This conference call transcript was computer generated and almost certianly contains errors. This transcript is provided for information purposes only.EarningsCall, LLC makes no representation about the accuracy of the aforementioned transcript, and you are cautioned not to place undue reliance on the information provided by the transcript.
Operator
All lines have been placed on mute. I would now like to introduce Ryan Simon, Vice President, Investor Relations, to begin the call.
Ryan Simon
Thank you, Rachel. Good afternoon, and thank you for joining Hologic's second quarter fiscal 2023 earnings call. With me today are Steve McMillan, the company's chairman, president, and chief executive officer, and Carlene Overton, our chief financial officer. Our second quarter press release is available now on the investor section of our website. We will also post our prepared remarks to our website shortly after we deliver them, as well as an updated corporate presentation. And a replay of this call will be available for the next 30 days. Before we begin, we would like to inform you that certain statements we make today 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 the Safe Harbor Statement included in our earnings release and SEC filings. Also during this call, we will discuss certain non-GAAP financial measures. A reconciliation to GAAP can be found in our earnings release. Two of these non-GAAP measures are, one, organic revenue, which we define as revenue excluding the divested blood screening business and revenue from acquired businesses owned by Hologic for less than one year. And two, organic revenue excluding COVID-19, which excludes COVID-19 assay revenue, revenue related to COVID-19, and sales from discontinued products and diagnostics. Finally, any percentage changes we discuss will be on a year-over-year basis and revenue growth rates will be in constant currency unless otherwise noted. Now, I'd like to turn the call over to Steve McMillan, Hologic CEO. Thank you, Ryan, and good afternoon, everyone.
Rachel
Thank you for joining us today to discuss our financial results for the second quarter of fiscal 2023. Our exceptional results confirm that Hologic is now a much bigger, stronger company with more diverse and durable growth than pre-pandemic. On top of this transformation, with our strong cash flow and exceptional balance sheet, we are operating from a position of strength and are poised to carry our positive momentum forward. We've also said throughout the pandemic that we've dramatically strengthened the company. We recognize that this transformation was harder to see and fully appreciate and supply chain anomalies. As these clouds continue to clear, the result of our robust transformation really shines. For the quarter, total revenue was $1.03 billion, and non-GAAP earnings per share was $1.06. Both results were above the high end of our guidance. Before providing the highlights for the quarter, which admittedly did have two more selling days, and we were going against softer comps from last year due to the Omicron surge, make no mistake about it, we are very proud of these results. First and most notable, our organic revenue, excluding COVID, grew 21.9%, with two out of three divisions growing north of 25%. By division, excluding COVID, diagnostics grew 14.9%, again, powered by molecular diagnostics, which grew nearly 24%. Surgical also continued to deliver, growing 25.2%. And breast health returned to growth, posting a very strong performance of 25.7% growth. Our outstanding results are a testament to the commitment of our many colleagues around the world to our purpose, passion, and promise to elevate women's health. Without the discipline and incredible execution of our teams, who have shown up every day throughout the pandemic, this strong performance would not be possible. Turning to our themes for today. First, we'll provide insight into the growth drivers in each division to showcase and to reinforce the diversity and durability of our transformed business. Second, we'll review our strong performance against our 2023 guidance and longer-term growth targets, helping to frame the outlook for the remainder of the fiscal year and longer term. And to close, we'll reflect on where we stand with COVID today, our progress through the pandemic, and our excitement as we look ahead. With that brief introduction, let's now focus on our second quarter performance and specifically the growth drivers powering our strong results. At the highest level, we continue to demonstrate and appreciate that many of you have come to realize our business is dramatically different compared to where we were pre-pandemic. We are more balanced, more diverse, and more durable. Through the pandemic, we strategically added growth drivers across the company that are contributing to our top-line growth today and will do so for years ahead. These innovative products and services are also accretive to our overall strength within the markets we participate in, deepening our strong relationships with the customers we serve. While the macro environment continues to present a multitude of challenges, you can count on us to deliver. In diagnostics, molecular diagnostics continues to lead the way. Our expanded global installed base of Panthers, over 3,250 strong, represents the catalyst for the division's sustained growth. The superior workflow of the Panther, combined with our broad menu of nearly 20 FDA-approved assays across the Panther and Panther Fusion systems, creates tremendous value for our customers and differentiates us from our competition. As we exit the pandemic, we are placing more menus with more throughput on more Panthers and adding more Panther fusion systems, positioning labs to unlock our full breadth of menu over time. Ologic and our Panther systems are well positioned to continue our strong performance. Consistent with prior quarters, the pillars of molecular diagnostics growth were diverse in the period. Growth was driven by our BVCV-TV vaginitis panel and aided by our core STI menu, including chlamydia gonorrhea, HPV, and TRIC. We also once again had strong contributions from biotheranostics and our respiratory menu on the Panther Fusion, where we expect the latter of the two to be more seasonal in nature. In breast health, After four quarters of decline, primarily due to semiconductor chip supply headwinds, the division emphatically returned to growth, posting 25.7% growth for the quarter. Comp considerations aside, the strong growth in breast health resulted from a combination of four positive factors. First, semiconductor chip availability continues to improve. allowing for the delivery of more gantries in the