Good afternoon, and welcome to Hologic's Second Quarter Fiscal 2020 Earnings Conference Call. My name is Bryce and I'm your operator for today's call. Today's conference is being recorded. [Operator Instructions]. I would now like to introduce Mike Watts, Vice President, Investor Relations and Corporate Communications to begin the call. Please go ahead.

Thank you, Bryce. Good afternoon and thanks for joining us for Hologic's Second Quarter Fiscal 2020 Earnings Call. With me today are Steve MacMillan, the company's Chairman, President and Chief Executive Officer; and Karleen Oberton, our Chief Financial Officer. Steve and Karleen both have some prepared remarks, 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 through May 22. Before we begin, I'd like to inform you that certain statements we make during this call will be forward-looking. These statements involve known and unknown risks and uncertainties that may cause actual results to differ materially from those expressed or implied. Such factors include those referenced in our safe harbor statement that's included in our earnings release and in our filings with the SEC. Also during this call, we will be discussing certain non-GAAP financial measures, a reconciliation to GAAP can be found in our earnings release. One of these non-GAAP measures is organic revenue. As a reminder, we're defining organic revenue as constant currency revenue less the divested Blood Screening and Cynosure businesses as well as the acquired SuperSonic Imagine business. Finally, any percentage changes that we discuss will be on a year-over-year basis, and revenue growth rates will be expressed in constant currency unless otherwise noted. Now I'd like to turn the call over to Steve MacMillan, Hologic's CEO.

Thank you, Mike, and good afternoon, everyone. Let me start by stating the obvious. This is an unprecedented time for the company, our shareholders and the entire world. Therefore, we're going to structure our remarks differently today. First, I'm going to discuss 3 strategic topics related to the COVID-19 pandemic, then hand it over to Karleen, who will cover our results and outlook. Rather than keep you in suspense, here are my key points upfront. First, Hologic was performing exceptionally well until late March, continuing the strong momentum that has been building over the last few years. Second, as COVID-19 spread and threaten global economies, we moved quickly to mitigate the risk with a focus on cash so that our healthy fundamentals would be intact on the other side of the pandemic. And third, as one of the world's leading molecular diagnostics firms, this is a unique moment for us to live into our purpose by providing solutions for the most important issue facing the globe today. So while we are scaling back in some areas in the short term, we are simultaneously boosting investments in our diagnostics business to respond to the world's needs, which will make us a much stronger company on the other side of this. Obviously, it's our employees who are making this possible, and we want to take a moment to thank them. I am so unbelievably proud of the engagement and commitment we've seen inside Hologic in the face of these challenging times. Countless employees from all our divisions have volunteered to help with our COVID efforts, offering everything from new business ideas that keep customers safe to their own hands and feet for the packaging line in our San Diego plant. A special thanks goes out to our diagnostics team under the leadership…

Thank you, Steve, and good afternoon, everyone. In my remarks today, I'm going to provide an overview of our divisional sales results, walk through the rest of our income statement, briefly touch on our overall financial condition and discuss some expectations for the future. Unless otherwise noted, my remarks will focus on non-GAAP results, and percentage changes will be on a year-over-year basis and constant currency. Let me start by summarizing our second quarter results. Revenue of $756.1 million declined 7.1% due to the divestiture of Cynosure. Organically, we grew 1.1% despite the impact of COVID-19 pandemic late in the quarter. EPS of $0.57 was below our expectations, commensurate with the decrease in revenue but basically flat compared to a year ago. Now I will provide some more detail on our divisional revenue results. Diagnostics became our largest division in the second quarter by growing a strong 8.3%, despite a substantial decrease in demand in late March. Cytology had a good quarter internationally, driven by Germany's decision to adopt co-testing for cervical cancer screening. But the primary growth driver was Molecular, as it has been for many quarters. International sales were exceptionally strong, based in part on the continued uptake of viral load assays in Africa. The U.S. business performed very well, even when you exclude sales of our COVID assay on Panther Fusion, which were only $3.4 million in the quarter. In Breast Health, underlying trends were solid, and the division performed well through most of the quarter. However, gantries, accessories and 3D upgrade volumes were substantially impacted as a result of COVID-19 disruptions late in March, as our customers focus on responding to the pandemic and our field service engineers weren't allowed to install new products. Given these factors, global Breast Health sales of $307.8 million decreased 3.7%,…

[Operator Instructions]. We'll now take our first question from Tycho Peterson at JP Morgan.

