Michael J. Watts - Hologic, Inc. Stephen P. MacMillan - Hologic, Inc. Robert W. McMahon - Hologic, Inc..

Isaac Ro - Goldman Sachs & Co. Mike Sarcone - Deutsche Bank Securities, Inc. Jack Meehan - Barclays Capital, Inc. Raj Denhoy - Jefferies LLC Tycho W. Peterson - JPMorgan Securities LLC Jonathan Block - Stifel, Nicolaus & Co., Inc. William R. Quirk - Piper Jaffray & Co. Vijay Kumar - Evercore Group LLC David Ryan Lewis - Morgan Stanley & Co.

LLC Brian David Weinstein - William Blair & Co. LLC Mark Anthony Massaro - Canaccord Genuity, Inc..

Good afternoon and welcome to the Hologic, Inc. Second Quarter Fiscal 2017 Earnings Conference Call. My name is Cody, and I am your operator for today's call. Today's conference call 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, sir..

Thank you, Cody. Good afternoon and thanks for joining us for Hologic's second quarter fiscal 2017 earnings call. With me today are Steve MacMillan, the company's Chairman, President and Chief Executive Officer; and Bob McMahon, our Chief Financial Officer.

Steve and Bob both have some prepared remarks today, then we'll have a question-and-answer session. Our second quarter press release is available now on the Investors 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 on our website through June 2.

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, as well as 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 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 the GAAP financial measures can be found in our earnings release.

Finally, unless otherwise noted, all percentage changes that we discussed will be on a year-over-year basis and revenue growth rates will be expressed in constant currency. Now, I'd like to turn the call over to Steve MacMillan, Hologic's CEO..

International expansion, our R&D pipeline, and business development.

It's a testament to the strength and dedication of our team that we delivered constant currency growth in core revenues, excluding blood screening and Cynosure, of 5.4% and EPS growth of 21.6% while simultaneously building new global capabilities, launching multiple new products, and closing two major deals.

All in all, this was the busiest and most productive quarter we've had since I joined Hologic more than three years ago, and our accomplishments accelerate our transformation into a sustainably higher growth company.

With that introduction, now, I'd like to provide an overview of our second quarter revenue results highlighting international and new products. Then, I'll discuss growth opportunities at Cynosure before handing the call over to Bob. In the second quarter, reported revenue of $715.4 million grew 3.2% on a reported basis, or 3.8% in constant currency.

This includes partial quarter contributions from both Cynosure and blood screening. If you were to back out Cynosure sales, revenue would have been $699.4 million, exceeding our most recent guidance of $675 million to $685 million.

Of this amount, revenues from our divested blood screening business totaled $38.3 million, down markedly from the prior period – prior year period, but still about $10 million higher than expected. Net of these, as we said, revenue in our core business grew 4.7% on a reported basis, or 5.4% in constant currency.

As you've seen in recent periods, our ongoing efforts to both revitalize and reshape our portfolio paid dividends again in the second quarter. As a reminder, if we rewind to 2015, it was our U.S. Breast Health division that drove growth behind the rapid adoption of Genius 3D mammography.

As this growth driver slowed last year, Surgical emerge to pick up the slack. And now, in the second quarter, as Surgical annualized some competitive benefits, our molecular diagnostics and international businesses both stepped up to post double-digit growth rates, with Cynosure waiting in the wings for the future.

With that context, let's provide some quarterly revenue details. Growth in the second quarter was led by molecular diagnostics where global sales of $142.1 million, increased an exceptional 13.3%.

In the United States, where sales increased at a low double-digit rate, our commercial team is doing an excellent job of cross-selling our full product portfolio, gaining market share behind our fully automated Panther system and expanding the market by driving compliance with testing guidelines.

Outside the U.S., where sales grew more than 20% for the third time in four quarters, we continue to see the benefits of healthy Panther placements and multiple new product introductions. Our Surgical division also performed well again with global sales of $101.1 million, increasing 11.9%, our ninth straight quarter of double-digit growth.

NovaSure sales were basically flat as expected, as we have annualized the benefit of a competitive recall, but MyoSure continues to shine, with global sales growth again in excess of 30%. In terms of geography, international sales really emerged as a growth driver in the quarter, growing 11.1%, excluding blood screening and Cynosure.

While we still have a lot of work ahead of us, let me remind you that over the past 12 months, we have hired four new commercial leaders for Latin America, Asia-Pacific, Canada and Europe. These leaders have been busy building the foundation for strong and sustainable growth in the years ahead, while already putting a few wins on the board.

While molecular diagnostics and Surgical led the global growth this quarter, we also believe that our international Breast Health business is improving as new leadership works on a country by country basis to optimize channel strategies and strengthen our commercial capabilities.

International Breast Health sales increased at a mid single-digit rate in the second quarter. And the opportunities ahead of us remain robust.

To further capitalize on these opportunities, in April, we acquired Medicor, our long-time distributor of breast and skeletal health products in Germany, Austria and Switzerland Although this is a small acquisition, it provides us a nice platform for future growth by giving us direct access to our customers and full control over commercial strategy.

In addition, it's a good example of the kind of tuck-in acquisitions that we continue to pursue, even after the larger Cynosure deal.

So, while we are not yet declaring victory outside the United States, I can honestly say that for the first time since I joined the company, we can see clear capabilities to drive strong and sustainable growth in our international business in the quarters and years ahead.

