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Edited Transcript of HOLX earnings conference call or presentation 2-Aug-17 8:30pm GMT

Thomson Reuters StreetEvents

Q3 2017 Hologic Inc Earnings Call

BEDFORD Aug 12, 2017 (Thomson StreetEvents) -- Edited Transcript of Hologic Inc earnings conference call or presentation Wednesday, August 2, 2017 at 8:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Michael J. Watts

Hologic, Inc. - VP of IR & Corporate Communications

* Robert W. McMahon

Hologic, Inc. - CFO

* Stephen P. MacMillan

Hologic, Inc. - Chairman, CEO and President

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Conference Call Participants

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* Alexander David Nowak

Piper Jaffray Companies, Research Division - Research Analyst

* Anne Edelstein

BofA Merrill Lynch, Research Division - Research Analyst

* Anthony Charles Petrone

Jefferies LLC, Research Division - Equity Analyst

* Brian David Weinstein

William Blair & Company L.L.C., Research Division - Partner and Healthcare Analyst

* Chris Lin

Cowen and Company, LLC, Research Division - Research Associate

* Daniel Louis Leonard

Deutsche Bank AG, Research Division - Research Analyst

* David Ryan Lewis

Morgan Stanley, Research Division - MD

* Isaac Ro

Goldman Sachs Group Inc., Research Division - VP

* Jayson Tyler Bedford

Raymond James & Associates, Inc., Research Division - Senior Medical Supplies and Devices Analyst

* Mark Anthony Massaro

Canaccord Genuity Limited, Research Division - Senior Analyst

* Mitchell Frank Petersen

Barclays PLC, Research Division - Research Analyst

* Richard S. Newitter

Leerink Partners LLC, Research Division - MD, Medical Supplies and Devices and Senior Analyst

* Tycho W. Peterson

JP Morgan Chase & Co, Research Division - Senior Analyst

* Vijay Muniyappa Kumar

Evercore ISI, Research Division - MD and Fundamental Research Analyst

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Presentation

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Operator [1]

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Good afternoon, and welcome, everyone, to the Hologic, Inc.'s Third Quarter Fiscal 2017 Earnings Conference Call. My name is Denise, and I am your operator for today's call. Today's conference call is being recorded. (Operator Instructions) I would now like to turn the conference over to Mr. Mike Watts, Vice President, Investor Relations and Corporate Communications, to begin the call.

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Michael J. Watts, Hologic, Inc. - VP of IR & Corporate Communications [2]

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Thank you, Denise. Good afternoon, and thanks for joining us for Hologic's Third 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 third 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 August 25.

Before we begin, I'd like to inform you that certain statements we make during this call will be forward looking. These statements involve known and unknown risks and uncertainties that may cause actual results to differ materially from those expressed or implied. Such factors include those referenced in the safe harbor statement that's included in our earnings release and our filings with the SEC.

Also during this call, we will be discussing certain non-GAAP financial measures. A reconciliation to GAAP financial measures can be found in our earnings release. Finally, unless otherwise noted, all percentage changes we discuss 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.

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Stephen P. MacMillan, Hologic, Inc. - Chairman, CEO and President [3]

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Thank you, Mike, and good afternoon, everyone. We're pleased to discuss Hologic's performance in the third quarter of fiscal 2017. We posted solid results overall and delivered on our near-term financial commitments. Revenue exceeded our guidance and non-GAAP earnings per share finished at the high end of our forecast. Our molecular diagnostics and international businesses continued to emerge as strong growth drivers, and our recently acquired Cynosure business performed in line with our quarterly expectations.

From a longer-term perspective, our quarterly results reflect positively on our efforts to revitalize and reshape our business portfolio. If you could have listened to our strategic planning discussions back in 2015, when our domestic Breast Health business was driving tremendous growth, we knew that we needed molecular and international to accelerate when Breast inevitably slowed, and that is exactly what has happened, as we upgraded leadership and made the necessary investments.

This quarter, in fact, both businesses, international and molecular, posted double-digit growth, results that would have seemed unlikely even a year ago. But while we were working to establish new growth drivers in molecular and international, we were also ramping up R&D in all our divisions to ensure that we could generate sustainable organic growth for years to come.

Several of the new products that resulted, like the Affirm Prone Biopsy System and Myosure REACH, are making increasing contributions to growth. This quarter, for example, sales of new products exceeded $40 million globally, although obviously, this is not all incremental. And other new products are emerging, some of which we'll discuss today. But before doing that, let's provide a brief overview of our third quarter results.

Reported revenue of $806.1 million grew 12.4% on a reported basis or 13.1% in constant currency. Margins were solid based on continued price discipline and solid expense control, which led to non-GAAP earnings per share of $0.50. EPS declined by 2.0% compared to the prior year period, a small amount considering the comp included a full quarter's contribution from our divested blood screening business. So we are doing an effective job of filling that earnings hole with gains in our base business as well as Cynosure.

If you were to back out blood screening and Cynosure, core revenues grew 2.4% on a reported basis or 3.1% in constant currency. Similarly, core EPS would have increased 11.9% if you excluded blood and Cynosure. So we continue to show good leverage up and down the income statement.

So while it was a solid quarter overall, we plan to do better. At Cynosure, our efforts to stabilize and strengthen the domestic sales force are underway under new leadership, and our R&D remains highly productive. And in Breast Health, we are excited about new claims for our Genius 3D Mammograms, new insurance coverage and new products that we're launching now, which we will discuss for the first time today.

With that introduction, now we'd like to discuss some third quarter revenue highlights, focusing on molecular diagnostics, international, Cynosure and Breast Health, then I'll hand the call over to Bob to cover other revenues, expenses and our updated guidance.

First, growth in the quarter was led by molecular diagnostics, where global sales of $144.1 million increased a very healthy 10.3%. The story here is very similar to prior quarters. In the United States, where sales grew at a high single-digit rate, our commercial team is doing an excellent job of cross-selling our full product portfolio, increasing market share and utilization of our fully automated Panther system and expanding the market by driving compliance with testing guidelines.

In addition, this quarter, we gained FDA clearance for our Aptima assay to detect herpes simplex virus 1 and 2. While the molecular herpes market is not huge, our new test is an important addition to the Panther women's health menu and a nice incentive for new customers to try out the system.