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

Yes. Thanks, Tycho. And by the way, Tony and the rest of the guys at the warehouse are busting their butts right now. So -- and part of it is on Panthers. We have, as you can imagine, getting a significant increase in interest in Panthers around the world. And I think everybody is realizing just what an incredible platform it is. So as a reminder, folks, we've been placing about 200 to 250 Panthers a year. Generally in that, call it, 20-ish a month. We are also scaling capacity right now for Panthers, they're much longer lead times but we're having significant additional requests, particularly as well, frankly, from departments of health, some of the additional labs from hospitals, but it's across the board and including even the largest reference labs. So it's almost across the board, people wanting to get even more access to capacity. On the serology piece, to your second part, yes, don't expect us to really do anything there. We're not sure we bring anything to the party in that game. We're just putting all of our resources in the molecular world that we know so well.

We'll now take our next question from Patrick Donnelly at Citi.

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

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

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

Yes. I think it's still an evolving piece, Patrick. I think -- frankly, our orders were positive in the quarter. We had a tremendous Breast Health orders quarter. I do worry and having lived through the '08-'09 downturn, where I know a lot of the hospitals and the radiology suites, they want new capital. I'm sure in a month or 2, as things start to settle back down, you know hospital CFOs are going to go back through their CapEx with a fine tooth comb and do some of those get pushed out. I think if we're a betting person, I think Breast Health will probably be a little slower to come back because of that. Now the positive for us is, remember, we don't really get paid on a -- even as the patients take a little time to get back in, we've got the capital sales and then the recurring revenue in a lot of cases, really from service and those kinds of things. So it probably won't go down quite as deeply but it will probably be a longer road back.

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

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

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

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

Yes. And I would just say, we have, as Steve made meaningful investments in capital to do that, so that we don't have to make those trade offs.

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

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

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

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

We'll now take our next question from Doug Schenkel at Cowen.

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

Sure. On the second part, yes, you can run Panther and Fusion simultaneously. In terms of supply, I think part of the reason, frankly, that Dr. Birx and the government are so excited that we're a little bit of the cavalry coming to the rescue here is we already have the systems everywhere. We're the only folks that have high throughput systems in all 50 states. So while there were a lot of tests that were approved and suddenly people are scrambling for equipment, I think we feel pretty good that we've already got this massive installed base that's been building over the last 6, 7 years as opposed to this mass scramble now. Can we supplement it? Are we getting additional requests? Yes. But fundamentally, we can ship 3 million tests next week. And the capacity is already there to be able to produce -- to be able to run those.

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

Yes, Doug, I think, again, the best thing we have going for us is already the installed base that we have out there. It's hard to underscore the people over 1,000 of these systems in the United States. So let's just take an example, Northwell hospital or the more than 400 of these that are already in the hospitals. One of the key areas to keeping our health care workers safe is making sure that they're all tested on a regular basis. So picture this. Most of the hospitals that already have these employees at the end of the day could all be tested. The test can be run overnight and in the morning, they know if somebody shouldn't show up for work. The same can be true in so many decentralized areas, even companies around, not necessarily via us, but there's going to be labs all over the place, very close that we'll be able to run these things. So it's back to -- it's not point -- let's be very clear, we are not point of care, but we are able to run a whole bunch of tests in a very local geography. So to a large degree, again, if somebody wants to do a drive-through, pop-up thing, there's generally a Panther not too far away that they should be able to access through either a hospital lab, one of the reference labs or even the departments of health within their states. So again, we -- do we wish we had even more? Yes, but it's already an incredible installed base that again, nobody else has had. When you look at the marketplace, you got point-of-care on one end and you've got the massive systems in a centralized reference lab at the other end, which you have not had is the ability to have high throughput testing close to the patient to be able to deliver those results where and when they're needed, not a week later.