Another reason we are optimistic about our future prospects, both internationally and domestically, is the steady cadence of new products beginning to emerge from our R&D pipeline. For example, sales of new products continue to increase and exceeded $25 million in the second quarter, led by MyoSure REACH and the Affirm prone biopsy system.

While this revenue is obviously not all incremental, we are nonetheless pleased with our progress and we continue to add more new products. In the second quarter, we launched our next-generation NovaSure ADVANCED product in the United States.

We announced FDA approvals of two important new diagnostic assays, our viral load tests for HIV-1 and the hepatitis C virus. And we continue to expect U.S. regulatory clearance for our hepatitis B assay next year. Now, let me turn to our third major initiative, business development.

As you can imagine, closing both the blood screening divestiture and the Cynosure acquisition in a single quarter was no small feat, and I'd like to publicly thank our team for all the hard work and long hours involved.

Together, these two deals de-risk our product portfolio, will accelerate our long-term growth rates and provide us opportunities to expand profit margins. Overall, they have made us a fundamentally stronger company. Cynosure added $16 million of revenue to our second quarter results based on sales recorded after the acquisition closed.

For the full March quarter, however, Cynosure sales totaled only $77 million. Although the March quarter is seasonally weak for Cynosure, sales also were negatively affected by the significant distraction that began early in the quarter when a media outlet reported that Cynosure was in talks to be acquired.

These negotiations clearly distracted management's attention and resulted in unusually high turnover in the sales force, as well as delayed hiring of new reps. Together, these changes had a significant but transient effect on revenue.

With the deal now closed, we've made great progress on stabilizing the sales force, just as we did with Hologic three years ago. And also like Hologic, the Cynosure sales force has innovative, market-leading products to work with.

Looking beyond this March quarter blip, which doesn't affect Hologic's results anyway, we see two huge positives in Cynosure, an attractive growing market and technological leadership that has led to great products.

Cynosure has tapped into and helped create a movement toward less invasive aesthetic treatments, an area that we believe has tremendous growth potential for many years ahead.

In terms of the market, medical aesthetics growth is being driven by major societal trends, an aging population, higher levels of disposable income, and a focus on personal appearance in a world of selfies.

And even after Allergan's acquisition of ZELTIQ which, by the way, operates only in the body sculpting segment, the overall aesthetics market remain highly fragmented. Cynosure has become the clear leader in the overall market, thanks to its deep expertise in lasers, which in turn has produced best-in-class products.

Cynosure's core competency is identifying customer needs and finding products to meet them, either through organic innovation or external business development. I'd like to highlight three of these Cynosure products now.

These products serve as the foundation for the revenue categories that we will disclose going forward, body contouring, skin and women's health and other. We're hopeful that as we provide more transparency on Cynosure's products and business, you'll come to share our excitement about our future in medical aesthetics.

In non-invasive body contouring, most of you are familiar with SculpSure, a 1060 nanometer laser that was launched in late 2015. This is a large market today, totaling over $1 billion, but it remains very underpenetrated. So, we believe there is more than enough room for multiple players.

This is especially true given the inherent competitive advantages of SculpSure, which have been demonstrated by roughly 1,400 unit placements and very solid head-to-head performance since launch. In addition, we believe that SculpSure has many opportunities for future growth.

For example, we recently filed for regulatory approval to use this system on the back for bra fat and on the inner and outer thighs. We also are completing clinical trials for an indication to use SculpSure under the chin in what's the called the submental area.

We expect that SculpSure's efficacy in this area will be a further competitive differentiator, and hope to receive regulatory clearance in the first half of fiscal 2018. Finally, let me mention that we believe we can help drive consumer demand for SculpSure, building on the successes we've had with Genius 3D Mammography.

As this demand built, we expect to sell an increasing number of disposables, known as PAC keys, associated with the system thereby boosting sales and profitability. In fact, we're pleased that consumable sales began to pick up in the last quarter.

The second product I want to highlight, one that may be overlooked by the investment community, is PicoSure. After years of internal development at Cynosure, PicoSure was the first picosecond laser approved by the FDA in 2013, and it remains the gold standard today, with about 1,000 placements in the field and 1 million patients treated worldwide.

Unlike traditional lasers which rely on intense heat that can generate significant redness and downtime, PicoSure is a gentler option that activates the body's natural cellular response to revitalize skin with minimal discomfort and downtime.

PicoSure has been used mainly for tattoo removal historically and is differentiated because it employs different wavelengths that can remove all colors of tattoo ink from various skin types. But PicoSure is increasingly being used for skin revitalization, the removal of pigmented lesions, acne scars and wrinkles, especially on the face.

As shown by a number of studies presented recently at the Annual Meeting of the ASLMS, PicoSure and the disposable focus lens array generate similar or better results in nanosecond lasers, but with fewer treatments and less downtime.

We believe the market here could become very large as we educate providers and patients about the differentiated benefits of PicoSure. Almost everyone can benefit from facial skin revitalization, and patient satisfaction is exceptionally high. In addition, PicoSure has significant potential outside the United States.

In China, for example, PicoSure has been approved for tattoo removal, but we intend to submit for regulatory approval for pigmented lesions later this year.

The third product I want to highlight is MonaLisa Touch, a fractional CO2 laser that is used to treat the painful symptoms of menopause, as well as women with vaginal problems following a hysterectomy or breast cancer treatments.

The product, which we distribute for the Italian company El.En., delivers controlled laser energy to the vaginal wall to promote collagen generation and rejuvenate the vaginal mucosa. At the risk of sounding too bullish, the market for this product could be enormous.