quarter than planned. This included moving a number of gantries originally allocated for the back half of the year into the second quarter. As a result, for the balance of the year, we anticipate Q3 and Q4 gantry delivery levels to each register modestly below Q2, though still well ahead of last year, as our visibility on chip availability continues to strengthen. Second, exceptional demand for our clinically differentiated mammography instruments remains high. And despite the duration of the CHIP headwind, our backlog remains strong, and we are seeing no increase in order cancellations. Third, in Q2, we again delivered strong service revenue, service being the largest source of revenue for the division. As we consistently demonstrate our value proposition, and strengthen our relationships with customers. And fourth, the interventional side of the breast health business returned to form, growing 13.9% for the quarter, driven by our disposable portfolio, such as Brevera's biopsy needles and Somatex's two-mark markers. This strong interventional result also serves as an indication of our success navigating some of the non-chip-related supply chain headwinds we faced in prior quarters. To close out Breast Health, we'd like to take this opportunity to thank our chip supply partners who have aligned with our purpose and have prioritized women's health. As a result, we had the ability and confidence to deliver more gantries than projected this quarter, and our customers are better positioned to screen more women sooner rather than later. We are thankful for these strengthened partnerships, which have also undeniably influenced our innovation and design efforts, making Hologic even stronger for the future. While much attention has been given to diagnostics and breast health, our surgical business has also remarkably transformed during the last few years and is emerging as a meaningful driver of growth for us globally. A completely different business than three to four years ago. It's much bigger, stronger, and faster growing. In Q2, surgical grew more than 25% and was driven by strong contributions from our hysteroscopic portfolio of MyoSure, the fluent fluid management system, and NovoSure, On the latter, we are encouraged by yet another strong quarter for our latest NovaSure iteration, the NovaSure V5. In addition, our laparoscopic portfolio continues to build momentum and is growing into a larger driver for the division. Now we'll move on from the division growth drivers to reflect on our performance against our guidance for the year. At the beginning of the fiscal year, we said that each division would deliver low double-digit organic growth for 2023, excluding COVID. As the Q2 close marks the halfway point of the fiscal year, we are pleased to share our progress towards achieving our 2023 goal. Through the first half of our fiscal year, the total company has delivered organic growth of nearly 14% excluding COVID. And by division, diagnostics, surgical, and breast health have grown 15.4%, 19.6%, and 9.1% respectively. This puts us in great shape to achieve or exceed our initial low double-digit 2023 targets. Looking ahead, for diagnostics and surgical, we will have much tougher comps going forward. By the close of Q3 last year, both divisions were posting solid numbers, resulting in the healthier, stronger comps we'll now be facing. And for breast health going forward, due to the phasing of the chip headwind, the opposite is true. Our breast health comps in the back half of fiscal 23 will be softer than in Q2. Now, focusing on our longer-term growth projections. With recent very strong results, we understand that some may question whether our 5% to 7%, excluding COVID, organic revenue growth rate through 2025 is still appropriate. In short, We believe that it is because we see fiscal 23 as a unique year. Taking a step back, we view our long-term revenue goal as more impressive today due to our expectation for double-digit growth in 2023, on top of our already strong performance since we announced the target. Shifting gears to our final topic today, COVID. In Q2, we generated $71 million in COVID assay revenue, exceeding our prior guidance of $50 million. We are excited for the opportunity to turn the corner and further concentrate our energy and resources to continue to drive our dynamic business forward. Since the start of the pandemic in early 2020, we maximized the opportunities presented. We rose to the occasion, delivering high quality, highly accurate molecular tests to meet the world's testing needs. For this, we are extremely proud. And should COVID waves return, leaning on the massive expansion of our manufacturing capacity and operational flexibility, we are even more capable of weathering future storms. We are also extremely proud of the larger and stronger business Hologic is today. We've accelerated years of Panther placements across the globe. And as a byproduct, we expanded our largely domestic business into a much more formidable global enterprise. Today, Hologic is a more recognized and respected worldwide brand, which has immensely more influence to advance women's health around the world. With the benefits from our response to the pandemic, We diligently and thoughtfully invested in our business, adding growth-driving products through organic R&D innovation and completing strategic acquisitions. And equally important, through it all, even during the strongest quarters of COVID revenue, we maintained expense discipline. We managed our business with precision and never got ahead of ourselves with headcount. And when the world needed it most, we made opportunistic and carefully timed marketing investments with our Super Bowl ad and WTA sponsorship, each encouraging women to prioritize their health and to return to well-woman exams that were put off during the pandemic. Maintaining our operational discipline and opportunistic investment approach affords us the ability to continue to support R&D, marketing, and sales initiatives today, all while keeping expenses relatively flat versus a year ago after adjusting for the Super Bowl and WTA initiatives. All in, our Q2 results demonstrate that we are realizing the benefits of our transformed, bigger, stronger business that is fueled by our purpose-driven culture. We've built our culture from the ground up over many years, and it has powered our success through the challenges of the pandemic, where we maximized our opportunity. As a result, Pologic has transformed into the strong force we are today, and at the same time, transformed our future. We have strengthened our durable growth path, and our future is bright. With that, let me turn the call over to Carlene.