Outside the United States, where molecular sales grew more than 20% for the fourth time in 5 quarters, we continue to see the benefits of new leadership, healthy Panther placements and multiple new product introductions, including our viral load assays. And we recently received a CE Mark for our new Panther Fusion system, which provides lab customers new capabilities and enables them to further consolidate testing on our platform. We still have a lot of work ahead of us, but we are on our way to building an international molecular business that rivals the leadership position we have established domestically.

Beyond molecular diagnostics, we are very pleased with the continued growth and positive evolution of our international business as a whole. More than a year ago, we said this business felt like a startup and told you that building the foundations for sustainable growth would take some time. But we laid that groundwork in a very deliberate way, starting with new leadership.

Now for the second consecutive quarter, international sales grew low double digits, excluding blood screening and Cynosure. While we are still early in the game, we are clearly putting points on the board and are encouraged by our progress.

One reason we are feeling good about international is the breadth of our performance. In recent quarters, molecular diagnostics and surgical lead the charge. But this quarter, every business, except skeletal, posted solid growth. In particular, I want to highlight the progress made in international Breast Health. As a reminder, in all 4 quarters of our fiscal 2016, that business declined. In the first quarter of this year, it was flat. Then it grew at a mid-single-digit rate in Q2. This quarter, international Breast Health grew in the low teens, reflecting our efforts to optimize channel strategies and strengthen our commercial capabilities.

The third area I'd like to discuss is Cynosure. Our view of Cynosure continues to be very optimistic over the long term, though still cautious in the near term. Cynosure posted revenue of $110 million in its first full quarter as part of Hologic. This was much higher than in the second quarter sequentially and in line with our quarterly guidance.

There was a lot to like about Cynosure's performance in the quarter. First, we are pleased with sales of skin-related products, especially Picosure. Second, overall international sales grew significantly compared to the prior year. Third, sales of consumables increased at a low teens rate, driven by dramatic growth in SculpSure PAC keys, which illustrates the value that our product is providing in the field. And fourth, we made important progress in new product development. But at the same time, it's clear that we can improve Cynosure's commercial execution in the United States, just as we did at the larger Hologic 3 years ago.

As we discussed last quarter, there's been a considerable amount of disruption in the U.S. sales force, and newly hired reps are still getting up to speed. To tackle this challenge, we have named Kevin Thornal as Division President of Cynosure. I have personally known Kevin, who engineered the remarkable turnaround in our European Breast Health business over the last year or so since our years together at Stryker. He is a strong, commercially focused leader, who we're confident will have Cynosure growing again in 2018.

Kevin replaces Michael Davin, who will be retiring on September 1. Michael built Cynosure into the world's leading medical aesthetics company, and we thank him for remaining with Hologic during the integration process to share his expertise and knowledge.

Longer term, we remain enthusiastic about the value of the aesthetics market as well as Cynosure's ability to lead it. Nothing has changed in terms of the positive market backdrop. With the changes we are making, we are now in an excellent position to capitalize on these tailwinds with a broad portfolio of differentiated products, the commercial expertise and backing of Hologic in areas like direct-to-consumer advertising and a robust R&D pipeline.

As evidence of this last point, we received FDA clearance ahead of schedule this quarter to use SculpSure, our noninvasive body contouring product, to treat the back and thighs. In addition, we have filed for regulatory clearance to use SculpSure in what's called the submental area under the chin. This is a significant market opportunity that should boost growth in 2018 as we believe our laser technology provides an advantage over the competition. And finally, we have filed for clearance of an innovative new radio frequency platform, which over time, will have applications in aesthetic, women's health and surgical markets.

Now we'd like to turn to our fourth subject, Breast Health. In the third quarter, global Breast Health sales of $283.7 million increased a modest 0.9% in constant currency. The U.S. business declined 1.7% while international sales increased 13%. In the United States, incremental placements of 3D gantries declined like in recent quarters as the time required to close deals has increased due to market and competitive dynamics. But at the same time, 3D units increased sequentially. Booking trends remained solid. Our backlog is healthy. We still have roughly half our installed base to upgrade, and we remain a net market share gainer.

In addition, other drivers of growth continue to emerge within Breast Health. For example, service revenue again benefited from an expanding installed base in the United States, delivering more than $100 million in sales. Revenue from our interventional products also increased nicely as we are doing a better job of selling our full portfolio. Finally, sales of our new Affirm Prone Biopsy System continued to build.

In addition to these positive trends, several other factors give us confidence that our domestic Breast Health business will grow in 2018. First, this quarter, we earned important new labeling indications that will broaden our competitive advantage. Our sales representatives can now say that Genius Mammograms are the only mammograms clinically proven to detect 20% to 65% more invasive cancers than 2D alone, with an average increase of 41%. In addition, only Genius Mammograms are FDA-approved as superior to 2D mammography for routine screening of the nearly 50% of women who have dense breasts. This is meaningful because more than 30 states now have laws requiring women to be notified of their breast density.

Second, we made significant progress on reimbursement during the third quarter. Approximately 85% 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.

And third, we expect sales of new products to continue to build as we move into 2018. Revenue from our Affirm Prone Biopsy System is healthy, and we expect to launch Brevera, our innovative new biopsy system, around the end of our fiscal year. So our interventional portfolio is well positioned for long-term growth.

Finally, we wanted to share for the first time that we are in the process of launching our first 2 new mammography systems since 2011. These new products will enable us to further segment the market and extend our competitive leadership position.

Our new 3D performance system, which has been launched globally, provides the superb image quality that customers have come to expect from Hologic, but with workflow capabilities and throughput that are geared towards smaller, lower volume customers.

In addition, at the high end of the market, the best just got better. Our new 3Dimensions system delivers the industry's fastest, highest resolution breast tomosynthesis exam, plus a wealth of additional improvements. These include a better patient experience using the SmartCurve breast stabilization system, superior image clarity from our fastest and highest resolution detector and faster, better 2D images than improved software -- from improved software and machine learning algorithms.

The 3Dimension system has been launched overseas where customers are giving it positive reviews, and we expect to introduce it domestically in the coming quarters. So behind the scenes, our R&D team in Breast Health has been highly productive, and we look forward to these products adding to growth in coming quarters.