In the United States alone, more than 30 million women experience genitourinary symptoms of menopause or GSM, which is also called vaginal atrophy. In terms of potential domestic placements, Cynosure has sold roughly 700 MonaLisa Touch systems to date out of an estimated 16,000 women's health focused practices.

And for many women, the therapy can be truly life-changing, as evidenced by 18 published studies and many other trials currently underway. MonaLisa Touch was rapidly adopted in 2015 in its first year after launch, but sales stalled in 2016 as new competitors entered the market and Cynosure devoted sales resources to SculpSure.

We believe the product can do much better as part of Hologic, where we can leverage our large OB/GYN sales force to generate leads among our customer base we know very well.

Before I turn the call over to Bob, let me summarize by saying that we are excited about the current and future opportunities for Cynosure to grow in the medical aesthetics market. Similarly, we remain enthusiastic about the potential of our R&D pipeline, as well as the momentum that is building internationally.

We made tremendous progress on all these fronts in the second quarter, while simultaneously posting revenue and earnings result that exceeded expectations. Now, I will turn the call over to Bob..

Thank you, Steve, and good afternoon everyone. In my remarks today, I'm going to highlight some of our other divisional sales drivers, walk through our second quarter income statement, touch on a few other key financial metrics and then finish up with our updated financial guidance for 2017.

Unless otherwise noted, my remarks will focus on non-GAAP results, and percentage changes will be on a year-over-year basis. As Steve mentioned, we posted good financial results in our second quarter, highlighted by 5.4% constant currency growth in our core business, when you exclude blood screening and Cynosure.

Steve already highlighted molecular diagnostics and Surgical, so I'll start my discussion with Breast Health. Global Breast Health sales up $280.5 million, increased 2.1% in constant currency against the challenging prior year comp.

In the United States, incremental placements of 3D gantries continued to moderate, like in recent quarters, as we pursue smaller, more price-sensitive customers. But at the same time, booking trends remained solid, and our backlog is healthy.

In addition, more than 75% of American women in our target patient population now have incremental insurance coverage for 3D, which we believe will solidify even broader market adoption over time. Also in the second quarter, Breast Health service revenue again benefited from an expanding installed base in the U.S.

with low double-digit growth year-over-year, while sales of our new Affirm prone biopsy system continue to build. And as Steve mentioned, international Breast Health sales grew at a mid single digit rate for the first time in over a year as new leadership continues to make good progress in optimizing our distributor relationships.

Now, moving on to cytology and perinatal. Global revenues of $115.6 million were essentially flat in constant currency. The story here really hasn't changed much.

We maintain very high market shares domestically, yet still face headwinds, albeit moderating from longer cervical cancer screening guidelines intervals, and we see significant opportunities outside the U.S. both to increase market share within liquid-based cytology and to drive conversion from traditional Pap tests over time.

To wrap up the revenue discussion, Skeletal Health revenues of $21.8 million decreased 1%, a slight improvement over disappointing results in the first quarter. Now, moving down the P&L.

Gross margins of 63.9%, decreased 190 basis points compared to the prior year, mainly due to the blood screening divestiture, the negative impact of a stronger dollar and product mix.

Total operating expenses of $223 million were up slightly compared to the prior year, mainly due to the addition of the partial quarter Cynosure expenses at the end of the quarter. Beyond this, operating expenses remained well-controlled, helping to support a very healthy operating margin of 32.7% in the quarter.

And to round out the discussion of the income statement, a lower effective tax and a slightly reduced share count enabled us to once again increase EPS at a multiple of sales growth. Specifically, reported EPS of $0.50 grew 6.4% compared to a year ago, double the rate of reported sales growth.

As noted in our press release, blood screening contributed $0.04 to EPS. So, if you back this out, along with $0.01 from Cynosure, you can see that non-GAAP EPS in our core business grew by more than 20%. I'll quickly touch on a few key financial metrics, beginning with the balance sheet. Total debt decreased $123 million compared to the prior year.

We are very proud that we were able to fund the Cynosure acquisition with cash from the blood screening divestiture, with no need to increase debt.

Our leverage ratio, net debt over EBITDA, currently stands at 2.1 times, although that number would be approximately 2.7 this quarter if we were to adjust for the roughly $650 million in taxes on the gain from our blood screening divestiture. We remain comfortable with our debt level and strong cash flow generation.

We believe we have more than enough capacity to continue to pursue small tuck-in acquisitions like Medicor, eliminate our convertible debt, and opportunistically act on our outstanding share repurchase authorization.

Now, before moving to our updated financial guidance, let me mention that adjusted EBITDA was $255.9 million in the second quarter, an increase of 0.8% compared to the prior year. And return on invested capital was 13.2% on a trailing 12-month basis, a 150 basis point improvement over the prior year.

Finally, let's turn to our updated non-GAAP financial guidance for the full year and the third quarter, and begin with our full year sales guidance.

As a reminder, our previous guidance range of $2.785 billion to $2.825 billion included mid single-digit constant currency growth for our core business, once you back out sales from our divested blood screen franchise.

Now, as we move to the fiscal third quarter, there are a few moving pieces, especially the addition of Cynosure, but our view of the core business remains constant, with an expectation of mid single-digit growth.

So, taking into our account our Q2 results and adding Cynosure, we now expect reported revenue of $3.05 billion to $3.08 billion in fiscal 2017, representing a reported growth rate of 7.7% to 8.7%. Based on recent exchange rates, this equates to high single-digit constant currency growth of between 8.4% and 9.5%.