Panther
Thank you, Steve, and good afternoon, everyone. In my statements today, I'm going to recap our divisional revenue results, provide a walkthrough of our income statement, touch on a few other key financial metrics, and finish with our guidance for the full year and third quarter of fiscal 2023. As Steve said, our second quarter financial results were very strong. and well ahead of our expectations for both revenue and profitability. Total revenue came in at $1.03 billion, beating the midpoint of our guidance by over $70 million. And our non-GAAP earnings per share were $1.06, 25% higher than the midpoint of our guide. We also continue to repurchase our shares. In Q2, we repurchased approximately 600,000 shares for $50 million. And year to date, we have repurchased 2.2 million shares for $150 million. Before moving to our divisional results, we want to emphasize again that our balance sheet is a bedrock of strength in an uncertain macro landscape. With nearly $2.6 billion of cash, and a leverage ratio well below our target range, we have tremendous amount of firepower should opportunities for capital deployment arise. However, while we are very active, our philosophy remains to be patient, which we will discuss in more substance shortly. Before we do that, let me recap our divisional revenue results. In diagnostics, global revenue of $464.7 million declined 52.2%. However, it is important to recognize that COVID testing revenue in the prior year period was inflated because of Omicron. Specifically, we generated $584 million of COVID assay revenue in Q2 2022. more than eight times higher than our COVID assay revenue for Q2 2023. Therefore, a more accurate depiction of a long-term health of the diagnostics business is to exclude COVID assay in related ancillary revenues. By making this adjustment, we see that organic diagnostics revenue increased 14.9% in the quarter. the diagnostics division continues to be led by molecular, which grew nearly 24% in the period excluding COVID. As Steve highlighted, powering Q2 performance within molecular diagnostics was our increasingly diverse portfolio of assets as newer assays contributed alongside our legacy women's health portfolio. Rounding out diagnostics, our cytology and perinatal businesses declined 0.7% compared to the prior year. Moving to breast health, our fiscal second quarter results were terrific. Total revenue of $385.4 million increased 25.7%. And while this performance was aided by soft comps due to supply chain headwinds in the prior year, the outcome still exceeded our estimates. Moving next to surgical, second quarter revenue of $144.8 million increased approximately 25% compared to the prior year. And finally, in our skeletal business, revenue of $31.6 million increased slightly more than 53%. It is important to point out that growth rates in our skeletal business can change based on the timing of just a few orders. Therefore, we would caution when modeling not to extrapolate this level of growth going forward. Now let's move on to the rest of the non-GAAP P&L for the second quarter. Gross margin of 62.1% was driven by strong performance in our base business and higher than expected COVID-19 testing revenues. Total operating expenses of $317 million in the second quarter decreased 6.3%. the decrease was driven by less marketing spend, as our Super Bowl ad and the initial portion of the expense from our partnership with the WTA were incurred in the prior year period. When normalizing for these marketing initiatives, total operating expenses would have been relatively flat compared to the prior year, partially offsetting lower marketing spend in the quarter with higher R&D and sales expense. as we continue to invest in internal programs to drive top line growth. Below operating income, other expense represented a gain in our fiscal second quarter. Net, we benefited from higher interest rates in the period, as interest income from our nearly $2.6 billion cash balance more than offset elevated interest expense on our floating rate debt instruments. Finally, our tax rate in Q2 was 19% as expected. Putting these pieces together, operating margin for Q2 came in at 31.3%, and net margin was 25.9%. Non-GAAP net income finished at $265.7 million, and non-GAAP EPS was $1.06. Moving on from the P&L, cash flow from operations was $206.3 million in the second quarter. We had nearly $2.6 billion of cash on our balance sheet, and our leverage ratio remained at 0.2 times. As it relates to our broader capital allocation strategy, our philosophy remains unchanged. We continue to be very active and selective in screening potential targets, while also exercising discipline and patience. We are operating from a position of strength as we explore opportunities. Now let's move on to our updated non-GAAP financial guidance for the third quarter and full year fiscal 2023. In the third quarter of fiscal 2023, we expect strong financial results with total revenue in the range of $930 to $980 million. representing another quarter of double-digit growth when you exclude COVID. For the full year fiscal 2023, we are again increasing our guidance and expect total revenue in the range of $3.925 to $4.025 billion. To help with constant currency modeling, we are assuming minimal foreign exchange headwinds in the third quarter at less than $5 million. And for the full year, we are expecting approximately $40 million in foreign exchange headwinds. These headwinds have improved compared to our previous guidance as the relative strength of the U.S. dollar has abated over the past several months. According to our divisions, each business maintains its own unique growth drivers for the remainder of our fiscal 2023 and beyond. In diagnostics, we expect continued strong performance out of molecular. aided by steady support from cytology. Within molecular, we are excited to go after additional greenfield opportunities with newer assays, such as BVCV-TV and Mgen, while also reinforcing our leadership position in core women's health screening. Closing out non-COVID diagnostics, we expect blood revenue of slightly more than $30 million for the year. In terms of COVID revenue, we expect COVID assay sales to be approximately $25 million in the third quarter of 2023 and $245 million for the full year. COVID-related items, inclusive of a small amount of discontinued product revenue, are expected to be slightly less than $30 million in the third quarter and approximately $120 million for the full year. Moving to breast health, as mentioned, We capitalized on improved CHIP availability and moved a number of gantries allocated for the back half of the year into Q2. As a result, we are assuming total breast health revenue above Q1 2023 levels for each quarter in the back half of this fiscal year, but below Q2. These results are still expected to deliver healthy double-digit revenue growth compared to the prior year in Q3 and Q4. Finally, in surgical, we expect strong, low double-digit growth in fiscal Q3 and for the full year. Starting with our legacy portfolio, we are pleased by the performance of NovaShore and MyoShore. In NovaShore, customers continue to see the benefits of our innovative V5 line extension, and with MyoShore, we continue to grow the myomectomy total addressable market. However, the beauty of our surgical business today is is that the franchise is more than just NovaShore and MyoShore, and our guidance contemplates Fluent, Boulder, and Assessa, adding a creative growth to the division's top line. Moving down the P&L, for the full year, we continue to expect our non-GAAP gross margin percentage to be in the low 60s, and our non-GAAP operating margin percentage to be approximately 30%. Within this operating margin profile, we have again incorporated elevated inflationary pressures into our guidance of approximately 200 to 250 basis points, which we expect to persist throughout fiscal 2023 and likely into fiscal 2024. In terms of operating expenses, we expect spending to move lower sequentially in Q3 and remain relatively flat in Q4. As Steve shared, we are proud of how we have managed expenses over the last several years. Our level of operating expense expected to decline not because of reduction in headcount, but rather due to our efficient management of larger marketing initiatives coinciding with periods of elevated COVID testing revenue. Below operating income, we expect other income net to be an expense of slightly more than $20 million for the full year. Our guidance is based on an annual effective tax rate of approximately 19% and diluted shares outstanding are expected to be approximately 250 million for the full year. All this nets out to expected non-GAAP EPS of 83 cents to 93 cents in the third quarter and $3.75 to $3.95 for the year. To conclude, Our strong second quarter results exceeded our guidance and we are once again raising our full year estimates despite larger macro uncertainties. Our growth in the quarter was broad-based with each business growing double digits organically excluding COVID. Our results reinforce the fact that Hologic is a much stronger company than just a few years ago. We are larger and more durable than prior to the pandemic. and our balance sheet is as strong as it's ever been. As we move to the back half of our fiscal 2023, we are excited to continue to advance women's health while also delivering strong financial results and creating value for all of our stakeholders. With that, we ask the operator to open the call for questions.