Before I turn the call over to Bob, let me summarize by saying that we are pleased to have met our financial obligations in the quarter. We expect molecular diagnostics and international to be increasingly important growth drivers in our portfolio and have lots of new product innovation on the way to improve growth at both Cynosure and in Breast Health. So we believe we are well positioned for the future.

Now I will turn the call over to Bob.

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Robert W. McMahon, Hologic, Inc. - CFO [4]

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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 third quarter income statement, touch on a few other key financial metrics and then finish 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 solid results in our third quarter, molecular diagnostics and international performed well and are emerging as new growth drivers within our portfolio, consistent with our strategic plan. This is an important development as our domestic molecular business and our international franchises combined to represent nearly 40% of revenue this quarter, and we have initiatives in place to improve growth at Cynosure and in Breast Health based on both better commercial execution and productive R&D.

With that introduction, I'll begin with diagnostics, our largest division, where revenue of $284.1 million decreased 7.4% due to the divestiture of our blood screening business. Although we closed this transaction last quarter, we do have an ongoing agreement with Grifols for raw material and instrument supply, which yielded $19 million of very low margin revenue in the quarter. This was higher than expected and much more than we anticipate in the fourth quarter as well.

Excluding blood screening, diagnostics revenue grew a solid 5.4% in the quarter. Since Steve already covered molecular, I'll mention that cytology and perinatal sales of $121 million were essentially flat in the quarter versus a tough comp from last year. In our GYN Surg business, revenues of $106.5 million grew a solid 5.2%. Myosure continues to lead the charge, with global sales growth of 20.8% in the quarter. NovaSure sales declined 5% as we've lapped the benefit of a competitive withdrawal. Specifically, it's worth noting that the third quarter a year ago was a huge one for NovaSure as sales grew by nearly 15%, making for the toughest comp of the year for the division as a whole.

To wrap up the revenue discussion. Skeletal Health revenues of $21.8 million declined 5%, although we are encouraged by interest in our bone density products, especially for body composition testing in the U.S. and expect this business to improve in the fourth quarter.

Now moving down the P&L. Gross margins of 63.1% decreased 260 basis points compared to the prior year. This is mainly due to product and geography sales mix, the divestiture of our blood screening business and a full quarter of sales from Cynosure products, which carry a lower gross margin.

Total operating expenses of $274.9 million increased 19.9% primarily due to the inclusion of Cynosure expenses for the full quarter. So if you back these out, we demonstrated good operating leverage, with total expenses declining by 4.2%. As a result, operating margin was 29% in the quarter. This was 480 basis points lower than a year ago due to product and geography sales mix and the blood screening divestiture. However, our profit profile remains among the best in the medical technology industry, and we have nice opportunities to boost operating leverage going forward.

To round out the discussion on the income statement, net margins of 18% decreased 220 basis points compared to a year ago, as negative mix was partially offset by a lower effective tax rate. All this led to non-GAAP earnings per share of $0.50 at the high end of our guidance range. Despite the divestiture of the very profitable blood screening business, EPS declined by only $0.01. So we were doing good job of filling the earnings hole with growth in our base business and Cynosure. Specifically, Cynosure contributed $0.02 to EPS this quarter, so we have already achieved the accretion goal we had established when we announced the deal. If you back this out, along with $0.01 for blood, non-GAAP EPS in our base business grew 11.9%, much faster than sales.

Now before we talk about our updated guidance, I'll quickly touch on a few other key financial metrics, beginning with the balance sheet. Total debt decreased $201 million compared to the prior year. Of note, we repurchased $200 million in principal of our convertible notes or $269.1 million, reducing their future dilutive impact.

Our leverage ratio, net debt over EBITDA, currently stands at 2.6x, and we remain comfortable around this level. One reason we are comfortable with our debt load is that we continue to generate strong cash flow. This quarter, free cash flow was $180.1 million on a normalized basis, excluding the large tax payment we made related to the gain on the sale of the blood screening business. To combine with our revolver, we have plenty of capacity to continue to pursue small tuck-in acquisitions and eliminate our remaining convertible debt when the notes become callable in fiscal 2018.

Now finally, adjusted EBITDA of $260.7 million decreased slightly compared to the prior year as improvements in our base business were offset by the divestiture of the blood screening business. Now let's turn to our updated non-GAAP financial guidance for the full year and fourth quarter, beginning with our full year revenue guidance.

We are reducing our full year guidance mainly due to expectations for lower Cynosure sales in the fiscal fourth quarter. While we have made good progress in stabilizing and strengthening the U.S. sales force, we know it will take these reps some time to get up to speed and for our other commercial initiatives to kick in.

In addition, the overall medical aesthetics market experiences a seasonal slowdown over the summer months. So our guidance implies a significant decrease in Cynosure revenues compared to the prior year when sales were roughly $106 million. All in, we now expect reported revenue of $3.04 billion to $3.055 billion in fiscal 2017, representing reported growth of 7.3% to 7.8%. Based on recent exchange rates, this equates to high single-digit constant currency growth of between 7.9% and 8.4%. If you were to back out Cynosure and blood screening, we continue to expect solid mid-single-digit growth in our core franchises.

With only 1 quarter remaining in our fiscal year, this annual guidance implies revenues of $785 million to $800 million in the fourth quarter. Compared to the prior year period, this range reflects revenue growth of 8.0% to 10.1% on a reported basis or 8.3% to 10.3% in constant currency terms.

For modeling purposes, let me remind you of 2 things that will affect our fourth quarter results. First, as we discussed when we initially gave guidance for the year, we have 1 less selling day in the quarter versus the prior year. We estimate this will depress our growth rates by 70 to 80 basis points or so. But at the same time, we are due a multimillion dollar royalty payment from one of our diagnostics partners, which will boost our molecular line.

Now let's move on to our revised EPS forecast. We are slightly raising the midpoint of our non-GAAP EPS guidance for the full year to a range of $2 to $2.02, which implies reported growth between 2% and 3.1% in constant currency growth of between 3.0% and 4.1%. So we are growing non-GAAP earnings for the year despite losing a net $0.22 per share from blood screening.

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 be much smaller than recent quarters, and essentially have 0 impact on EPS. This earnings guidance is based on recent foreign exchange rates, a full year tax rate of 30.5% and diluted shares outstanding of approximately $288 million for the full year.