We'll now take our next question from Ivy Ma at Bank of America. Ivy M&A: Congrats on the new test. So first question is we've seen estimates from anywhere just on the broad testing market, the need for like anywhere 50,000 -- 500,000 molecular test a day and up to 1 million a day just throwing around in the news these days. So just wanted to get your thoughts on what sort of capacity expectations or need expectations you are eventually planning for since there are plans to get to -- to make investment to increase that by the fall. So first part of this question is just on what you think the ultimate testing need will be and how long the duration of that is. And this goes into a question about where you think your ultimate market share would be.

Sure, Ivy. I'll start backwards. In terms of market share, we're not really focused on that the way we typically are because I think we're all rooting -- it's a unique time in the world where I think we're less about competing against each other and more all trying to race to create enough capacity to help not just this country but help the world get back to work, which kind of gets back to the first part of your question. There are so many unknowns. Come the fall, are we running 500,000 tests a day. Are we running 200,000 tests a day, we're running 3 million tests a day in the U.S. It's just so hard to know at this point in time. We are planning to continue to invest in capacity. Candidly, one of the biggest rate-limiting steps for us is our very unique cap system, which is what makes our system so highly automated. We're building more cap machines. These things typically take 18 months to build. We've got people working around the clock to try to build them and call it a 6-month time frame. So we want to be prepared to bring on even more capacity later in the fall, ahead of the next flu season in the Northern Hemisphere because we do believe the way we look at it is, next year, when anybody -- there's any outbreak of flu or anything as soon as somebody coughs we're going to be wanting to be testing them just for regular flu as well as for COVID. So we want to have even more capacity online by the fall. But I don't really want to get into giving specific numbers.

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

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

We'll now be taking our next question from Raj Denhoy at Jefferies.

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

Anthony, say hi to Raj for us, too. As it relates to the swab, the magic that we referenced, obviously, is we're -- we've qualified our Aptima swab to be used along with us. So the great part about it is we basically have some degree, it's a closed system, we can ship the swab and the vials together, boom, they test, use our swab and they're ready to go. So we're providing the customer with effectively a complete package. And I think that's going to dramatically streamline. I think it's hard for people that aren't close to these to fully understand the incredible workflow efficiencies that come from using the Aptima system all the way through. So that should be a huge advantage for us. On the Boston news with Minerva, I think we continue to feel really good about what our Surgical business is doing. As we mentioned, it was up 14.7% through the first 2 months of the last quarter. Our Surgical business has just really had an incredible turnaround and strength over the last couple of years. Clearly, Boston was not -- they're an incredibly successful company and having a challenge in that space with those products, I think our team is quite happy to see whoever is out there and continue to fight. So we think we've got better products and a better sales team.

We'll now take our next question from David Lewis at Morgan Stanley.

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

Yes. I would say that the 1 million per week is an average. So with lot -- this product is built in lot, so we may not actually ship 1 million each week. But yes, that probably gets you pretty close.

Okay. And then, Steve, I think getting Panther out there can be underestimated from sort of public health perspective. I want you to just sort of share your thoughts. There's been significant barriers to testing, reagents, nasal swabs and then general protocols and infrastructure, I would sort of call it, and yet 5 days ago, we have 300,000 tests a day and then yesterday, we had 200,000 tests. So reagents are coming on but the test numbers haven't gone in the right direction. As you think about the infrastructure and these barriers that have been addressed, just wondering if you could share your thoughts with us about do you think all the barriers have been addressed out there? And what are some of the outstanding barriers that are sort of creating this disconnect between capacity and then usable test? And great work on this.

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

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

Yes. And we'll now be taking our next question from Dan Leonard at Wells Fargo.

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

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

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

Yes.

We have time for one more question, operator.

All right. We'll now be taking our last question from Dan Brennan at UBS.

I guess I'll ask a question on Breast Health then. So the numbers that you gave for April and for the quarter, maybe could you parse out a little bit between, Steve, in terms of the U.S. gantry being 20%, but how do we think about the math on that in terms of what gantries are doing, kind of service and then interventional? And then as we look out, is there any predicate for '08 and '09 that you suggested about how we might look further out beyond the next quarter or 2 and how hospital CFOs might react?

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

Yes. And I would just add, the biggest component of revenue for that business is the service business. So this stability within foundationally for that division was that recurring revenue.

Great. Thank you, everybody.

Thank you. And that is all the time we have for questions today. This now concludes Hologic's Second Quarter Fiscal 2020 Earnings Conference Call. Have a good evening.