Operator
Thank you. If you would like to ask a question, please signal by pressing star 1 on your telephone keypad. If you are using a speakerphone, please make sure your mute function is off to allow your signal to reach our equipment. Please limit your questions to one question and one follow-up. Again, please press star one to ask a question. We'll pause for just a moment to allow everyone an opportunity to signal for questions. Our first question comes from Patrick Donnelly with Citi. Please go ahead.
Patrick Donnelly
Hey, guys.
spk03
Thank you for taking the questions. All right. Carlene, maybe just – hey, Steve, how are you? Carlene, maybe one on the margin profile. You know, you guys have done 31%, I think, both this quarter and last quarter. You know, that guidance still for 30% out margins obviously implies a bit of a step down here in the second half. Can you just talk about, I guess, the moving pieces in the second half and then just thinking forward about what the right exit rate would be? Because, obviously, again, the second half would be a little lower as we work our way towards – Just thinking about the margin profile, I know during COVID you guys always talk about kind of that landing rate margin number. So if we could just revisit that in the second half and then also just that move forward right ballpark to think about the out margin would be helpful.
Panther
Yeah, sure. So I think when you look at the second half compared to the first two quarters, certainly the lower COVID revenue are putting pressure on that operating margin compared to the first half. And I think, you know, prior to the pandemic, Patrick, what is also putting pressure on those operating margins are the higher inflationary costs that we've quantified at 200 to 250 basis points for the full year. So, you know, I think moving forward to think about low 30s is probably the right way to think about it as we move forward, like you said.
Patrick
Okay, understood.
spk03
M&A commentary, Steve, that's something that's come up a lot more this quarter with investors. I know, Carleen, I think you said tremendous amount of firepower there during the call. Can you just talk about the pipeline, the appetite here? I know you guys want to be patient, but what the right sizing is, whether it's a leverage ratio, are you looking only in core areas? Steve, I believe you said in the past you don't want to add another leg to the stool, but We'd love to just talk through the M&A side, given it's become a bit more of a focus here since last quarter.
Rachel
Yeah, I think overall, Patrick, our strategy remains the same, which is being patient, diligent, and active. And I think our focus continues to be leveraging the capabilities and strengths that we have and leveraging the existing sales channels. So, you know, bulking up the businesses that we have makes sense. You know, we are – considering widening the aperture to consider larger deals. But frankly, those would be things with more mature earnings profiles and still be accretive to growth. So each of the divisions has some pretty nice pipelines. We've also, because the core business is doing so well, again, I think it gives us that ability to be patient because we don't have to do anything. And so it's this magical combination of We can afford to be patient.
Patrick Donnelly
We've got a lot going on, but we'll continue to see where it goes.
Operator
We'll take our next question from the line of Tim Daly with Wells Fargo. Please go ahead.
Tim Daly
Great. Thank you so much. Just curious about the growth performance driven by the selling days. You know, I think you guys call that two extra selling days in the quarter. What was the contribution of that towards growth? And then how should we think about that for the year? And then as well, you know, any potential offsets in that once we start thinking about modeling 2024?
Panther
Yeah, the contribution really wasn't that significant, probably less than 200 basis points in the quarter, I think. When we compared to Q1, we had that full calendar week, which drives the service revenue, which really didn't have any minimal impact in this quarter. And as we look at the balance of the year, I think it's a pretty negligible effect of extra days.
Patrick
Next. Follow-up.
Operator
Our next question comes from the line of Casey Woodring with JP Morgan. Please go ahead.
Morgan
Great. Thank you for taking my questions. So you talked about breast health pull forward on ship allocations, which sort of drove the non-COVID beat here. Is there further upside to ship allocations this year? Can we see another surprise bump in the back half? I'd be interested to hear what you're hearing from suppliers on that front.