Included in our updated sales guidance is roughly $115 million to $125 million from our divested blood screening business, higher than our previous guidance, due mainly to the stronger performance in the second quarter. Also included in our guidance is an estimated full year contribution of $235 million to $245 million from Cynosure.

Now, this may prove to be a conservative estimate, but we want to give ourselves some time to master the cadence of the business, as well as acknowledge that recently hired sales representatives will need some time to get up to speed.

Also as a reminder, Cynosure's December quarter, our first quarter of fiscal 2018, is typically their seasonally strongest. Now, let's move on to our revised EPS guidance for the full year. As a reminder, our previous guidance range of $1.90 to $1.94 included roughly $0.13 related to blood screening.

We are raising our non-GAAP EPS guidance to a range between $1.98 and $2.02, which includes a $0.14 contribution from blood screening and a Cynosure impact of between $0.03 and $0.05 as previously communicated.

Please note that while we will continue to see blood screening revenue throughout the year as we fulfill our contractual obligations to Grifols, these sales will have a minimal impact on EPS.

So again, by way of illustration, if you were to back out blood screening EPS from this year's forecast and last year's and also remove our Cynosure estimates at their midpoint, our forecast continues to imply reported EPS growth rates for our core business in the mid-teens on an apples to apples basis.

Now, I'd also like to provide some color on the non-GAAP margins that are embedded in our guidance following the blood screening divestiture and the Cynosure acquisition. In terms of gross margins, blood screening was more profitable than our corporate average, while Cynosure is lower.

Netting these out, our second quarter gross margin should be a good base from which to build going forward. It's important to note that the product mix for Cynosure is in the early stages of shifting from hardware to higher margin consumables, so we expect profitability to improve over time.

In terms of the overall company operating margin line, we carried minimal operating expense for blood screening, while Cynosure invests heavily in sales and marketing. As a result, we expect operating margins of around 30% in the back half of the year.

This remains one of the best operating margins amongst our peers, and as I mentioned previously, we see room for improvement going forward. Our new guidance assumes a full year tax rate of approximately 31% and diluted shares outstanding of between 287 million and 289 million for the year. As usual, our guidance does not assume any capital deployment.

Finally, for the third quarter of fiscal 2017, we expect sales of between $790 million and $805 million. This includes blood screening sales of between $5 million and $10 million, as well as Cynosure results of between $110 million and $115 million.

We expect earnings per share of $0.48 to $0.50 in the third quarter, which includes a small benefit from Cynosure and minimal impact from blood screening. As you update your forecasts, we would again encourage you to model around the midpoint of our guidance ranges. We have incorporated both upsides and downsides into our forecast.

There is uncertainty around the remaining blood screening revenues. And obviously, the Cynosure business is new for us. So before opening up the call for questions, I'd like to reiterate a point made by Steve earlier. Our second quarter was another good one in terms of financial results and a great quarter from a strategic perspective.

In our core business, molecular diagnostics and Surgical continue to drive growth, while our international business is contributing progressively more as well.

We're seeing the pipeline of organic innovation continuing to expand, and we've set the stage for the next chapter in our sustainable growth story by divesting the blood screening business and acquiring Cynosure. With that, I will ask the operator to open up the call for questions.

Please limit your questions to one plus a related follow-up, and then return to the queue. Operator, we are ready for the first question..

Thank you. And we'll take our first question from Isaac Ro from Goldman Sachs. Please go ahead..

Good afternoon, guys. Thank you..

Hey, Isaac..

Hi, guys. I wanted to start with Breast Health. Obviously, you mentioned the double-digit growth outside the U.S. Can you talk a little bit more about what's going on in the U.S. market? Obviously, it's a little bit more mature there in terms of penetration for Tomo and there's, I think, a little bit of a new backdrop here politically.

Trying to figure out if this new policy change, if that'll impact hospital capital spending. So, anything that you could tease out in terms of how the quarter went in the Breast Health equipment side, and then just sort of your expectation for the rest of the year in the U.S. That would be a great start..

Sure. Great, Isaac. And by the way, just to make sure that we didn't mix up things, the international Breast Health business grew at about mid single-digit rate. The overall international business grew at double-digit. So, I just want to make sure and clarify that. I think in the U.S., I think the simplest way to think about what we're seeing in the U.S.

at this point is we've largely gotten all the big hospitals and the big institutions.

And so where in the past, the orders, we're getting 5 gantries, 8 gantries, 6 gantries, 10 gantries, we're now kind of moving into that second half, but we're about halfway through our customer base where we're moving out into the community hospitals and it's much more onesies and twosies.

And probably, candidly, among audiences and customers that are a little more price, sensitive, that might have gotten in later in the curve last time. And they may be slightly more spooked, I would say, just ever so gently, around what is the moving state of healthcare reform.

So, I think in our key big hospitals, everything else, I think we're not seeing any real changes in capital. I think with some of the smaller hospitals, they're probably just being a little more cautious.

So, I'd say nothing that we're overly concerned about by any stretch, but I do think we're kind of at that point in the curve where it's getting a little slower and a little harder to keep going and getting much more.

So, I think it's why that business, as we've signaled really for quite some time, moving into a lower growth mindset, which is why we are very encouraged with the uptake outside the U.S. And at the end of the day, we're still less than 50% penetrated.

So, we still have years' worth of gantries to convert over, it's just going to be in probably smaller orders..