Fiscal year guidance translates to non-GAAP earnings per share of $0.48 to $0.50 in the fourth quarter. This represents a decrease of 3.8% to 7.7% on a reported basis and 3.4% to 7.2% in constant currency, primarily due to the divestiture of our blood screening business, partially offset by the acquisition of Cynosure. Now as you update your forecasts, we would again encourage you to model around the midpoint of our guidance ranges, as we've incorporated both upsides and downsides into our forecast.

Now before opening the call for questions, let me summarize by saying that we delivered on our revenue and EPS commitments in the third quarter. Our results highlight the progress we have made in building a vibrant molecular diagnostics and international businesses over the last couple of years. And at the same time, we reenergized our R&D efforts in Breast Health and are strengthening our commercial capabilities in Medical Aesthetics. We remain bullish that these efforts will pay off as we move into 2018.

With that, I will ask the operator to open up the call for questions. (Operator Instructions) Operator, we are ready for the first question.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question today comes from Dan Leonard with Deutsche Bank.

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Daniel Louis Leonard, Deutsche Bank AG, Research Division - Research Analyst [2]

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So for starters, I could use a little help reconciling the performance in Cynosure. So you performed in line with your guidance in the third quarter, yet you're lowering expectations for that business in the fourth quarter. What are the dynamics in play there? And any more color you could offer would be helpful.

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Stephen P. MacMillan, Hologic, Inc. - Chairman, CEO and President [3]

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Yes, Dan. In simple terms, it probably is a little head scratcher, at the end of the day, international came in a lot stronger than we expected, and the U.S. was frankly disappointing, and it's says we've got more work to do. And I'll give it to you this way. Obviously, when we did the acquisition, we knew there'd been a lot of sales force disruption in the quarter right before we bought it. That leadership team at Cynosure had a long track record and they said at the start of the quarter they thought things were settling down. And they gave us a number that they thought they would deliver for the quarter. At the end of the day, we came up short in the quarter. I wanted to give them one quarter to let them prove that they were back on track. And at the end of the day, they fell short. So we're making changes. We've just installed a new president. And I think what -- so what we will see here in the third quarter is, because international's gotten stronger and there's a normal seasonal slowdown, I think what you're going to see is that seasonal slowdown in July and August internationally is particularly soft in medical aesthetics. So I think we see it being a step back before we really start to step forward again as we go. And I will tell you, feel really, really good about the commercial leader we've put in to run that business now, but also want to give him a little air cover while he gets back -- while he gets his feet on the ground, because there's always a little disruption in that change. So it's really a -- call it, a one quarter step back. I think we showed we at least know what we're doing, by delivering on the -- frankly, at the low end of what we had hoped for the quarter, but feeling great about international, great about the pipeline and we do have some work to do in the U.S.

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Daniel Louis Leonard, Deutsche Bank AG, Research Division - Research Analyst [4]

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And Steve, for my follow-up, where there any timing aspects or any abnormal discounting or anything to be aware of, to get you the $110 million in that third quarter? Or was the activity more run rate, if you will?

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Stephen P. MacMillan, Hologic, Inc. - Chairman, CEO and President [5]

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No, it was run rate. There was no end-of-quarter discounting. If anything, I would tell you frankly, the end of the quarter, was probably a little disappointing, which -- in its own way. We might have thought we would have done even a little bit better than where we came in there. So that's what precipitated the change. But I think, suffice it to say, orders, it's not like we carried in a bunch of orders either or anything into this quarter. In an ideal world, they would have been running hot and we might have even been able to carry some or whatever into this quarter, we weren't able to do that. So it is a complete U.S. sales execution issue. I -- we don't break out the U.S. international piece. I would tell you, we are much more excited about the performance internationally than we imagined, and it really is a very isolated issue that we know how to fix. As a reminder, by the way, Kevin Thornal, who was just put in as Division President. He is the guy we sent over to Europe 18 months ago when, many of you remember, our European and especially our global Breast Health business was a disaster. In that business, within 18 months of him arriving, is now growing at double-digit rates. He's completely put that business back together again. Kevin and I have a long history together at Stryker. He came over to Hologic about 3 years ago. First, into the U.S. Breast Health business, he's gone over there. And I would tell you, I'm incredibly excited about what he's going to bring to the business, but he's not going to work magic this quarter.

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Robert W. McMahon, Hologic, Inc. - CFO [6]

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Yes, I think, just to build on that, Steve, I think if you look at it obviously, we felt very good about the performance that we had in international, but also, if you look at the non-laser, the PAC key utilization that also improved across the globe. Most of that here is in the U.S. So whether it's really about getting that sales organization up and trained and clean it up. And then moving into 2018, we have new products that will help drive back additional growth as well. We talked about submental and then the RF platform as well. So we feel good about the future.

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Stephen P. MacMillan, Hologic, Inc. - Chairman, CEO and President [7]

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Yes, Dan, I'd add one last piece. A year ago, everybody thought international was a mess. Now it's a double-digit grower. We look at this and said, "Been there, done that. We'll absolutely be back to great growth rates in this business."

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Operator [8]

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Our next question comes from Jack Meehan with Barclays.

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Mitchell Frank Petersen, Barclays PLC, Research Division - Research Analyst [9]

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This is actually Mitchell Petersen on for Jack this afternoon. Appreciate all the updates on Cynosure, especially on the new leadership and long-term view there. As of now, is there any reason why, in fiscal 2018, this business won't be able to grow in the double digits?

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Stephen P. MacMillan, Hologic, Inc. - Chairman, CEO and President [10]

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We're not going to give exact guidance for '18 yet on this call. Cynosure will grow in 2018, there is no doubt.

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Mitchell Frank Petersen, Barclays PLC, Research Division - Research Analyst [11]

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Okay. And then, just as a follow-up. Could you just comment on how long you think it's going to take the Cynosure sales force to get fully ramped up? And are there any productivity improvement metrics you can share with us?

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Stephen P. MacMillan, Hologic, Inc. - Chairman, CEO and President [12]

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Sure. You know what, we typically are going to assume a 6- to 9-month ramp for new reps and new businesses. And I think that would be an appropriate piece here. So I think, my hunch is, this coming quarter's probably the bottom, and we start to rebuild even by the end of this quarter. So as we go into calendar year 2018, it ought to be looking pretty good. We obviously track internal performance metrics, nothing we're going to share externally.