Rachel
Yeah, Casey, I think it was kind of more of a one-time, you know, bump here as it now gets very steady. I think we feel really good about our visibility, frankly, not just through 23 but into 24, and we continue to manage this for the long haul. You know, we had to run a little extra overtime for some of our service people with the extra installs, and I think we'll be at a really good rate here going forward.
Patrick Donnelly
Great.
Morgan
And then just longer term, you know, have you changed your expectations at all within molecular diagnostics as it relates to the 5% to 7% total diagnostic growth guide? You know, just looking at the non-COVID side has been strong for a number of quarters. So just trying to think through your expectations on that business. Have they changed at all since you gave that initial guidance now back in July of 2021?
Rachel
You know, longer term, not necessarily. We always just want to be careful not to get ahead of ourselves. I think clearly in the short term. And what we aspire to be is certainly better. And clearly what we're putting up right now is great. Now, you know, it's going to be much tougher, clearly, when we start bumping up against, you know, 24% comparable levels. Then growing that, you know, in that five to seven on top of those numbers, cumulative is going to be a lot better off than, frankly, when we gave the guidance. So, in fact, you know, in some ways it actually is much higher. But, you know, we don't want to get too far ahead of ourselves on that. on that number.
Panther
Yeah, Keith, I would just add that we've always said that we'd expect molecular to be at that high end of that five to seven, if not slightly over, but overall DX would be within the five to seven.
Keith
Brilliant.
Patrick Donnelly
Great.
Operator
Once again, if you would like to ask a question, please press star one, and please limit yourself to one question and one follow-up. Our next question comes from the line of Anthony Patron with the Mizuho Group. Please go ahead.
Anthony Patron
Thanks, and congrats on another strong quarter here. The first one will be on surgical, the 25% organic, just trying to get an understanding of how much of that is underlying procedures within women's health just coming back versus, let's say, synergies with Boulder Surgical. And then I'll have one quick follow-up on molecular.
Rachel
Sure, Anthony. I think it's probably more the market coming back. And combined with surgical was weaker in this quarter a year ago because of the Omicron surge. And I think the, you know, I go back to a year ago where people were kind of picking it, gee, surgical might not be as strong or whatever else. And it was back to that was a market dynamic. And I think now there's probably some catch up going on procedure wise, as you're hearing really across the med tech space. And having said that, I think we feel really good about how we're performing among that, both with our existing businesses and, frankly, having the broader portfolio that you referenced.
Panther
Yeah, I would just add to that, Anthony.
Rachel
Oh, go ahead.
Panther
Yeah, we're getting some really nice traction internationally with our surgical business. A smaller base, but like I said, some really nice traction that's helping that growth rate for sure.
Anthony Patron
And then on molecular, just excluding COVID, you know, another strong quarter. And just wondering if you could provide an update on, you know, where utilization on the Panther systems that were placed during the pandemic, those new systems where you had some demand pull, just where utilization on those systems is today and where do you think it can go over the next 12 to 18 months? Thanks again.
Panther
Yeah, Anthony, we haven't really, we haven't disclosed that utilization number, but what we have said is that of the new Panthers placed since April 2020, over 85% customers globally are driving at least one other assay beyond COVID. I think over 55% have at least two other assays that are driving that utilization. So feel good about the stickiness of those Panthers, the new Panthers that have been placed.
Operator
Our next question comes from the line of Liza Garcia with UBS. Please go ahead.
Liza Garcia
Hey, guys. Thanks so much for taking the questions, and congrats on another strong quarter. So I guess let's start off with maybe biotheranostics. I know you guys, maybe we could dive in there and thinking about that one. So I know you said a strong contribution there, but I know you recently opened up the lab and you've been working on initiatives to help, you know, improving the customer ordering flow. But how do we think about the runway for the business there and where that can go? I'm kind of thinking about that in the diagnostics platform.
Rachel
Yeah, I think we are as excited, if not more excited, about the growth potential. Probably more excited even, I would say, Liza, today than when we acquired the business. The team that we have there is great. As you mentioned, we've now brought The lab over from nearby, we've consolidated it into our San Diego facility. And I think we're realizing that the penetration of this opportunity relative to the full market is still in the very low single digits. So there's potentially a lot of runway. We've been putting in more automation, frankly, just to make the ordering systems easier and other stuff. And I think we're really excited. It's clearly growing rapidly. very accretive to the growth rate of the division. And we think we'll be for, that's one of those for years to come.
Liza Garcia
Great. Super helpful. And then just circling back to kind of Guy and Serge, I know that there was some weakness last quarter, but even kind of when you do the two-year stack, I'm still getting to some low double digits kind of growth there and I think, you know, you've called out just kind of the performance of NovaShore and V5. If you could just dig in a little bit on kind of, you know, it seems like it's been surprising you to the upside there. And obviously, I know that, you know, you've got Fluid and Assessa as well. Just kind of, you know, where kind of that portfolio can go and how you think about that and the growth levels there. Yeah.
Rachel
Yeah, Les, I think this is one, you know, we've been incredibly excited under the leadership of Essex Mitchell, who's been running that business now for the last few years. He's dramatically strengthened both the U.S. business as well as we've made, you know, a couple of those great acquisitions of Assessa and Boulder. And, you know, so we are seeing some really nice growth. I still think this quarter, you know, may have been a little bit of procedural catch up in the overall market. So we never want, as you know, we never want to get too far ahead of ourselves. But we love the team that we have there now. And as Carlene said, and you can see in the press release, the growth rate internationally now for surgical is really, really doing well. You know, we're north of 30, and I think in this quarter, close to 40-ish percent. And that's starting to become meaningful. So I think our, you know, as we sit here today and think about another growth driver for this company, you know, surgical is definitely in there.
