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Good afternoon, and welcome to the Hologic First Quarter Fiscal 2018 Earnings Conference Call. My name is Isaac, and I am your operator for today’s call. Today’s conference is being recorded. All lines have been placed on mute.
I would now like to introduce Mike Watts, Vice President, Investor Relations and Corporate Communications, to begin the call.
Thank you, Isaac. Good afternoon and thanks for joining us for Hologic’s first quarter fiscal 2018 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, then we’ll have a question-and-answer session.
Our first quarter press release is available now on the Investors section of our newly redesigned 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 for 30 days.
Before we begin, I would like to inform you that certain statements we make during this call will be forward-looking. These statements involve known as well as unknown risks and uncertainties that may cause actual results to differ materially from those expressed or implied. Such factors include those referenced in the Safe Harbor statement 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. 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. We’re pleased to discuss Hologic’s financial results for the first quarter of fiscal 2018. We posted solid results overall, and are off to a good start for the year. As we pre-announced at the J.P. Morgan conference, revenue of $791.1 million finished just above our guidance range. And earnings per share of $0.55 also exceeded our expectations based on the benefit from U.S. tax reform.
We enjoy unique leadership positions in a range of women’s health markets, and our two largest divisions, Breast Health and Diagnostics, are performing well based on these differentiated products. And we believe Cynosure, our medical aesthetics business, is turning the corner toward a future of consistent growth. Our solid performance in the first quarter demonstrates the two important elements of our strategic plan are paying off.
First, our international business, which we described as a start-up and was an area of great concern for investors as recently as 2016, is now thriving. Specifically, core international revenue, excluding the acquired Cynosure and divested blood screening franchises, again delivered double-digit growth in the first quarter.
Second, a research and development pipeline that was barren four years ago has now generated new products that are contributing more than 10% of quarterly sales. And as we look to the future, we are particularly encouraged because our international businesses and our R&D pipelines both have the potential to contribute to sustainable growth for a very long time.
With that introduction, let’s review our divisional revenue results for the first quarter. As a reminder, growth rates compared to the prior year period were artificially depressed by the fact that we had four extra selling days in the first quarter of fiscal 2017. We estimate that these extra days added more than $20 million to sales in the prior year period, with the greatest benefit to our recurring revenue lines in the United States.
In the first quarter, revenue of $791.1 million grew 7.7% on a reported basis or 6.7% in constant currency. Excluding the impact of the Cynosure acquisition and the blood screening divestiture, first-quarter revenue increased 2.7% or 1.5% in constant currency. But accounting for the extra days in the prior year period, revenue growth would have been about 6.2% on a reported basis or 4.9% in constant currency, slightly better than the 4.4% organic growth we posted in the fourth quarter.
In terms of geography, international was the standout in the first quarter, as we alluded to earlier. International revenue of $193.9 million increased 15.8%, helped by the contribution of Cynosure. Even excluding Cynosure and blood, international sales increased a robust 11.6%, as a result of very focused and deliberate efforts that began with new leadership less than two years ago.
In the United States, revenue of $597.2 million increased 4.1%, again primarily due to the acquisition of Cynosure. Excluding Cynosure and blood, U.S. revenue declined by 0.8%, but remember the impact of extra days in the prior year period was concentrated in the United States.
In terms of divisional performance in the first quarter, our two largest businesses, Breast Health and Diagnostics, which represent nearly three-quarters of sales, are performing well. Let’s start with Breast Health, where results have clearly improved over the last couple of quarters. We remain the undisputed leader in this market, based first and foremost on the established clinical superiority of our products.
No other mammogram has been proven to detect 20% to 65% more invasive breast cancers compared to 2D alone, and no other mammogram has also been proven superior for women with dense breasts. In addition, no other manufacturer has partnered with customers as extensively or as effectively as we have.
We help breast centers prosper by referring patients through our direct-to-consumer initiatives, and by fighting for insurance coverage. As a result, we continue to add to our overall market share. Based on all these factors, global Breast Health sales totaled $288 million in the first quarter, an increase of 4.2% compared to the prior year period, and another sequential acceleration compared to the 2.4% growth we saw in the fourth quarter. The U.S. business declined 1% versus the tough comp in the prior year period, which benefited from extra selling days.
International sales, however, grew a robust 29.2%, marking our second consecutive quarter with growth over 20%. This performance reflects the tremendous progress we have made in building a sustainable growth engine through both organic and inorganic means, including the recent purchase of our Spanish distributor.
In addition, we are seeing good adoption of our new mammography systems, which are called 3Dimensions and 3D Performance. These new products further strengthen our market-leading Genius brand, better segment the market, and encourage customers to upgrade the thousands of 2D systems that remain in the field today. At the same time, we are building a broader portfolio of Breast Health products and services around the core of our Genius systems so that we can play a more significant role in the Breast Health continuum of care.
The success of these strategies was apparent in our first quarter results. Our new mammography systems represented almost a third of the systems we sold. And sales of interventional breast products mainly biopsy systems and disposables increased by 16.1% on a global basis. This strong performance resulted from an increased focus on portfolio selling, and an excellent start from our revolutionary new Brevera real-time biopsy system, which we just launched. In addition, sales of our Affirm prone biopsy system, which we introduced a little more than a year ago, continue to build nicely.