It's helpful color. Thanks. And then just a follow-up. You guys had a pretty solid revenue beat, but I think I mis-modeled gross margin here. It was a little bit lower than I expected.

So, could you talk a little bit about what went on with the gross margin? Obviously, you have some different mix now with Cynosure in the folds, but wondering if there was maybe a pricing dynamic or something else in there on the gross margin that would explain the result. Thanks..

Yes. Hey, Isaac. This is Bob. Yes, to be clear, there really was no pricing impact that impacted our gross margin at all. In fact, we feel very good about our pricing across all of the divisions.

It really is a combination of the blood screening divestiture, and actually the over-performance of the blood screening was actually at a fairly low margin, as we have talked about as part of the contractual commitment. So, that impacted us negatively.

We did have some effects in there, a little greater than what we had expected, and then there is some product mix issues as well, but nothing materially different than what we had expected..

Thank you. We'll now take our next question from Dan Leonard with Deutsche Bank. Please go ahead..

Hey, guys. This is Mike Sarcone on for Dan Leonard. Thanks for taking my question..

Sure, Mike..

First one, on the mid single-digit full year guidance for the core business.

Do you think you could parse out what you're looking for in terms of segment?.

Yes. I don't think we're going to get into that level of detail. I mean, I think, we have – we kind of identified that early on. I think our performance on our molecular business has exceeded our expectations to date, and we expect that to continue to be very strong.

Our Surgical business, as we had talked about, had a stronger performance in the first half of the year than the second half of the year, but we're not going to get into giving segment guidance..

Okay. Thanks for the color there anyway.

And just on the Cynosure integration, do you think you can elaborate on what you're doing to kind of unlock potential revenue synergies there?.

Sure.

I think, simply put, it's a – first off, getting their sales team back to 100%, and then we are increasingly working with our surgical sales team, and they're going to be working actually as lead generators, particularly the first program we're working on is lead generation for MonaLisa Touch because we believe our OB/GYN sales force has a tremendous number of customers that should be very good customers for MonaLisa Touch.

So, I think that will be one of the very first areas. The other piece is I can tell you we're going to inject a little more into the direct-to-patient marketing and generally the marketing area.

So, I think the way we look at it overall is they've got unbelievable products and we can probably help on a little bit of the sales generation lead and help on the marketing fronts.

I think the other piece that I think we're starting to see is our strong relationships, not only with customers but with the professional organizations, is giving them new access that Cynosure on its own didn't have.

And while that – it's hard to model in a spreadsheet, that does provide us with optionality going forward, and I think that gives us doors that are opening that weren't otherwise opened as a standalone organization for Cynosure..

Yes..

Thank you. Our next question comes from Jack Meehan with Barclays. Please go ahead..

Hi. Thanks. Good afternoon..

Jack..

I wanted to start with a two-part around molecular. You talked about driving testing compliance here in the U.S.

So, how was growth for trich relative to HPV and CT/NG? And then as you looked at international, do you think you're starting to take some share with viral load?.

Yes. I think – we don't want to get into too much specific detail down to the specific assays, but I think overall what we're seeing is we're getting more docs to order a fuller menu of tests. They can be complementary while they're in there in the U.S., and I think that's what's really helping us drive growth from already very strong market shares.

International, I think the virals are helping, but I frankly wouldn't overplay that.

I think it's more driven by we're really getting Panther's placed and if you recall, we put a new leader in of our diagnostic sales organization in Europe back in the summer of 2015 and he spent a lot of the back half of 2015 and really into early 2016 rebuilding the team there, and I think that team has really started to hit its stride on both the women's health assays and virals as well.

But I think it's more a Panther-driven story than truly a viral load-driven story at this point..

Yes. I would agree, Steve, and maybe provide a little more color commentary on the U.S. If you look across all of the three main assays, we believe that we gained share in the quarter, very robust shares already. So, very strong growth not only in trich, but HPV and CTGC as well..

Great. And thanks for all the details on Cynosure too. I was hoping you could elaborate just a little bit on the sales force disruption in the quarter with the deal.

Just what is the guidance to assume in terms of a ramp-up in productivity over the next couple of quarters?.

Sure. In simple terms, like, I think the best way is to paint a picture for you and you guys know it's to be as straightforward as you can be. You recall there was a leak that they were being potentially shopped.

They then had their national sales meeting, probably at the worst time humanly possible, which was about two weeks after that leak, and Mike Davin, who has been the incredible leader and continued with us. Mike was – been with that business for 13 years, 14 years. He couldn't even go to the sales meeting because of the process.

So, he had to Skype into the sales meeting. So, you put a sales organization together in a room, their long-time leader is not there and he's answering questions on Skype, but by the way, he couldn't even really be as honest with them because, as we all know, in that time period you can't discuss.

And I think the sales team sensed that, and we lost some good people in that realm. So, there were a few people that were, I think, on the fence, and lost them. We're completely rebuilding those. It reminded me, we've lost a ton of people right before we came to Hologic, and obviously Mike's built a good commercial team over time.

We know how to do that. Having said that, the other piece I would tell you is it delayed some people that offers were out to. Who is going to join a company when you don't know exactly where it stands. So, there were some territories that were open for a while.

They've now all been filled, but I think we're not yet necessarily assuming they're going to be back to 100% strength this quarter. I think, by the time we enter our fiscal 2018, we ought to be in great shape, but the next quarter or two it will be nothing like it was last quarter.