Operator
Our next question comes from the line of Andrew Cooper with Raymond James. Your line is open.
Andrew Cooper
Hey, everybody. Thanks for the questions here. Maybe just one more on breast and thinking about the commentary for the back half of the year. How much of that pull forward do we think about working the backlog down? And that's why maybe a little bit lower quarter over quarter into 3Q versus you know, still being a little bit limited by chip supply, just where are you in terms of kind of the allocations versus what you'd ideally like to have? And just help us think about sort of the cadence as we work through the back half of the year in terms of why a little bit lower versus being able to maintain maybe the great level that you saw in this quarter.
Panther
Yeah, what hasn't changed is our outlook for production for the full year. So we really have a lot of confidence in the total number of gantries we can produce based on the chip availability. And with that increased confidence, we're allowed to accelerate into Q2 from the back half. So the total production outlook hasn't changed. And I think as we've always, as Steve mentioned, to accelerate even here in the quarter is an uptake on our service, our field service engineers to do those installs. So like we've said all along, we don't think we'll have any outsized quarters as we move through this recovery. And certainly cancellations are at a minimal level in that backlog. It's still really strong.
Andrew Cooper
Okay, super helpful. And then maybe just one more. You mentioned the respiratory seasonality in the prepared remarks. So maybe just help us think about the sizing of kind of where that business is on a non-COVID basis today. and how you think about what that seasonality really looks like through the course of the year as it continues to kind of stick with us post-COVID.
Panther
Yeah, I mean, it's really strong performance. If we think about growth year over year, that non-COVID respiratory more than doubled versus prior year in the quarter. But what we are planning conservatively is a significant step down in Q3 and Q4, given the seasonal nature of of the respiratory infections, but this continues as the flu seasons.
Keith
In the flu seasons, we're seeing really nice uptake and growth in that business.
Operator
Our next question comes from Puneet Sudha with SVB Securities. Please go ahead.
spk20
All right, great. Steve, thanks for taking the questions, and congrats on another solid quarter here. Thanks. So, first one, you know, at a high level, you know, given the macro uncertainty, which businesses, I mean, if things, obviously, recessionary talk is here and ongoing and expectations are sort of lower for the second half across overall in the economy. So where do you think the businesses can hold up better versus others, where the team is continuing to watch sort of more closely for the demand term versus where you think the demand will continue to outpace the macro uncertainties?
Rachel
Yeah, truthfully, I think we feel good about all three of the businesses as we go into the back half of the year. I mean, obviously, the biggest thing is it's one reason we wouldn't get ahead of ourselves and start to raise guidance and raise long-term expectations when we're going into that exact uncertainty that you're referencing.
Patrick Donnelly
But the fundamentals of each of the businesses, I think we feel really good about.
spk20
Got it. And then a question on HPV standalone versus co-testing that's come up again in our investor conversation. So just wondering any updated thoughts on the potential for it to go standalone versus co-testing. And do you think USPSTF guidelines could get revised potentially with updated information from AACC? And do you see any risk for co-testing from sort of primary testing with the new emerging competitors in the space?
Rachel
Yeah, let's start at the highest level. There is no doubt in our minds that more frequent co-testing is still the absolute best healthcare for women. You know, there are anecdotal increases that we're starting to see upticks in cervical cancer screening since the intervals have gotten longer. And frankly, there's enough data out there that says co-testing is significantly better than HPV primary alone. So while there are those advocating for that, and USPSTF could do that, it doesn't make it the best science. And I think where we feel really, really good, and as you know, in our tagline is the science of sure. We feel it's our responsibility to bring the best care to women around the world. And we're going to continue to drive for co-testing as the right way to go. So, and frankly, I think most of the, you know, certainly most of the U.S. doctors are well aware of that. And even if the USPSTF does something, you know, to change those guidelines, we think that'll be slow to change because of the remarkable success of the pap test in largely almost eliminating cervical cancer screening over the last generation or two. particularly in the U.S. So it's something we feel very strongly about, and we believe time and the science will be on our side. You know, having said that, there's going to be, you know, pressures. There's, you know, deep-pocketed pharmaceutical companies that want to try to drive to HPV primary, but we feel really good about the science on our side and that our business will be more durable.
Operator
Our next question comes from Jack Meehan with Nefron Research. Please go ahead.
Jack Meehan
Thank you. Good afternoon. Steve, we'd love to get your in how we trust. There we go.
Rachel
Bulldogs, whatever they are.
Jack Meehan
Exactly. Wanted to get your latest expectations on COVID-19. So I heard the guidance commentary We've heard from some of the big labs about volume following off, and we have the PHE expiry coming soon. Can you just talk about the stickiness of this product line and what your latest stab is on what an endemic number or guidepost might be for 2024 here?
Rachel
Yeah, Jack. I think the fundamental reality on COVID is none of us have been able to predict more than a quarter out. going. I think, if anything, our expectations for next year might be a little bit less. I think, you know, we're certainly starting to see it, you know, start to ramp off a bit, and yet what we feel really good about is those that are still going to do it will be using us. You know, I think there'll still be usage at the hospital levels for admissions, for staff, you know, those kind of pieces, so I think we're still going to have some ongoing business, but You know, and we're still having it this quarter, but I think clearly you see it coming down to just a few percentage points of the total business at this point. And, you know, it's hard to fully predict. You know, certainly by the time we get guidance next year, we'll be more up to date. But, you know, it certainly looks like it's falling off, you know, pretty sharply at this point, which deep down for our company and getting on with it and letting people know look at the true transformation of the business we kind of like. But a little bit of that profit flowing through isn't bad either.