Now let’s turn to Diagnostics, which remains on a solid growth path. Excluding the divested blood screening franchise, we posted sales of $272.0 million in the first quarter, an increase of 3.3% despite the headwind from additional selling days in the prior year period. Including residual blood screening sales of $12.6 million, which was in line with our expectations, Diagnostics revenue was $284.6 million.
Fueling this growth again was molecular diagnostics, where sales of $148.6 million increased 5.3%. The U.S. business remained healthy, growing at a mid-single-digit rate despite the days headwind, while international sales increased high-single-digits versus a difficult prior-year comp.
As in recent quarters, global growth was driven by the Panther system, our fully automated molecular diagnostics instrument, and increasing utilization of our Aptima women’s health assays, which have long been leaders in testing for chlamydia and gonorrhea, HPV, and trichomonas. We continue to work with our customers to expand the market for sexually transmitted disease testing, providing better healthcare through earlier detection.
At the same time, sales of our new molecular diagnostics tests are steadily increasing, although their overall impact remains small. We’re exceptionally proud that over the last six quarters, our Diagnostics business has earned regulatory clearance for seven new products in the United States. These include the first three respiratory assays on our new Fusion platform, and three viral load tests for HIV, hepatitis C, and most recently, hepatitis B. This steady cadence of domestic assay innovation positions us well to consolidate molecular testing on the Panther system.
And at the same time, our ability to commercialize new products in various global markets continues to strengthen as well, fueling our geographic expansion. Before we leave Diagnostics, we want to mention that sales of cytology and perinatal products were $123.4 million in the first quarter. This represented a slight increase of 0.9%, as higher sales of perinatal products offset the headwind from more selling days in the prior year period.
In cytology, where our ThinPrep liquid Pap test is the clear leader, market dynamics are unchanged despite noise surrounding the draft USPSTF guidelines for cervical cancer screening. While the domestic cytology market is not a growth driver for us, we continue to believe that co-testing will remain the standard of care for women and physicians who want to continue the tremendous progress that we have made against cervical cancer over the last several decades.
Now let’s turn to Surgical, which had a disappointing quarter with sales of $107.5 million, down 7.1%. Surgical is primarily a consumables business, so the four extra selling days in the prior year period had a significant negative effect on the year-over-year comparison. In addition, the first quarter a year ago was the single biggest quarter Surgical has ever posted, as we benefited materially from the recall of a competitive product.
Nonetheless, we do have some work to do to return Surgical back to a growth trajectory. MyoSure continues to grow nicely, but NovaSure has struggled in the face of increasing competition and a stagnant market for endometrial ablation. We are pursuing a number of strategies to boost growth in Surgical. We put in place new leadership about six months ago, and now that team is upgrading sales talent, structure and incentives.
We are fighting back against competition more directly with new products like NovaSure Advanced and MyoSure MANUAL. And we are expanding our efforts to grow the ablation market through increased patient awareness, just as we have expanded other key categories where we are the market leader.
Now let me discuss our new medical aesthetics division. Cynosure sales were $91.3 million in the quarter. While this was down significantly versus the prior year period, when Cynosure was an independent company, it was up 12.2% sequentially versus the $81.4 million we posted in the fourth quarter, as we predicted. So we view this quarter’s Cynosure result as a step in the right direction, while recognizing that we still have a lot of work to do to fully capitalize on the potential of the medical aesthetics market, which remains robust.
In addition to the in-line quarterly sales number, we are encouraged that our new leadership team has made good progress in filling open sales positions and upgrading our commercial talent. We expect to be largely done with that process this quarter. While it will take time for newly hired reps to complete our re-vamped training program and become fully productive, we are confident that we are moving forward with a highly motivated, talented commercial team that is committed to winning the right way, in long-term partnership with our customers.
We also continue to be impressed with the productivity and innovation emerging from Cynosure’s R&D pipeline. As an example of this, we are now launching TempSure Envi, our new radio-frequency platform that minimizes facial fine lines and wrinkles, tightens skin through soft tissue coagulation, and improves the appearance of cellulite. Early feedback from customers has been positive, and over time, we look forward to expanding the TempSure platform into the women’s health and surgical fields.
With new products like TempSure, and many more to come, we are expanding what is already the broadest portfolio of energy-based treatments in the medical aesthetics industry. And as we continue to enhance our commercial capabilities in parallel, we are confident that we will demonstrate the scale, stability and strength needed to be the partner of choice for our customers.
To wrap up the divisional revenue discussion, Skeletal revenue totaled $19.7 million in the first quarter, a decrease of 7.3%, mainly due to lower Fluoroscan sales. We do, however, expect quarterly sales to improve over the course of the year, driven by better portfolio selling, increasing interest in our Horizon bone densitometry system for body composition testing, and our new mini C-arm product.
Before I turn the call over to Bob, let me summarize by saying that our two largest divisions, Breast Health and Diagnostics, are performing well, while Cynosure is on the rebound. Our international business is thriving, and our R&D organization is continuing to churn out new products. These dynamics have us off to a good start in fiscal 2018, and more importantly, they give us great confidence for the future.