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Operator [13]

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Our next question today comes from Tycho Peterson with JPMorgan.

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Tycho W. Peterson, JP Morgan Chase & Co, Research Division - Senior Analyst [14]

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Steve, I'll hop over and hit on Breast Health. You threw out a couple of things here. You've got the 2 new systems, 2 label indications and then you apply the increased competitive dynamics. Maybe, can you touch on the latter point a little bit? Is it more pricing pressure on the market with GE? And what kind of growth trajectory do you think Breast Health can get back to, with the label indications and ultimately, the 2 new systems?

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Stephen P. MacMillan, Hologic, Inc. - Chairman, CEO and President [15]

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Yes, I think less -- there's always been the price competition. We're still maintaining pricing and not going down that rabbit hole. I think GE has gotten a little more aggressive with their new system, just in terms of marketing and activity. But we still feel very good about the ongoing trajectory. I think this is probably a low single-digit grower for us, as we go into 2018. But we'll -- and we'll certainly aspire to more. But I think, just given where we are in the market life cycle, as we go into that kind of second 50% of our installed base and further down into the market, it's just smaller, smaller customers, smaller orders.

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Robert W. McMahon, Hologic, Inc. - CFO [16]

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I think on that, Tycho, this is Bob. As part of that, with the launch of the 3D performance product, that allows us, I think, to be more effective leaders in the smaller volume hospital and so forth. And we're not going to play the price game, but that provides us with -- our customers with good value and allows us to have a portfolio of products that suit the various needs of our customers more effectively.

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Tycho W. Peterson, JP Morgan Chase & Co, Research Division - Senior Analyst [17]

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Okay. And then for the follow-up, I want to make sure I understand the dynamics on Cynosure, because it has gone from double-digit grower to a flat and declining business. And I know there's the sales force churn dynamic, and it seems like you've got a handle on that. But how much of it is also just a timing issue in terms of -- you're repositioning Picosure for a broader audience, you're leveraging MonaLisa into the OB/GYN channel. Obviously, you've got the new product cycles you've talked about. So how much of it you think is sales force related and trying to get them optimized versus just maybe the timing on some of these other initiatives?

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Stephen P. MacMillan, Hologic, Inc. - Chairman, CEO and President [18]

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It's probably a bit of both, Tycho. I think they certainly had the tremendous run with the initial launch of SculpSure. So we are going against comps when they were growing at the 20% plus level. We still think this is a high-growth market over time. But going against those particularly high comps, when it was all the capital going in, you're probably dealing with a little bit of that. But overall, we continue to feel great about the market dynamics and know that we can have a better commercial execution as we go forward, frankly, on both sales, but also marketing. I mentioned in the script direct to consumer marketing. We're actually just beginning some direct to patient marketing programs that they lacked as a company to date.

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Operator [19]

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Let's take our next question from Vijay Kumar with Evercore ISI.

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Vijay Muniyappa Kumar, Evercore ISI, Research Division - MD and Fundamental Research Analyst [20]

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So maybe I'll start one on the guidance front. Bob, I think you mentioned the guidance reduction was mostly related to Cynosure. I just want to understand, get some of the numbers. So the revenues were lower, I think, by $10 million to $25 million, right, versus the prior guidance for the overall company revenues. Now I know the last guidance was, you had blood at $115 million to $125 million and you had Cyno at $235 million, $245 million. Can you just maybe walk us through what changed? Was it all Cyno? Or was it (inaudible) in blood or the base business?

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Robert W. McMahon, Hologic, Inc. - CFO [21]

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Yes, so the vast majority of the change, Vijay, is due to Cynosure. There's always some moving parts, but the vast majority of it is due to Cynosure. And so I think that, that is the area of focus. It wasn't blood. We actually had more blood in the third quarter. We expect to -- a sequential decline but in line with our expectations there, and our base business is roughly in line as well. So obviously, we've got a lot of focus on that. Part of the business in Cynosure, bringing in new leadership and so forth. But if you look at a sequential change from where we are in Q3 to Q4, another way to kind of look at it, all of that change is related to Cynosure.

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Vijay Muniyappa Kumar, Evercore ISI, Research Division - MD and Fundamental Research Analyst [22]

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Got you. Basically, it implies, I think the organic for the base business was unchanged. Steve, maybe one on Cynosure. I know you're getting a bunch of questions on this. I just want to understand. On the sales force, right, are you still hiring sales force for the Cynosure? Do we need to hire more people? Is that what the delta is? Or are we done with the hiring? And this is just now a question of getting the sales force ramped up?

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Stephen P. MacMillan, Hologic, Inc. - Chairman, CEO and President [23]

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No, there'll be more hiring. There'll be more hiring. We still have some opportunities and just managing them. It's -- the other piece I'd give you is, we've all seen companies kind of go from that 0 to 400, 500 range. And then you kind of start to -- can stumble a little bit as you go to that next level, and sometimes you need some new leadership to take it to that level. And I think that's exactly what we need on the commercial side. So there will be, still a few more changes as we go forth and bringing in more people.

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Operator [24]

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Our next question today comes from Isaac Ro with Goldman Sachs.

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Isaac Ro, Goldman Sachs Group Inc., Research Division - VP [25]

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I have to ask another question on Cynosure. Given what we've seen here with the turnover in the sales force and in your earlier comments, hearing that last question, I'd be interested in sort of, if you can illustrate a couple of the first items of business for Kevin as he takes over. I know you mentioned it's going to take more than 1 quarter. But I'd love to know a little bit about his program, first couple of specific steps when he takes the job.

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Stephen P. MacMillan, Hologic, Inc. - Chairman, CEO and President [26]

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Yes, it's really for Kevin to get into it. Kevin is one of the greatest sales and commercial leaders you'll find, just as he went over to Europe. And it starts by getting to know the key people and the key opportunities and then repositioning and making sure we got the right people against the right opportunities. It's going to be blocking and tackling. And nothing -- no whiz-bang stuff, but a lot of basics. Frankly, we're seeing that sales training is a huge opportunity. There's a lot of just basic things where, they've hired a bunch of people that don't even necessarily have been trained on the full line of products. It's a lot of stuff. It's not pretty, but it collectively creates great performance. And that's the kind of stuff I'm sure Kevin's going to get into.