Jack Meehan
Yeah, makes sense. Just as a follow-up, wanted to talk about something that might be a little bit bit more, not that COVID isn't durable, but might be more durable in the eyes of investors, the vaginitis panel. Can you just give any color on the size of that business now? Is it annualizing over $100 million at this point? And just talk about the penetration in your customer base. How's that going?
Panther
Yeah, we're really pleased with the performance in that uptake. And our full year outlook would be that that would be over $100 million business, clearly one of our top women health assays. and think there's still room to grow there. So really excited about that uptake and what we can do there with our customers.
Patrick Donnelly
Yeah, it's been a really nice surprise for us how big that's getting help quickly today. Thanks.
Operator
Our next question comes from Tejas Savant with Morgan Stanley. Please go ahead.
Tejas Savant
Hey, guys. Good evening, and thanks for the time you are having. Um, one, one quick, um, clean up question and guidance. Actually, Steve, if I may, um, you know, you got the approval in Europe and Canada on the V5 for Nova shore. How are you thinking about the revenue implications off that over the medium term here? Nova shore. I mean, it's been a flattish business. Doesn't get too much attention from investors, but I think it's still the second largest piece of that, that segment for you.
Rachel
Yeah. It's, you know, that business has been a great business. When I arrived here 10 years ago, the, uh, You know, that was the big part of this division. That was most of it. And MyoSure was this little thing. And it's been fun to see MyoSure come up. But I think our team has done a great job of really trying to maintain NovoSure in the midst of all kinds of both market issues from the ACA Act and everything else and just continuing to bring innovation. And it's still a great procedure. So, you know, I think the overall procedural numbers, you know, that marketplace probably continues to be a low single-digit decliner. But I think we're doing well within that from a share and an innovation standpoint.
Tejas Savant
Got it. That's helpful. And then one on imaging. Carlene, I know you talked about sort of the cadence you're normalizing versus F2Q levels for the gantries, but Did you benefit at all from this very significant correction in demand that some of these semis manufacturers are seeing? I know you've talked about your chips being very distinct from what goes into consumer products in the past. But just curious as to whether that drove a little bit of the uplift here. And to your point, Steve, around the macro being something you're watching, is this just sort of a little bit of conservatism and wider error bars around sort of the normalization trajectory here that's making you take a relatively conservative stance of the gantry placements versus the field service engineers and that aspect of it?
Panther
Yeah, so just on the chip issue itself, I don't – Increasing availability was not the direct result of demand dropping other sectors. It was more of our partnerships with our suppliers and having them understand what we're using the chips for and how important they are and really working closely with them versus other sectors' demand declining.
Keith
I'm sorry, you had a second part to that question.
Rachel
Yeah, and the other part was just being conservative. I think We're managing for the long haul here, too. We're very much thinking about 2024 and what things look like there. I think this is already a really, really good year.
Patrick Donnelly
Let's not get ahead of ourselves.
Operator
Our next question comes from the line of Andrew Brackman with William Blair. Your line is open.
Andrew Brackman
Hi, guys. Good afternoon. Thanks for taking the questions. I've actually got two questions on molecular diagnostics and sexual health specifically, so I'll just ask them both up front. First, you know, CDC had that report out a few weeks ago showing the rise in STI cases. So maybe can you just sort of remind us on some of the initiatives that you have here with customers and public health services broadly for your testing solutions? And then just secondly on this platform, can you just sort of talk about what you're seeing internationally with this franchise? Anything in terms of where wins might be coming from, be that versus competitor tests or even sort of LDTs transitioning here? Thanks.
Rachel
Yeah, I think the first part, and it really is, I think it's the hidden gem of our company that doesn't always get as much attention, but is that dedicated physician sales force that we have within our diagnostics business that's really unique. It's an extra investment from our end, but it is having our reps that call on the physicians and really help educate them both about the guidelines and and including the changing guidelines where we've gone to effectively the need to opt out. So you're getting more screening earlier. And it allows us to partner with a lot of the major labs and even hospital systems where they value that education that we do. And it helps us both shape but also build markets. When you look at really what WholeLogic has done, and I think we've you know, been pretty good about it across our businesses. We've helped create a lot of markets through physician education. I mean, you know, if you go back to the original pap test and, you know, thin prep and what we did there, what Novosher and Myosher have done, we're doing it a lot in diagnostics, certainly through the STIs. And to the second part of your question on international, I think, again, by placing so many panthers in internationally, it's allowed us to have more of those discussions and start to get some of that menu in around the world as well, and then hopefully able to help educate and shift guidelines in those countries over the years ahead as well.
Panther
Yeah, the only thing I would add internationally for molecular diagnostics is our viral business, specifically in Africa, continues to have really nice double-digit growth as we make investments there to help that region.
Patrick
Thanks. All right, thank you.
Operator
Our next question comes from Derek DeBruin with Bank of America. Your line is open.
Derek DeBruin
Hey, this is John on for Derek. Good afternoon. I wanted to ask, so recently a federal judge struck down a key provisions of the Affordable Care Act. And that kind of jeopardized the free coverage of wide-ranging preventive services, including mammograms and cervical cancer screening. How do you see this playing out? And I guess, are you worried at all about reimbursement or do you have any fear of the patients having to pay out of pocket and that will deter them from screening?