Now I will hand the call over to Bob.
Thank you Steve, and good afternoon everyone. In my remarks today, I’m going to walk through the rest of our first quarter income statement, touch on a few other key financial topics including U.S. tax reform, then finish with our updated financial guidance for 2018. Unless otherwise noted, my remarks will focus on non-GAAP results, and percent changes will be on a year-over-year basis.
As Steve described, we are pleased with our first quarter results, as revenue slightly exceeded our guidance. In addition, a lower effective tax rate due to the enactment of U.S. tax reform helped us outperform significantly on the EPS line, and will boost our already healthy net margin going forward.
We also continued to strengthen our balance sheet, in line with our long-term goals. We essentially retired all our 2013 convertible notes, leaving only one remaining tranche that we plan to call in March, and we are refinancing $1 billion of debt on very attractive terms.
With that, let’s jump right into the P&L. In the first quarter, gross margins of 63.8% declined 140 basis points compared to the prior year, due primarily to sales mix associated with the divestiture of the blood screening business and sales of lower margin Cynosure products.
Total operating expenses of $271.8 million, increased 17.6% in the first quarter, mainly due to the inclusion of Cynosure costs. Normalizing for the impact of Cynosure, operating expenses in our base business declined at a mid-single-digit rate, reflecting very deliberate efforts to control costs and drive operating leverage.
Our operating margin of 29.4% declined 430 basis points due to product and geographic mix, as well as the divestiture of our blood screening business. However, on a sequential basis, our first quarter operating margin improved after normalizing for the benefit of non-recurring royalty payments in the fourth quarter. Interest expense was $36.4 million in the quarter, an increase of 3.4% compared to the prior year period, reflecting the changes we have made to our debt structure in recent quarters.
Now let’s spend a moment on tax. In late December, new U.S. tax legislation was enacted into law. Due to our fiscal year end, two provisions of the law immediately affected us. First, the U.S. federal corporate rate was lowered from 35% to 21%, and we are able to apply a blended rate to our U.S. income for fiscal 2018.
As a result, we expect our non-GAAP effective tax rate to be approximately 23% in fiscal 2018, which is significantly lower than the approximately 31% that we previously anticipated. In addition, we performed preliminary calculations and recorded a discrete net tax benefit of $355.2 million on a GAAP basis in the first quarter. This benefit resulted primarily from the re-measurement of U.S. net deferred tax liabilities at a lower corporate tax rate.
The second component of tax reform that immediately affected us was the set of changes to the treatment of our foreign subsidiaries’ earnings, and the related tax imposed on the deemed repatriation of historic foreign earnings. We estimate our transition tax to be approximately $26 million.
Please note that because of the significant changes to the law, the overall impact of U.S. tax reform is subject to further analysis as the legislation is interpreted and clarified. Finally, net margins of 19.4%, decreased 80 basis points, as the negative mix factors discussed previously were partially offset by improvements in our non-GAAP effective tax rate.
All of this led to non-GAAP earnings per share of $0.55, an increase of 5.8% compared to the prior year, and exceeding our guidance range due to the benefits of tax reform. If you were to exclude the impact of our divested blood screening business, non-GAAP EPS would have increased in the high-20% range.
Before we move on to guidance, I’ll quickly touch on a few other key financial metrics. In recent months, we have continued to make good progress on our long-term goal to strengthen our balance sheet. In the first quarter, we further reduced our convertible debt by eliminating $241 million in principal, and in January we also announced that we would call the slightly more than $200 million that’s remaining.
So by the time we have our next quarterly call, we will have eliminated more than $1.3 billion in convertible debt from our balance sheet over the past few years. Pretty impressive accomplishment, and a testament to our underlying financial strength.
At the same time, we have made other positive changes to our debt structure to capitalize on favorable market conditions. Specifically in mid-January, we announced a private offering of $1 billion in senior notes. $600 million of these notes bear interest at 4.38% and mature in 2025, while $400 million of the notes bear interest at 4.58% and mature in 2028.
These proceeds will be used in mid-February to refinance our $1 billion, 5.25% senior notes due in 2022. So based on our strong financial position, we are able to both reduce interest expense and extend our debt maturities.
At the end of first quarter, our leverage ratio, net debt over EBITDA, stood at 2.6 times, within a comfortable range for us. The net debt calculation includes cash and equivalents of $664.4 million. This is higher than in recent quarters as we prepare to retire our remaining convertible notes.
Finally, adjusted EBITDA of $258 million in the first quarter declined 4.1% compared to the prior year, as improvements in our base business were offset by the divestiture of blood screening.
Now I’d like to shift gears and discuss our non-GAAP financial guidance for the full year and second quarter. We are updating our guidance based on our solid first quarter results and the beneficial impact of U.S. tax reform. At a high level, we are reiterating our full year revenue guidance and increasing our EPS forecast.
Let’s start with revenue. Based on our solid first quarter results, we are maintaining our original revenue guidance of $3.20 billion to $3.28 billion, with reported growth rates between 4.6% and 7.2%. Based on recent exchange rates, this translates to constant currency growth of 3.9% to 6.5%, and organic growth in the mid single-digit range.
