Dan. I think it will, you know, it'll ramp up over time. If anything, it'll probably take a short-term pause because we're going to be running the machines probably, you know, at a fairly hefty pace. Nobody's going to even want to shut one down to accommodate adding a fusion onto the side. And now with the TMA assay out there, they frankly can manage without it for a while. So I think we'll continue to build it over time. Mike, did you want to add something?

Yeah, Dan, the only thing I would say is once we get into the fall and the winter with the flu season and you get kind of intermingled virus, in order to be able to test for both, you do need a fusion. So we think that'll be helpful in the medium term as well. Yep.

Great. Okay. Thanks, Dan.

We have time for one more question, operator.

All right. We'll now be taking our last question from Ben Redman at UBS. Please go ahead.

Great, thank you. I guess I'll ask a question on breast health then. So the numbers that you gave for April and for the quarter, maybe could you parse out a little bit between Steve in terms of, you know, the U.S. gantry being 20%, but how do we think about the math on that in terms of, you know, what gantries are doing, kind of service, and then interventional? And then, you know, as we look out, is there any predicate for 08-09 that you suggested about, you know, how we might look further out beyond the next quarter or two, and how hospital CFOs might react? Thank you.

Sure, thanks, Dan. You know, we're kind of describing this internally as everybody talks about Vs, Ws, Ls, Us, whatever, in terms of the recovery. We're describing it as kind of a checkmark, you know, a sharp down, and then, you know, certainly coming back, I think, nicely. It'll be, you know, probably a little jagged there on the way back up. But I think what we see, and we feel really good about the breast health business overall, that it has become so much more diversified. But the capital will probably be lagging a little bit as it comes back. And then the flip side is, in the grand scheme, our capital purchases are also not a huge amount for any given hospital system. So we're not totally sure, but we feel really good that we're gonna be able to work with our customers to have it coming back online. But, you know, I would, you know, I think we'll be back by, you know, a year from now, but, you know, I wouldn't expect to be back, you know, in the next couple of quarters. Carlene?

Yeah, and I would just add the biggest component of revenue for that business is the service business. So there's some stability within, you know, foundationally for that division with that recurring revenue.

Thank you. Great. Thank you, everybody.

Thank you. And that is all the time we have for questions today. This now concludes Hologic's second quarter fiscal 2020 earnings conference call. Have a good evening.