Rachel
No, you know what? I mean, there's been so many various court cases between state, federal, all kinds of, you know, frankly, goofiness going on in the political and court systems right now. We tend to think here things will prevail and be fine over time.
Patrick Donnelly
So we're not going to react to any one thing that, you know, could easily get overturned again.
Patrick
Gotcha. Appreciate it. Great.
Patrick Donnelly
All right.
Operator
Our next question comes from the line of Vijay Kumar with Evercore. Please go ahead.
Vijay Kumar
Hi, Steve. Congrats on a pretty strong quarter here. Thanks.
Rachel
Sorry I missed you on the visit out here.
Vijay Kumar
No, no, all good. You guys made it up with the print. I guess on some of the numbers we're seeing here, Steve, I mean, this is almost… You made it up with some pretty impressive numbers. This is almost ortho kind of numbers, 20%. Now, I understand from an ortho perspective, there's backlog. So I'm just curious when you look at numbers like 25% GYN, 15% overall diagnostics to you, what do you think is driving this? Is this a catch-up of backlog or is this perhaps a pull forward of demand? And related to that, Steve, you know, first half, I think the organic now is almost teens, mid-teens. I think the prior guidance here for all segments, double digits, is the implication now for the back half, you know, six to seven in line with the longer term as chefs. So just talk to us about what drove first half and what the implication is for second half.
Rachel
Yeah, I think the implication for the second half is still much better than the numbers you just We're still saying double-digit here in the third quarter and likely fourth. So I don't think it was pull-forward, Vijay, to be very clear. I do think the Gain Surge market, probably like some of the ortho markets and some of the other markets, some of the docs may have been doing more what I would call catch-up. So I don't think it's as much pull-forward, but they're catching up from the last few years of not maybe doing as many procedures as they could have. So I think, you know, will that same quarter a year from now, you know, maybe not be quite as active. Yes. But I don't think it was any kind of pull forward per se. I think it's more catch up. And I think we just feel great about, you know, our surgical business. We have added more growth drivers. I think, again, it's been kind of missed in the COVID spikes. I think it's the business has been most overlooked because of the way the COVID spikes were happening and just really proud of what that team is doing. And, uh, You know, we've added Fluent. We've got MyoSure and NovoSure doing well. And then we've got Boulder and Assessa. And we've got that business getting stronger internationally.
Vijay Kumar
That's helpful, Steve. And, Carlene, one for you here. I know you called out the days. Any days impact here in back half? Are days now a headwind here in back half? And, sorry, on capital allocation plans, Is this, Steve, I'm sorry, I missed a comment. Are you saying like the pipeline is looking healthier? Maybe just put some context around the M&A commentary here on perhaps, you know, we're getting closer to something here in the near term versus how we should interpret your commentary around the pipeline looking good across all segments.
Panther
Yes, let me start with the days, Vijay. So we have, I think, one less day in the fourth quarter, so really negligible impact in the back half of the year when we talk about selling days. And again, here in the second quarter, a little bit of benefit, but not to the extent that we had in the first quarter given the full calendar week and how that impacts our service line. And let me try to answer your M&A. You know, I think what I would say is a couple of things. As we said in the prepared remarks, our philosophy and approach haven't changed. division-led, very active, probably some rebuilding over the past year in diagnostics of the pipeline given the level of acquisitions we did in 2021. But we're approaching this from a position of strength. Our aperture is a little wider given our firepower and that we can look at some things that may be a little bigger than we've done in the past, but certainly those things we're looking for mature on-market products and accretive to earnings. So not looking for a fourth leg of the stool, but just to leverage our strengths and capabilities that we have across our current businesses.
Operator
Our next question comes from Navan Thai with BNP Paribas Exane. Please go ahead.
Navan Thai
Hi. Thanks for taking my questions. I just have a few on women's health. So was the vaginitis assay still the key driver of Q2 performance? And can you discuss the competitive environment in women's health? So are competitors far behind given Hologic's competitive advantage and women's health focus? And does Hologic still benefit from the opt-out guideline for its legacy test? And I have a follow-up on M&A after. Thank you.
Panther
Yeah, so our vaginitis panel, as we said, we really like the performance that we're seeing. The outlook would be that that's greater than $100 million for 2023 and really puts that as one of our top assays. Women's health, we're still market leaders in protecting that. That market leadership in SD said one of the kind of the secret sauce that's underappreciated in how we do that is our physician sales force that's out there educating physicians on guidelines, promoting testing, and it's certainly where we saw a change in guidelines about two years ago where it's more universal screening. We're helping grow our business as well as our customers' business with that physician sales force.
Navan Thai
Thank you. And then on M&A, so would M&A be part of the international expansion, or is international expansion mostly expanding the install base and maneuver?
Panther
From an M&A perspective, you know, certainly some of the recent deals we did are we acquired companies that were based overseas. But, you know, Moby Diag, the biggest one, would have potential revenue both in the U.S. and OUS over time. And then we do have our go-direct strategy, primarily in our breast health, and we've done a little in surgical, where we've in the past leveraged dealers. And what we find is when we go direct, those businesses perform better as part of Hologic than on a standalone basis. But certainly... As a global organization, we look at acquisitions around the globe, not just in the U.S.
Operator
Thank you. This now concludes Hologic's second quarter fiscal 2023 earnings conference call. Have a good evening.
Disclaimer