As a reminder, we are defining organic revenue as total revenue less blood screening and Medical Aesthetics for the first two quarters of fiscal 2018. And as discussed last quarter, organic revenue growth also adjusts for fewer selling days in 2018, and the non-recurring royalty revenue.
Now let’s turn to the impact of U.S. tax reform for fiscal 2018. We are updating our full year non-GAAP tax rate guidance to approximately 23%, down significantly from an initial forecast of approximately 31%. As we discussed early in January, we do plan to reinvest a portion of the benefits from tax reform to future growth initiatives. These initiatives are likely to include discrete marketing campaigns in areas like Medical Aesthetics and Surgical, as well as investments to speed up or initiate R&D projects.
Even with that reinvestment, we are increasing our full year EPS guidance substantially, to a range of $2.22 to $2.27, up from a prior estimate of $2.10 to $2.15. Our updated EPS guidance adds $0.12, or roughly half the savings from our updated effective tax rate, to our previous earnings estimate for the year, and results in reported EPS growth of between 9.4% and 11.8%. This updated full year guidance is based on diluted shares outstanding of roughly 283 million for the full year.
Tax reform also should be beneficial to our cash flows overall. For this fiscal year, we now expect free cash flow in the mid $600 million range, not including the one-time tax recapture associated with retiring our convertible notes.
Now let’s turn to guidance for the second quarter of fiscal 2018. We expect revenue of between $770 million and $785 million, which reflects growth of 6.5% to 8.6% on a constant currency basis, and reported revenue growth of 7.6% to 9.7%.
We expect quarterly revenue to be down slightly versus the $791 million we posted in the first quarter for a few reasons. First, we expect revenue from our divested blood screening business to decline sequentially, probably to around half the first quarter level.
Second, as a reminder, the March quarter is seasonally weaker than the December period for both our Surgical and Medical Aesthetics businesses. On the bottom line, we expect EPS of $0.53 to $0.54 in the second quarter of fiscal 2018. This forecast implies reported EPS growth rates of between 6.0% and 8.0%.
As you update your estimates, we would again encourage you to model around the middle of our guidance ranges, as we have incorporated both upsides and downsides into our forecast. Before we open the call for questions, I’d like to conclude by saying that we are pleased with our start to fiscal 2018.
We began our fiscal year with quarterly revenues that slightly exceeded our guidance. In addition, recent U.S. tax reform has provided us with an opportunity to both bolster our earnings and opportunistically reinvest in the business to drive growth.
With that, I will ask the operator to open up the call for questions. Please limit your questions to one plus a related follow-up, then return to the queue. Operator, we are ready for the first question.
Thank you. And we’ll take our first question from Isaac Ro with Goldman Sachs. Please go ahead.
Good afternoon, guys. Thank you. A question for you on market share in both Breast Health as well as Diagnostics. I’m curious, you have a major competitor on the Breast Health side that’s going through some changes. Curious if you thought you gained any share in that business this quarter, and you had said you think you might perpetuate that for the rest of the fiscal year, I’m curious. And then as an addendum to that, I’m curious in Diagnostics if there’s anything meaningful on the share side for cytology in FE. Thank you.
Sure. Thanks, Isaac. I think in Breast Health, yes, I think we just continue to feel that we’re doing very well on an overall share basis. I think we – one of our key competitors, I think it looked like they might have had a half decent quarter earlier in the year and gained a little momentum. I think we’ve pushed that back and just continued to gain a hugely disproportionate share in 3D relative to our overall market share. So I think we just continued to feel great.
Nothing obvious from any of the disruption over there. I think on the cytology front, again as well, we just continued to strengthen our shares. We’re so strong there. I don’t think much additional movement up, but feeling really good about where we are in both of those areas. And as you know, obviously, in Breast Health, we like that strong position and feel like it’s going to continue to help us leap forward.
Hey, Isaac, this is Bob. I think in addition to that, in addition to the U.S., obviously with the strength that we’re seeing in our international business, that’s being driven by our Breast Health business. So we also believe that we’re gaining share internationally there as well. And that we believe that, that will continue to be a strong growth driver for us, not only through the rest of this year, but beyond.
That’s helpful. Thanks. Just a follow-up on the Aesthetics business. Obviously, that’s an area that people remain very focused on. And you called out the seasonality year-on-year despite the easy comp as a sequential decline there. But I’m just curious, kind of we put in the numbers aside for a minute, can you just give us an operational update? There’s been some leadership change. I’d be interested in sort of what’s going on behind the scenes to kind of, over the long term, drive better performance. Thank you.
Sure, Isaac. You know what, I feel so great about the leadership in place. And we just had our global leadership team together for the last couple of days for all of our businesses. And I think if you look at the presidents we have sitting around that table, everybody has so much confidence in the team, particularly, that we’ve put in place in Cynosure. And again, you look at the international Breast Health numbers that we’re posting right now, and you are with us on the journey, you know where we stood six, seven, five, eight ago in international Breast Health.