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Isaac Ro, Goldman Sachs Group Inc., Research Division - VP [27]

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Okay, that's helpful. And to follow up on diagnostics. You guys have done a great job, I think, not only with new products, but also market share. So I'd be interested in knowing just how much more headroom do you see in terms of share gains? Or is it really going to be more about the pipeline? I think you alluded that it's pipeline, but I just want to clarify.

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Stephen P. MacMillan, Hologic, Inc. - Chairman, CEO and President [28]

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In the U.S., there's probably not a lot of share to keep gaining. We do you think there's still some market expansion opportunities. One of the things we haven't talked as much about probably, Isaac is, trying get more testing done to guideline, where frankly, there are more tests that can be prescribed on -- in various situations, and we're trying to get more of that done. The huge, certainly market share gains are outside the U.S. When you look at our molecular business, it's still over 80% in the U.S. And I think what we're really excited about is, we're really starting to get some traction internationally. Four out of the last five quarters, growth over 20%, admittedly off a small base, but the numbers you keep doing that, the numbers start to get much more meaningful. So I think the market share will probably be more outside the U.S.

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Robert W. McMahon, Hologic, Inc. - CFO [29]

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Isaac, one of the things, just to kind of build on that, one of the things we're really pleased with is not only that we continue to place very, very healthy levels. The Panther system's actually had a very good quarter, both domestically and internationally this quarter again. The revenue for Panther continues to increase both in the U.S. as well as domestically quite nicely. So it speaks to the power of the Panther system, not only with the existing products, but also as we add additional pipeline. And I think the team, as Steve mentioned in the script, has done a great job of cross-selling. But there's still some opportunity there on the sexually transmitted disease menu. And then that bodes well for the viral loads here in the U.S., which we've got the 2, HIV and HCV, HPV coming in 2018. And so we feel very good about that business.

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Operator [30]

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We'll take our next question today from Bill Quirk with Piper Jaffray.

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Alexander David Nowak, Piper Jaffray Companies, Research Division - Research Analyst [31]

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This is Alex Nowak on for Bill today. Just any initial feedback on Panther Fusion in the international markets? And will this system be FDA approved in time for this year's flu season?

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Stephen P. MacMillan, Hologic, Inc. - Chairman, CEO and President [32]

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Very positive feedback from Europe, and not likely for this year. We figure that's an '18-ish approval in the clearance, in the U.S.

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Alexander David Nowak, Piper Jaffray Companies, Research Division - Research Analyst [33]

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Okay. And then at what point do you start training your existing OB/GYN sales force with the Cynosure products? Are you going to wait until Cynosure stabilizes here before introducing these products to your existing teams?

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Stephen P. MacMillan, Hologic, Inc. - Chairman, CEO and President [34]

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Yes, we -- we're going to basically use referrals. But frankly, we want our existing GYN Surgical sales force to be selling a little more NovaSure frankly right now, and it continues to be a tremendous opportunity at Myosure. We're not sure we had figured out yet how big the full market potential for Myosure is. So they've got a lot of good things they can still be doing while they refer -- make references, but not -- we don't want to distract them and get them trying to sell the full Cynosure bag.

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Robert W. McMahon, Hologic, Inc. - CFO [35]

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Yes. And Alex, on the incentive program that was just launched this last quarter, it's still early days, but I think very promising in terms of the number of leads that have been qualified through our OB/GYN sales organization into the Cynosure group. And so I think we'll see that continue to be a positive harbinger for the future, primarily on the Cynosure side. But that's -- in the near term, that's the leverage that we're looking at. And early results are promising.

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Operator [36]

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Our next question today comes from Richard Newitter with Leerink Partners.

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Richard S. Newitter, Leerink Partners LLC, Research Division - MD, Medical Supplies and Devices and Senior Analyst [37]

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Steve, I was just wondering if you could -- on the new RF product that you just filed with the FDA, 2 questions on that. One, is there a particular order that the surgical indication, aesthetic indication -- and I can't remember what the third -- women's health indication are going to come out in? Or is this going to get approval for all of them at once?

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Stephen P. MacMillan, Hologic, Inc. - Chairman, CEO and President [38]

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Yes, it will not be all at once. What we're doing is, we're building a great box that will have opportunities to add products to it over time. The initial indications will be aesthetic.

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Richard S. Newitter, Leerink Partners LLC, Research Division - MD, Medical Supplies and Devices and Senior Analyst [39]

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Okay. And can you give us a sense as though like how long in between applications do you think it will take to get this so that some -- multiplatform functional? And then the second part would just be, is this going to be a worldwide launch? Or are you kind of going to wait for the U.S. launch first and then extended it o U.S.?

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Stephen P. MacMillan, Hologic, Inc. - Chairman, CEO and President [40]

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It'll likely be a U.S. launch, just the way they've typically filed stuff has been -- and we're in the process of changing that, but largely, U.S. first and then internationally. I think in the future, they can be more global launches. So we're excited about the opportunity.

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Robert W. McMahon, Hologic, Inc. - CFO [41]

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Yes. And I think -- Rich, this is Bob. I think as you look at the indications, think about it over a course of a year.

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Operator [42]

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

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Brian David Weinstein, William Blair & Company L.L.C., Research Division - Partner and Healthcare Analyst [43]

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A couple of questions. First, Steve, last quarter, you talked about Cynosure's core competency being identifying customer needs and finding products to meet them either organically or through external business, and you've talked about some of the organic stuff here. But should we expect you guys to do anything in terms of external or inorganic conditions to that business, to help maybe drive incremental revenue there?

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Stephen P. MacMillan, Hologic, Inc. - Chairman, CEO and President [44]

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No, I think, as it does relate to adding products, we always figured Cynosure will be an opportunity for us to have some inorganic tuck-ins along the way. I would tell you, in the nearer term, we see such an opportunity between the product pipeline and also our own need to focus on just getting the U.S. selling organization right up to where we want it to be. Again, not dissimilar to what we encountered here a few years ago, when this management team came into this company. So I think that will be our focus nearer term, and then tuck-in kind of stuff, maybe down the road. But I think it'll certainly be a place for tuck-ins. It's a great market and we continue to love being in the medical aesthetics market. I think it's going to be one of the highest growth markets to be in. And out of that, we'll certainly spawn additional opportunities for products or small company things.