We'll be making incremental progress this quarter as the guidance implies, and then I think a better quarter from there, and six months from now, I think, completely behind us..

Thank you. We'll hear next from Raj Denhoy with Jefferies..

Hey, Raj..

Sir, please check your mute function. We are unable to hear you..

Raj, are you with us?.

Yes. Sorry, had it on mute, apologies. I wanted to follow a bit on the breast imaging business in the United States. I'm curious, is there anything you can offer in terms of how it is competitively out there? We've seen Fuji come into the market, but conversely we've also seen reimbursement expansion.

So, maybe just some more detail on the complexion of market at this point..

Sure, Raj. I think probably the best way to describe the quarter, and you could see a little bit from the MQSA stuff, while the competitors were out there, they probably had, we would say, more of a slight delaying tactic in any time you have new competitors enter.

It gives a hospital that might be on the verge of purchasing a reason to kind of delay and take a peek, and we basically had Fuji, as you well know. The other piece is GE launched their new product called Pristina, which is yet another version of 3D that is still no better than their 2D.

And at the end of the day, we don't see having a huge impact, but it may have pushed a few things out. We're still best-in-class. We're holding our pricing. We have seen our competitors being very aggressive on pricing.

And frankly, we could probably move a few more gantries if we went down, but we've worked really hard over the last three plus years to maintain pricing discipline which, when you have the best-in-class product, we want to do.

So, I think that combined with growing insurance coverage, we continue to feel very good about where the market will go over time, but I think the big – the huge ramp-ups, I think, are behind us..

And I think, Steve, to add to that, I mean in terms of share of new placements of Tomo, we are actually still gaining more than our share of the installed base. And with that, actually our ASPs are up slightly year-over-year..

Yes..

So, I think the team has done a fantastic job of continuing to roll out the adoption of our 3D, talking to the clinical and technical narrative and value of that, and I think it shows in the market, in the competitive position that we have..

Yes..

That's helpful. Maybe just for my follow-up, staying on 3D. When you think about where we are from a penetration standpoint, still maybe less than 30% of gantries have converted, near as we can tell.

As you look out into the future in terms of the events that might – sort of a catalyst perhaps for faster adoption when we've already seen significant publications, and you mentioned 75% of women are now covered from a reimbursement standpoint, is there anything we can look to that could perhaps accelerate this market or the adoption at this point?.

Nothing that we dramatically see. To be honest, I think the – you think about back to the 2D curve when the DMIST study came out, that really popped it. That came out earlier in the lifecycle. I think, at this point, we've already had the JAMA study.

But I think we feel very good about much more steady progress as the covered lives continue to come on as more and more consumers become aware of the 3D. I think we just feel really good about the steady cadence..

Yes. And I think, to build on that, Steve, to your point, we've been shipping in that 300-ish range really since the third quarter of fiscal 2015. And what I would encourage folks to think about is really an evolving story of our Breast Health business.

As that installed base continues to grow, our service business is actually becoming a big growth driver there. And so, over the last two, three, four quarters, that business has been over $100 million. This last quarter, it grew double digits, really as that installed base continues to grow.

And then we have the new products, the Affirm prone biopsy system. Our interventional business, albeit a small part of the business, also performed well in the quarter. And so, I think it is an important component, but not the only component of our Breast Health business..

Thank you. We'll now take our next question from Tycho Peterson with JPMorgan..

Hey, thanks. Steve, sorry to harp on Cynosure, but can you....

Hey, no problem. We love it, Tycho..

Can you help us get comfortable with what's implied about $40 million sequential step-up at the high end of that $110 million to $150 million guidance for 3Q? And can you quantify the magnitude of the sales force churn? It just seems like you were $30 million light relative to consensus on sign-up for the quarter end.

How many reps, I guess, turned over?.

Yes. We're not going to get into the exact numbers on the sales force turnover. It was reasonably significant. Nothing that we hadn't seen with, frankly, the quarter or two before I arrived in Hologic. And overall, I think we feel very good about the underlying trend. The sales force is very much settled down.

And obviously, as we look to the guidance for this quarter, we've – it's a very different number than what they had last quarter. And I think we feel very good about our ability to be back on track..

I think the other thing, Tycho, is there is some seasonality in the business that the – our fiscal second quarter is typically one of the lighter ones for Cynosure. And the third quarter, the fiscal third quarter, is typically strongest. Their strongest is the calendar fourth quarter, which is now our fiscal first quarter.

But you do see some natural ramp-up in the third quarter relative to the second quarter as well. So, they're not all equally distributed..

And I'd tell you, Tycho, we feel better about the mid and longer-term projection for this business today than the day we bought it. But that's short-term disruption, and it's easily the stuff we know how to deal with..

Okay. And then just to follow up on NovaSure.

With the ADVANCED out there, should we think about that starting to grow again? Obviously, you've anniversaried the ThermaChoice dynamics, but how significant could ADVANCED be in terms of getting that back on a growth trajectory?.

Yeah. That business is going against such incredible comps. As you know, we're going against nine straight quarters of double-digit growth for the overall Surgical business. NovaSure itself came up. I would assume it's going to be flattish to slight growth at this point, and we'll actually be shooting for better than that.

But as things have settled down, I think hopefully the NovaSure ADVANCED will get it re-growing, but I think pretty modest growth at this point..

And I think, as we think about our Surgical business, the MyoSure product line continues to exceed our expectations..

Yes..