That was Kevin Thornal. Kevin went in the first few quarters of Europe. We’re still weak when he went over there in Breast Health. And today, it’s thriving. And Kevin is doing the same magic with the Cynosure business. We’ve got a great VP of Sales. He’s rebuilding the team. We’ve got all the strength of the folks that have stayed with us. And I think it’s really going to be a more magical team as we go forth.
We’re in that classic scenario, and you’ve heard me say it before, where sometimes, the numbers are better than an organization; sometimes, the organization is getting better than the numbers. And I think we feel really good that, that organization right now is getting better than the numbers and starting to see that, certainly some progress here in the last quarter. I think it’s just going to play out over the course of this year. But I think we just feel so much better. We’ve got TempSure coming out the door. The folks we’ve got in that organization today, really excited and building for the future.
And we’ll move to our next question from Jack Meehan with Barclays. Please go ahead.
Hi. Thanks. Good afternoon. I wanted to start in the molecular side. So I was hoping you can give an update on the Fusion system in terms of placement adoption and just thoughts on how customer utilization has changed, either with the LDT as a respiratory there.
Sure, Jack. We are in that very, very early stages of actually placing Fusion. We’re in the de minimis numbers at this point, just starting to get it out there. So I think – and even with the flu and respiratory stuff, obviously no impact yet this year. We got it out too late. So as we go into next year, I think that will start to be in effect. Now having said that, respiratory in molecular in the big labs is still a fairly small business. But we really like what Fusion is going to do, less over the coming quarters and more over the coming years.
Yes, and I think, Jack, while the end is small, certainly, customer feedback has been incredibly positive. And so we’re actually very excited about that for the long term. And again, it’s probably less a growth driver for 2018, but it sets us up very nicely for 2019 and beyond.
Yes, very much.
Great. And just in terms of the full year guidance, last quarter, you gave segment-level thoughts. Do you think those ranges still hold today? Or are there any pluses and minuses in your mind?
Yes, I think we’re not going to get into the habit of giving that every quarter. I think given our first quarter, maybe I feel a little less good about the Surgical business, maybe a little better about Breast Health. I think everything else is probably in line.
And we’ll move to our next question from Tycho Peterson with JPMorgan. Please go ahead.
Thanks. Bob, having said that, I’m going to ask about segment guidance. Just on Cynosure, I mean, you previously talked about double-digit pro forma growth for the year. I just want to make sure that, that is still on track. And can you maybe talk, I guess, on pacing, given the seasonably soft second quarter, I mean, what we should expect in the back half of the year and contributions from the new product as well, from TempSure?
Yes, we’re probably not going to give product-level detail there. I mean, we feel really good about TempSure. As we’ve said before, we expect strength growing throughout the course of the year with Cynosure, and the second half of the year, we would expect to be stronger than the first half of the year. We are fighting against a seasonality in the first quarter – in the second fiscal quarter, where, typically, that is lighter. And so the positives are our sales organization is getting stronger as well. And so the question – and as well as launching the new product. So the question is how much of that is going to be able to overcome that, but certainly feel good about the progress that we’re making.
All right. And then, Steve, on NovaSure, you’ve talked about new leadership, new sales force comp, restructuring that a bit. And that was just some of the new products. I guess where are you in the turnaround of that business? How much of it is operational and organizational versus just a function of getting these new products out to try to turn the growth around there?
Yes, great, Tycho. I’d say we’re in the late early innings in the turnaround. I think we’ve got a couple of more quarters, candidly, probably of some Surgical softness as that team really rebuilds it. But I think we exit this fiscal year in a good trajectory for that business. We’ve been making key leadership changes within that organization and have actually moved pretty quickly. I think we got a little fat, dumb and happy when we had the competitive withdrawal. It’s the reverse of what I said earlier. Sometimes the numbers look better than the organization, and sometimes the organization looks better than the numbers.
I think our Surgical business looked – the numbers were better than the organization a year ago. And now we’re reversing that, much as we’re doing with Cynosure, to build for the future. But I think a couple of more quarters before we’re really back where we want to be.
And we’ll move to our next question from Vijay Kumar with Evercore. Please go ahead.
Vijay.
Hey, guys. Thanks for taking my question. So maybe I’ll start off one high level, Steve, on the geographic, U.S. versus OUS. So in the quarter, U.S. GYN, Breast, they were down. Diagnostics was little singles, right? So as you think about U.S. versus OUS, what could turn around some of these, I guess, growth rates in the U.S., right? Because GYN, I think on the converter front, maybe there’s a little bit of headwind, and Breast, just given where we are in the penetration level and the converter dynamics, I’m just trying to understand what changes that view of dynamics.
Sure. Remember, Vijay, that most of the impact on the U.S. numbers this quarter was the four fewer selling days versus last year. That was clearly accentuated in the U.S. and especially in those disposable businesses. I think, on the core, we feel good about what our molecular business is doing. If you days-adjusted that in the United States, I think you’d have – it would have been very much high singles, possibly borderline double digit. So some very good underlying performances there.
I think Surgical was clearly weaker, and that was going against both the big comp and fewer selling days. But as we said, we got some work to do there to strengthen that. So I think the good news, as we look at it, is Breast Health, Diagnostics, our two largest businesses, both in the U.S. and globally, performing well. And we really do think we’ve got international on a sustainable growth rate that really is pushing that double-digit number that we’ve been aspiring to, as you know, for a while, and we’ve now delivered it a number of quarters in a row and expect to continue that.