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Brian David Weinstein, William Blair & Company L.L.C., Research Division - Partner and Healthcare Analyst [45]

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Got it. And then, as it relates to Breast Health, as you move to some of the smaller opportunities, you did talk about incremental time to close, tougher competition. But is there any reason to suspect that in the smaller hospitals or smaller imaging clinics that, that your share should be any different in terms of the net gains that you saw when you were going after the larger accounts?

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Stephen P. MacMillan, Hologic, Inc. - Chairman, CEO and President [46]

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No, there is no good reason to expect that our share should be any different. No, we've got superior products. Some of those have one source contracts and some of those kinds of things. But frankly, so do a lot of the big institutions, where there's even more money on the line. And it comes down to again, blocking and tackling and great salespeople selling a superior product. It just really is -- as we've been saying it for a long, long time, we predicted there was not going to be a cliff when everybody thought there was going to be a cliff. But we said it was going to slow down and be much more flat for a much longer period of time. And that's really how the market's playing out as you go into the -- this segment of the customers. But we are not relaxing our expectations one bit.

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Robert W. McMahon, Hologic, Inc. - CFO [47]

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No, and I think, Brian, to add to that, as of the end of this last quarter, we still estimate that roughly half of our own installed base is available to be upgraded to 3D. And now with the new products that we will be launching over the next couple of quarters, it continues to give us a lot of confidence that they will, in fact, upgrade. And we think that we will be a net share gainer, continued going forward, regardless of the type of hospital.

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Operator [48]

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Our next question today comes from Anthony Petrone with Jefferies.

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Anthony Charles Petrone, Jefferies LLC, Research Division - Equity Analyst [49]

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Just a couple on U.S. Breast Health and Cynosure, and maybe just to clarify and pick up on that last question. So is the retention of your own sockets in the quarter was -- did that change? So you're still -- when your own sockets come up for renewal, is the win rate for Hologic still the same? Or did that shift in the quarter? And then on Cynosure, just to clarify, is there a new range, from $235 million to $245 million? And then the follow-up there would just be legacy Cynosure sort of categories. Let's say, skin, hair and tattoo removal, for instance, versus body contouring. Is there's some color you can provide on how legacy Cynosure's doing versus some of the new areas they entered into?

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Stephen P. MacMillan, Hologic, Inc. - Chairman, CEO and President [50]

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I think on the share piece, I think we continue to feel very good that as our sockets, as our gantries come up for renewal, we are doing a very good job on those. We don't win all of them, but we win consistently most, and I would say, very close to all of them. And we continue to win competitive users. So that's why I think we continue to be a net share gainer. On Cynosure, I think as we mentioned, we felt very good about the performance in the skin business in the last quarter and feel good about that. And we think there's still opportunities as we get ramped up to help on the women's health side. And the body piece, we saw very good improvement in the consumables, but down on the capital sales.

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Robert W. McMahon, Hologic, Inc. - CFO [51]

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Yes, although down on the capital sale versus prior year.

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Stephen P. MacMillan, Hologic, Inc. - Chairman, CEO and President [52]

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Versus prior year.

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Robert W. McMahon, Hologic, Inc. - CFO [53]

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Up sequentially versus the prior quarter. So we're on the right trajectory, but still work to do there.

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Operator [54]

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Our next question today comes from David Lewis with Morgan Stanley.

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David Ryan Lewis, Morgan Stanley, Research Division - MD [55]

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I just had a couple of questions for you. So one for Steve, the more important one. Bob, I do want to clarify some things on guidance that I'm kind of unclear on. For the fourth quarter, I'm sort of assuming, you have kind of a $30 million organic guidance reset, that kind of feels like that's about $20 million of Breast. So Breast will be sort of flattish into the fourth quarter and $10 million of Cynosure. So Cynosure is sort of flattish into the fourth quarter. Are those kind of in the right ballpark? And that gets you to kind of 1.5%, 1% to 2% organic growth for the fourth quarter, just trying to level set those expectations.

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Robert W. McMahon, Hologic, Inc. - CFO [56]

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Yes. Those numbers are off. The Cynosure number is not flat sequentially. We mentioned that it would be down materially versus last year, which was at the $106 million. So -- and to be clear, we're not expecting Breast to be down that much. So our expectation is that our core business growth is not in that low single digits, the 1% to 2% that you quoted. It's higher than that.

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Stephen P. MacMillan, Hologic, Inc. - Chairman, CEO and President [57]

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Yes. The other way to think about it, David, just from the way we articulated in the script, effectively, the guide that -- the midpoint of the guide down is effectively all Cynosure, from what they just delivered this quarter to what we expect them to deliver this next quarter.

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David Ryan Lewis, Morgan Stanley, Research Division - MD [58]

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But then I guess, I'm sorry, I'm being dense here. But the -- you gave a number for Cynosure guidance. Maybe just give us that number again? The $235 million to $245 million, what is the new Cynosure guidance number?

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Robert W. McMahon, Hologic, Inc. - CFO [59]

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We haven't given a new number, but it's lower than that, right? So what we're saying is last year, it was $106 million in the quarter -- fourth quarter, and it's materially lower than that for this year's fourth quarter.

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Operator [60]

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Our next question today comes from Doug Schenkel with Cowen and Company.

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Chris Lin, Cowen and Company, LLC, Research Division - Research Associate [61]

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This is Chris Lin on for Doug today. I just want to follow up with a Cynosure question. What was the domestic Cynosure, really the domestic SculpSure consumable revenue growth in Q3? Was this as expected for the established installed base and in line with recent trends? I just want to get a sense of the existing domestic customer utilization and ensure nothing has changed with the fundamental market growth rate.

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Robert W. McMahon, Hologic, Inc. - CFO [62]

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Yes. This is Bob. What I would say is, that -- first of all, that number's off a small base, but the growth rate year-over-year is very, very high in the their -- what I'll call, the renewal rate for the PAC key utilization in the U.S. So it grew significantly. We don't feel that there's any issue with the market. And ultimately, we still believe that we're in the early innings of this market, and there is still lots of room to grow, not only in utilization but continued placement of SculpSure products in our current customer base.