It continues to grow at very strong double-digit growth. And it's becoming almost as big as our NovaSure business on a global basis. So, that's something to consider as well as we think about the overall Surgical business..

Especially when you look at our mix overall, three years ago today, just of our businesses, molecular quietly has snuck up to become really our single largest product franchise. MyoSure has gone from this little brand to a real major contributor. And by definition, our Surgical business has become a much bigger contributor.

So, you've got a lot of these mixes here that continue to shift, and I think just keep making us stronger..

Thank you. Our next question comes from Jon Block with Stifel..

Great. Thanks, guys. Good afternoon. Maybe first one, Steve, for you on Cyno. You already mentioned a solid pipeline of Cynosure products. They used to also speak to sort of skin tightening and a flagship that would feed up for 2018.

I'm just curious if maybe we can get some thoughts from you on those and are those two products still tracking for commercialization in calendar year 2018..

Yes, Jon. There's some very good work and additional things that we didn't highlight here today that make us feel really good, and skin tightening being one of those. We want to get our full hands around the complete timing of those, but everything is looking good there..

Okay. Maybe just a quick follow-up. I'll actually ask a molecular question because it's a big healthy beat, at least relative to our estimates. You mentioned that the Panther placements driving the numbers over there. You also have the full complement of virals.

Can we think about that international continuing? I know it's a law of larger numbers, but continuing to shake out in around that 20% range, helping to drive the overall worldwide into the low double-digits that we saw you guys put up this quarter. Thank you..

Sure. Thanks, Jon. I think I'm always leery to be forecasting 20% on top of 20%. Having said that, I think, do we think our international molecular business can at least be a double-digit grower for quite some time. And by the way, we still feel pretty good about the U.S.

I don't think we're ready to declare our global molecular business to be a double-digit grower. But I think we feel really good that it's certainly accretive. It's becoming our largest product franchise and it's accretive to our total growth rate.

So, we'll see with a few more quarters shaking out, but I think we continue to feel very good about where that is going..

Thank you. We'll now take our next question from Bill Quirk with Piper Jaffray..

Great. Thanks. Good afternoon, everybody..

Hey, Bill..

Hi. So, a couple of questions. One, going back to O-U.S. molecular, if memory serves, you guys are kind of on the cusp of launching the Fusion sidecar and some assays there.

So, Steve, could you talk about if, I guess, the anticipation of that helped out with Panther placements or is this some potential growth on the come? And then I've got a follow-up to that. Thanks..

Sure. I think the real driver internationally has just been Panther in the existing assays, more than the hoping of the Fusion. I think Fusion will be a very nice addition on top of it. I have a few customers.

It certainly helps, as we are selling in Panther, for them to understand where we are going overall as a company and it's probably helped a little, but I don't think it's had a huge impact..

Okay.

And then on Cynosure and specifically with the surgical training and MonaLisa Touch, is this something that is happening this quarter or is this kind of in the next six months? And then maybe if you could talk a little bit about some of the other cross-selling opportunities, not so much opportunities, but rather timelines as we look out call it a year or so from now..

Sure, Bill. I think the very initial piece with the MonaLisa Touch, we're just in the early innings of having put together the plans for that and really just going to be rolling out to the sales force in the coming weeks. So, I think that's less going to have an impact say this quarter; probably start to have a modest impact next year.

But I think will really be a very nice addition as we go into 2018. And as we remind everybody, we didn't buy Cynosure for 2017, felt really good about our core business and where we're going.

We very much bought it for the next decade, and I think that's where we're being thoughtful as we're putting together these programs, even as we – it's as simple as we want to get our GYN/SURG reps to refer their physicians over, but we also want to make sure they don't take their eye off their ball and forget about NovaSure and MyoSure.

So we've spent some time with the two selling organizations, coming up with the right incentive scheme so we don't do the old pendulum swing from one to the other. And then I think, assuming good success with MonaLisa Touch on the referrals, there is going to clearly be other opportunities to do more there with other products, I would think..

Thank you. We'll now take our next question from Vijay Kumar with Evercore ISI..

Hey, guys. Thanks for taking my question..

Hey, Vijay..

Steve? Hi, Steve. So, maybe one on Cynosure. I just – I apologize if you already explained this. And it looks like – so, because of the disruption, sales were down 19%, right, when I'm looking on year-on-year basis.

I just want to understand maybe, Steve, what were the month-on-month trends like Jan, Feb and March? Looks like most of the disruptions happened in March, and I'm assuming the guidance for the June ending quarter assumed some disruption in May.

I just want to understand, is that how we should be thinking about the Cyno numbers?.

Yes. First off, we're not going to get into month-on-month, Vijay, as you can probably appreciate. We may start to go weekly data. But I think here is the simple piece. Once the deal closed on March 22, we're able to start to get in there, and I'd say morale is in a very different place early May than it was early March.

So, we're in a very different place. They really lost people in late – lost a number of reps, frankly, in late January, early February, and then we've been replacing those and rebuilding. So, again, I think we feel it's very unfortunate, but I wouldn't at all expect that to be a trend. We very much think of it as a blip.

And as evidenced by our guidance already for what we have for this quarter, next quarter, we feel like we'll be back on track. We won't be knocking the cover off the ball the way we would like to, say, this quarter, but I think another quarter or two we're absolutely going to be there..

That's very helpful, Steve. And maybe one for Bob on the guidance. What is the organic revenue guidance for the base business, excluding Cynosure, Bob, in the upgraded guidance? I think the prior one was minus 70 bps to plus 70 bps.