Yes. Hey, Vijay, this is Bob. Just to put some numbers to it. As we said in our prepared remarks, the extra days were slightly more than $20 million in Q1 of last year, and the significant majority of that was in the U.S.
That’s helpful Bob. And maybe, Bob, one on the guidance for second quarter. It looks like it was $6 million to $15 million below where the Street was. Is that all coming from a delta versus how the Street had modeled Cynosure? Or was this maybe a little bit of softness on GYN? Any comments, I think, would be helpful.
Yes, I think, as we said in our prepared remarks, the kind of sequential decreases is really probably a couple of things. The first and foremost is the blood screening business and how that was – how we’re looking at that. And there is some seasonality in Surgical and in Medical Aesthetics. We have seen early in January, some combination of kind of the bad weather and the flu, somewhat impacted, and you’ve heard that from some of our customers. But primarily, if you look at quarter-over-quarter over the last several years, our second quarters been in line roughly with the first quarter.
We’ll take our next question from Dan Leonard with Deutsche Bank. Please go ahead.
Thank you. I’ll start with a question on Cynosure. Can you give us some color and context around your positioning and competitive environment with SculpSure? And I ask because it looks like you were sequentially up in Cynosure in every business but body, which I assume is mostly SculpSure.
Dan, I think that’s our bigger challenge that we’re in the midst of, I think, taking some very good actions to fix. But I think, last year at this time, they certainly sold a whole bunch in, frankly sold some to some customers that probably didn’t really know how to use the product as effectively, and we’ve been unwinding that and really focusing now on how we build it for the right path. I think the positive is, I think we’ve really gotten our hands around that. At this point, our understanding of our organization is totally on top of it.
And in the meantime, I think the real nuggets that show we’ve got some good things going are the growth in both women’s health as well as skin. And I think that’s where we’re starting to see some real traction that the new organization knows what’s it’s doing and frankly, quietly, very bullish about what we may be able to do with MonaLisa Touch, which is – could be a key leverage point for us as we also rebuild and restore SculpSure to its rightful place.
Thank you. And then for my follow-up. Possible if you could elaborate a bit on the reinvestment in R&D of U.S. tax reform dollars. Are we talking about acceleration of menu expansion on Panther? Or are there projects within Cynosure you’re going to accelerate? Any further color will be helpful.
Sure, we’re really looking at it both R&D and marketing and really across division. So what we’ve done is each division has put forth a list of some things. And I would say, it really is fairly, I wouldn’t say balanced, but fairly spread across the various businesses. And it’s a project tier there that we might be accelerating by 6 months or something else we might get started on a little bit earlier as well as some additional marketing activities to help drive the overall category demand for a number of these categories where we’re the market leaders. So nothing that’s going to dramatically affect revenue in 2018 but I think the kind of stuff that will probably start to show up in 2019 and beyond.
We’ll move to our next question from Bill Quirk with Piper Jaffray. Please go ahead.
Great. Thanks. Good afternoon everybody.
Hey, Bill.
All right. So first off, I was hoping if you could just help us think a little bit about the sales cycle for Brevera and Affirm. And then I certainly appreciate that we’re still pretty early here, particularly around Brevera, but how high or maybe help us think about kind of where we could get in terms of penetration within some of your existing accounts? Thanks.
Sure. First off, I’d be remiss if I didn’t say that I’m very pleased how my Eagles performed in your hometown during the Super Bowl. And I think Brevera is off to a good start. And Mike Watts is shaking his head. But I think it’s really interesting. If we’re brutally honest with you, Affirm, that we launched, call it, a year, 1.5 years ago, got off to a slightly slower start than we would have hoped. And yet Affirm is doing very well now.
And I will tell you, people NT who runs that business for us, and we really dug in. What we realized is we hadn’t really launched any non-mammography products in a long time in Breast Health. And this is back to a cultural piece as you start to see where we are in our organizational maturity. While Affirm didn’t get off to a great start, but is thriving today, we learned a lot about that and applied it to the Brevera launch, which is just getting more familiar with, getting it in front of the Capital Committee sooner, and Brevera really has come out of the gates humming.
And the great part about Brevera, unlike Affirm, is Brevera brings a very strong disposable stream. So the more we get these Breveras placed today, it’s going to create that ongoing revenue stream that we feel really good about. In terms of full penetration levels, I mean, some of that, probably I’m not ready to fully figure that out, but it’s a game-changing technology that, frankly, I think every hospital should end up certainly with a Brevera in their suite.
Yes, what I would say to add to that, Bill, just to give maybe a little bit more flavor, the life cycle of an Affirm Prone Biopsy table is longer than a life cycle of a Brevera.
Yes, and the bigger strategic piece is, this gets back to as we’ve been saying, we’ve got this great installed base in mammography. How can we build around that and create, a, more revenue and more recurring revenue, and Brevera is sort of one of the perfect examples of the kinds of things we want to be doing here. I think it’s going to really help us. It goes back to breaking that huge cliff that everybody was so worried about a couple of years ago.