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Chris Lin, Cowen and Company, LLC, Research Division - Research Associate [63]

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Okay. And then, I just want to make sure I heard this correctly. Is it right to think that domestic 3D unit sales can at least remain steady for the foreseeable future? And to be clear, was 3D sales in line with your internal expectations for Q3?

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Stephen P. MacMillan, Hologic, Inc. - Chairman, CEO and President [64]

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Yes. They can totally -- be stable and they were roughly in line.

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Robert W. McMahon, Hologic, Inc. - CFO [65]

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Yes. They were up sequentially quarter-on-quarter, and I think we see them roughly flattish for Q4.

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Operator [66]

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Our next question comes from Anne Edelstein with Bank of America.

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Anne Edelstein, BofA Merrill Lynch, Research Division - Research Analyst [67]

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So the first one is on the international Breast Health business. Now that, that's contributing meaningfully, can you just give us a better sense of what your o U.S. digital installed base is and where market share stands currently? And sort of what is driving the reacceleration in that business? Is it primarily 2D or 3D?

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Robert W. McMahon, Hologic, Inc. - CFO [68]

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Anne, we continue to sell both 2D and 3D outside the U.S., and we would expect to continue to do that. Over the last several quarters, it's roughly been about 50-50 in terms of the number of placements of 2D and 3D. The number of units in the U.S. is much higher than it is outside the U.S. It's roughly 2,000 units outside the U.S. 3D units. Our share outside the U.S., it's really market dependent, but we still have plenty of opportunity. It's roughly half of what it is in the U.S. on the digital side. So I think what it speaks to is the new leadership in place, working for the dealers in Europe, and then around the world, just having an increasing focus on better performance, not only with our dealers, but bringing in the right leaders and working in partnership with them on tenders, bringing in some additional capabilities like market access and so forth that are really helping drive screening protocols across the various countries. That's going to take some time. But those are the types of initiatives that we've been investing in over the 18 -- the last 18 months and it's starting to bear fruit.

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Anne Edelstein, BofA Merrill Lynch, Research Division - Research Analyst [69]

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Okay. And then just a quick one, I don't know how much you can say about this. But do you expect any impact from the injunction that you filed against Fuji in the U.S.?

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Robert W. McMahon, Hologic, Inc. - CFO [70]

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Yes. Obviously, with ongoing litigation, we can't comment.

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Operator [71]

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Our next question comes from Mark Massaro with Canaccord Genuity.

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Mark Anthony Massaro, Canaccord Genuity Limited, Research Division - Senior Analyst [72]

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Steve, you mentioned that there will still be some hiring in the sales force. Obviously, the prior quarter, there were some attrition in the sales force for reasons that you've outlined. But can you just speak to perhaps the number of sales reps that you may have lost in the current -- in the prior quarter? And how many folks you think you need to hire?

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Stephen P. MacMillan, Hologic, Inc. - Chairman, CEO and President [73]

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Yes. When I said there's going to be continued hiring, by the way, there's going to be continued hiring in every business that we ever have. It's part of being a growth company. So it's in my DNA that we will be always hiring and expanding our sales organization. So I think, a little bit bigger opportunity here in the Cynosure piece as we replace people that had left, but feeling very good about the leadership we're putting in place.

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Mark Anthony Massaro, Canaccord Genuity Limited, Research Division - Senior Analyst [74]

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Okay. And I guess, just for clarification, were there -- was there sales repatriation that may have impacted the prior quarter?

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Stephen P. MacMillan, Hologic, Inc. - Chairman, CEO and President [75]

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Yes, yes.

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Operator [76]

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Our next question comes from Jayson Bedford with Raymond James.

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Jayson Tyler Bedford, Raymond James & Associates, Inc., Research Division - Senior Medical Supplies and Devices Analyst [77]

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I wanted to ask about the changing growth profile in surgical business. And I realize that you lapped the Thermachoice boost from last year. But growth from last year, albeit quite strong, wasn't as strong as in past quarters. So can you talk about some of the dynamics in the market? Has competition picked up? Or is this just a function of the law the large numbers finally catching up to this business?

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Stephen P. MacMillan, Hologic, Inc. - Chairman, CEO and President [78]

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You got a piece of both. You know what I think on Myosure, it is the law of large numbers is that business has generated. Frankly, it had a lot more 30%, and high 20% growth quarters than we ever imagined. Still a 20% number, very healthy and excited. I think on the NovaSure piece, we obviously are going against very tough comps as we had the competitive withdrawal. Having said that, you know what, we'd like to be doing better and think we haven't necessarily maintained as much share as we should have.

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Operator [79]

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Our next -- our final question comes from David Lewis with Morgan Stanley and it's a follow-up.

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David Ryan Lewis, Morgan Stanley, Research Division - MD [80]

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Steve, just last one. I would just say, I think shareholders really want the Cynosure guidance number, and they're a little confused they don't have it, but we can take that offline. But Steve, I want to come back to where you started the call this afternoon. I think investors, what they want at Hologic was this notion that the new tomosynthesis was going to decelerate, they knew you were going to fix the core and we still get back to sort of that mid-single-digit growth profile, even where tomosynthesis is slowing. If you think about the third quarter here in 2% to 3% growth, it sounds like the fourth quarter is maybe sort of the same 2% to 3% growth, hard for us to get there without the Cyno number. But how do you think about '18 in the future? Do you still believe that even with tomosynthesis decelerating that this is still a mid-single-digit growth business? Or is this some transitional period here, where it's not mid-single-digit growth, it's more like low single-digit growth?

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Stephen P. MacMillan, Hologic, Inc. - Chairman, CEO and President [81]

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Yes. Great question, David. I think as we look to '18, we feel really good. We're not giving guidance obviously, but feel really good about mid-single digit. I would absolutely say, we're going to reaccelerate from, frankly what is this low third and fourth quarter growth rates. We just reported 3.1% organic growth. Fourth quarter is, if you really play out how that will shake out, I think fourth quarter's probably going to be a little bit better than that, is -- if you really parse out our guidance and this and that. But we don't like being down in that level. And as we go into '18 between the pipelines, getting the Cynosure stuff behind us, getting some of the pipeline stuff out of Breast Health, international kicking in, molecular being good, feel very good that we will be a reaccelerating story in 2018.

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Operator [82]

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And with no further questions in the queue, that does conclude today's conference. Thank you for your participation. You may now disconnect.