I'm just wondering, is there an apples to apples compare? I know you guys beat the quarter by $0.04 on the EPS, but it was raised by $0.08 for the year. So, are there other moving parts on EPS line that we should be thinking about? Thank you..

Yes. I guess, on the core business, Vijay, the way to think about the base business is still that mid single-digit growth rate on the revenue side and low single-digit growth on the EPS side, with that $0.48 to $0.50. There's really no contribution of blood in Q3 from an EPS perspective, and a minor contribution from Cynosure.

So, that's the way you should think about it..

Thank you. We'll now take our next question from David Lewis with Morgan Stanley..

Good afternoon. Steve, two questions for you. How are you? So, there's a lot of focus in this call about the M&A disruption because of the Cynosure process.

I guess, how confident are you that the rep disruption is not the impact of Allergan, ZELTIQ, which may have froze the customer channel and froze rep hiring?.

Yes. There is certainly an element of that, David, I think. But I think, now with them closed, us closed, it's back to stuff we know really well, which is building great sales teams around great products. So, I think there was certainly – there was a lot of chatter and noise and it's – that's what I want to say, and you get it.

That clearly had an impact on sales psyche. That's now all behind us, and we feel very good about our abilities to go forward..

Okay. Just two more quick ones. The other things you announced in this call, there's a six-month delay in the submental approval and, as you know, ZELTIQ has that label. So, was that at all a factor in guidance? We were expecting that back half 2017, it's now first half 2018. And then second question, on MonaLisa.

How important is it strategically to own the asset versus relying on the distributorship? Thanks very much..

Yes. First one, I don't think the submental is a significant change. It maybe has been communicated, but I think we're very hopeful that that program would be on, I think as we said, later this year. I think we did say our beginning of fiscal 2018, remember that is the end of calendar 2017 for us. So, we're feeling pretty good about where that's going.

And on the MonaLisa, owning would be nice, but I think we feel very good about the overall relationship there and the contractual state that we're in with El.En..

Thank you. We'll now....

Operator, I think we might have time for one or two more questions..

Thank you. We'll now take our next question from Brian Weinstein with William Blair..

Hey, guys. Thanks for taking the question. No shock on the topic. So, with Cynosure, we see miss in the quarter.

Are those revenues that are actually lost? Are those revenues that you were in negotiations with people and then the sales reps to kind of close and you will see later in the year? Can you just talk about if you've lost things to competitors or it's just more of a delay?.

Yes, I think we lost them to competitors, Brian. I think it's – we had a bunch of reps that weren't showing when you have reps leave and you're in a very customer and sales intensive business, but many of those sales will still be there. It will be later in the year..

Okay. And then, on the distribution, you made an acquisition named Medicor. Can you talked about any financial impact from that? Is it likely that we'll see others there and why did you start with that one? Thanks..

Sure. The impact is fairly de minimis in terms of overall revenue and profits, but strategically it's going to give us a very nice shot in the arm. And I think one of the reasons we started there, they were our single biggest distributor in Europe. So, we like them and we were able to do a deal there. They were largely a Hologic dealer.

Some of our other countries, we deal with dealers where we may be a minority part of their business, and a lot of complexity. So, we would hope to be able to do more in the years ahead, but they were clearly the one probably we coveted the most. And I think they have a direct presence, particularly in Germany. It's a really nice place to be..

Thank you. We'll now take our final question from Mark Massaro with Canaccord Genuity. Please go ahead..

Hey, guys. Thanks for taking the question. My first question is on Cyno. I think consensus estimates were calling for 12% and 10% growth year-over-year in calendar 2017 and 2018, respectively.

Understanding that there was a bit of a blip in this present quarter, how should we think about any changes to the double-digit growth rate trajectory of that business?.

We think that's going to be the ongoing growth rate. We feel great about that business. It's just going to take us probably a couple of quarters to get back to it. I think about it this way. When you look at where our Surgical business was a few years ago, nobody ever would have guessed we could generate nine straight quarters of double-digit growth.

I think, our prospects, as we look at the Cynosure business and the underlying market and the products we have, I think, we feel great about our ability to generate great growth.

This was just – it was an unusual year when you have a small company that's very dependent on its leader and its leader is very distracted in a quarter, and it's publicly being all the rumors out there that they're being taken over and this and that. It was a goofy period, but it's totally a blip. It's not an ongoing thing..

Great. And this is a two-parter. What percentage of revenue came from the non-core channel? And then following that, we did a survey, nearly 60% of physicians in the non-core channel indicated that they may adopt non-invasive aesthetics over time.

So, can you just speak to the market size and what you're thinking about the long-term market opportunity from non-core physicians?.

Yes. We're not going to break out what percentage of revenue came from non-cores, but we continue to believe non-cores are a huge, huge opportunity. That's what – when Mike Davin and I first sat down and talked, actually last year, that was so evident to me as to where they were thinking about going with so much of the non-core business.

And you think about – and you saw it, I think, in your research between both OB/GYNs as well as, frankly, even broader GPs, people starting to look for additional ways to make money and take care of women and women's health. We think that there is so much opportunity. It's why we're probably more excited today.

To a minor blip in the quarter, big deal, we're going to be past that. We just love the fundamentals of the market, the under-penetration of the docs, and we see great interest from a number of the non-cores going forward..

Thank you. That is all the time we have for questions today. This now concludes the Hologic's second quarter fiscal 2017 earnings conference call. Have a good evening..