That’s great. And of course, I’d be remiss if I didn’t congratulate you on the Super Bowl. So congrats on that, Steve. Glad hear that you guys enjoyed the tropical weather that we brought in for the game. This is just a quick follow-up. Just thinking about PAMA and potential bleed-through in terms of hospital pricing pressure on the manufacturers. My understanding of the economics in chlamydia and gonorrhea suggest you probably are not going to see much pressure, but I’d be curious about your thoughts there. Thank you.
Sure. We always worry about the pressures, and PAMA is another one of those many things we deal with. I think the biggest piece of it that we feel good about is we’ve been partnering increasingly, especially with our largest customers, in helping to drive the categories and expanding the categories and getting more testing. And through a combination of both, our OB/GYN sales force is detailing as well as increasing outreach to – through some direct-to-patient, really, education around things like, “yes means test,” and a lot of the things we have going on and co-testing and things like that.
So I think our major lab partners are seeing that we’re not just a vendor. We’re more than that. And we’re really helping to grow the overall categories and drive their business as well as our business and frankly, improving public health. So I think we’re in a pretty good spot there, not to say there’s always going to be pressures, but I think we can – our efforts will help us fight through those.
We’ll take our next question from Doug Schenkel with Cowen & Company. Please go ahead.
Good afternoon. This is actually Chris Lin on for Doug today. I just want to start with a question on Surgical. So days clearly had a pronounced impact on Surgical sales, adjusted for days and recognizing that there was a difficult comparison. How did MyoSure perform relative to your expectations in the quarter? And just building off that, for the full year, do you still expect MyoSure to grow at a double-digit rate?
Yes, I think MyoSure was in line, and we would certainly hope and expect it to still be a double-digit grower for the course of the year. Generally, we want to be careful not to give too much product line detail, but we feel pretty good about that product continuing to thrive.
Yes, Chris, as we said, Surgical was one of the ones that was probably most impacted by the days as well given it’s the consumable side of the business. But I agree with you, Steve.
Okay. And then maybe could you just also give us a sense of how interest has trended for the viral load assays from your existing customers in the U.S. And then just how much of a focus is there from the sales force to go after that opportunity now, and could you accelerate the efforts with the tax savings?
Yes, I’d say the first piece is we’re in such the early days. The hep B was just approved. So we’re literally just training up the sales force and getting that rolling. And I think this is one that we think, just given the way contracts expire and allow lockups and everything else, it’s going to be a slow build. But we’ve always thought about the virals as really being – increasing drivers in 2019 and even more in 2020 as they build up. So I think, in a lot of ways, just we feel great about what those will bring for the future. So sales force, early on, wouldn’t expect any tax reform piece to be affecting those at all right now.
Yes, I agree. And in addition to that, Chris, just as a another side, the utilization of our Panther systems continues to grow on a global basis. And I think the benefits of the Panther system will really help drive the adoption of the viral loads over time.
And we’ll take our next question from David Lewis with Morgan Stanley. Please go ahead.
Good afternoon. Thanks for taking the question. Steve, one for you, and then a quick follow-up for Bob. Steve, it feels like – I appreciate the targeted initiatives to improve the relative growth rate in Surgical, but it sort of feels like the sales force needs maybe another product to sell. So to what extent can that product be MonaLisa, and how much of it is the priority to potentially add that third product through M&A? And then a quick follow-up for Bob.
Sure, David. They certainly would benefit and can benefit from a third product. The flip side is we think they can be doing a better job with the two that they have right now, and it always becomes the easy answer from an underperforming salesperson to say they need more. And yet, our top people, frankly, still are finding more opportunity. So there are opportunities. I do think, to your point with MonaLisa Touch, I think there will be some opportunities more for, frankly, cross-referrals than necessarily having them sell it directly, but I think working in a little closer partnership with the Cynosure sales to open some more doors, and we’re just starting to see some of the early successes there. Having said all that, to your big point, Surgical is absolutely an area that we could use another product and is on the lookout for tuck-in acquisitions. So I would hope, over the coming years, we will be able to broaden that product line to your exact point.
Okay. Thanks Steven. And Bob, just a quick kind of clarification or question on tax. So number one, the 23%, 24%, I mean, is that a fleck where you see the new kind of statutory rate for the business? Or do you think that’s conservative in light of some of the complexities that you sort of called out around the reform at this early stage? And then also, if I think about your implied reinvestments, I think it’s $30 million to $35 million. Is it really realistic that you could put that money to work in the back half of the year?
Yes. Hey, David, yes, on the first question regarding the 23%. We feel pretty good about that, and that’s our best guess right now. So I don’t envision it changing too much throughout the course of the year. And regarding the investment, yes, you’re roughly in the ballpark, and I think given some of the opportunities that we have, obviously, we’re going to be disciplined. But we do think that we can use that money to invest, particularly in things like marketing efforts and so forth, to strengthen the business for the long haul.
And we’ll take our next question from Anthony Petrone with Jefferies. Please go ahead.
Thanks. One on Cynosure and one on Panther. On Cynosure, maybe just a recap of where the sales force build is at this point, where you expect it to sort of peek out at. And how many of those reps right now are in training, and when will that be complete? And then I’ll have a follow-up on Panther. Thanks.
Sure. As it relates to Cynosure, I’d say in the hiring process, we’re easily into the sixth, seventh inning and feeling really good about numerically. And a number of them have been going through training. Most of the hires actually have recently been trained. And I think it’s where we feel really good about where we’ll be in the coming quarters. But they don’t go out and hit the street day one and immediately be productive. So that’s what we’ve been saying here, we figure we’d exit this year, our fiscal year, which is the July to September quarter. I think we ought to be in great shape by that point and again, building nicely between now and then. The team getting much, much stronger.
A follow-up on Panther. Just curious to – you have the full viral load out there, and it looks like the portfolio is really extending. You’re looking more toward 2019 for a benefit. Just curious on the competitive front, I mean, does that bake in some conservatism for, let’s say, Abbott, Alinity in particular? Anything of note from that competitive launch?
We’re always going to be probably a little conservative as we think about the ramp ups to some of these things. And most of the Diagnostics products really do take time. Having said that, I think we feel great about Panther and the opportunities to put more on Panther’s, including the virals, should be very beneficial for us here over time.
And we’ll take our next question from Brian Weinstein with William Blair. Please go ahead.
Hey, guys. Can you hear me?
Hey, Brian.
Hi, Steve, I thought you might have cancel to attend the parade today, but I’m glad that you’re still doing the call. So thanks for that.
It was actually on the TV and Mike Watch’s office, because it was better for him to watch that because it was worse to watch CNBC at this point.
I get that. Hey, so a couple of questions first. Recent MQSA looks like it’s down over the last couple of months. So can you just talk about the difficulty potentially in sort of pushing through this middle point of the adoption cycle here? And anything else that you guys think you need to do? Obviously, you have new products going in there. But is it just more difficult to push through this, and is that where we’re starting to see a little bit through some of these MQSA data?
I think it is much as some seasonality here more than anything, Brian, over the last quarter-ish on the MQSA stuff. The MQSA stuff also, there’s some swirly stuff in some of those numbers. So as we try to reconcile them, I’d put it as directional at best. But I think fundamentally, between our 3Dimensions, our 3D Performance, we’re feeling pretty good, and I think especially the 3D Performance, as an ability to kind of continue to help push through this cycle. So we’re not detecting any material downturn in the market as we hit the state. Is it getting harder to – and requiring more work as you get further out in this – in the curve? Absolutely. But I think, frankly, it may even benefit us given our strength and our commitment and our resolve in this category as well as the benefits we’re bringing. So I probably feel, as Bob said, incrementally even better today about our Breast Health business than we did six months ago, both – and really both domestically and internationally.
Yes, I think to build on what you’re saying, Steve, I think one of the things that the team has done is really just portfolio sell. So it’s not just about converting a gantry or a mammography machine. It’s the Affirm Prone Biopsy System, it’s the Brevera system there. And we believe that all of those are best-in-class. And so that really helps that portfolio sell throughout the course of the sales replacement cycle.
Okay. Great. And then I don’t know if you guys hit this or not, so I apologize if you did. But did you kind of give any idea on rough breakout for Cyno between U.S., OUS and what those different geographies are growing at, at this point? Thank you.
Great. We’re not going down at that level of detail. But I think we continue to feel – international has been relatively strong, and it’s been the U.S., it’s been the larger rebuild.
And we’ll take our next question from Richard Newitter with Leerink Partners. Please go ahead.
Thanks for taking the questions. I had a couple on TempSure, Steve. With this product, could you just give us a sense of who you’re targeting? Is this more of a core focus product, especially with the initial indication seemingly more on kind of the face and the reduction in the appearance of cellulite? When can we expect the new indications for Surgical and women’s health? And then, historically, with Cynosure, in the first year of a launch of a new product, non-invasive set notwithstanding, they had generated anywhere from $20 million to $30 million in their first year of sales for a new product. Once you’re kind of a up-and-running with your sales force kind of exiting the next quarter, is that something that we should kind of expect for this product? Thanks.
Sure, I think the – clearly, the initial customer base for TempSure as its launching now is definitely much more the core cosmetic and derm audience, where we’ve always had a lot of strength as well. In terms of specific product-level guidance, I’m probably not going to go there. But I don’t think those numbers are wildly out of range, but we don’t want to get down to quite that level. As you can see, we’re trying to provide more detail than certainly what Cynosure used to provide as an independent company. Well, we’re not going to go down to individual product stuff.
Yes, Rich. And in regards to the additional indication, those will come over time throughout the course of this year and the first half of next year.
Okay. And maybe just one follow-up. Any statistics or metrics you can give us on the utilization of the SculpSure systems, how that’s been trending?
It – truthfully, it’s varied by customer. We have some that are doing really well and others, candidly, that I think where we sold it in and didn’t have the follow-up, and those are the ones we’re going back and working to improve now.
Yes, and what I would say, Rich, is that the PAC key revenue continues to grow year-over-year, but still a lot of long way to go.
And thank you. That is all the time we have for questions today. This now concludes Hologic’s first quarter fiscal 2018 earnings call. Have a good evening.