Earnings Call Transcript - HOLX Q3 2020

Operator, Operator

Good afternoon, and welcome to Hologic’s Third Quarter Fiscal 2020 Earnings Conference Call. My name is Cody, and I’m your operator for today’s call. Today’s conference call is being recorded. All lines have been placed on mute. I would now like to introduce Mike Watts, Vice President, Investor Relations and Corporate Communications to begin the call. Please go ahead, sir.

Mike Watts, Vice President, Investor Relations and Corporate Communications

Thank you, Cody. Good afternoon and thanks for joining us for Hologic’s third quarter fiscal 2020 earnings call. With me today are Steve MacMillan, the company’s Chairman, President and CEO, 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 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 through August 21st. 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 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 are 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 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.

Steve MacMillan, CEO

Thank you, Mike, and good afternoon, everyone. We’re pleased to discuss our financial results for the third quarter of fiscal 2020. Our results were very strong and reflect the value of our unique set of businesses in a time of great economic uncertainty. To begin, these last several months have been the most challenging, tumultuous, and unpredictable time of my career, but also the most exhilarating and ultimately gratifying. There’s still a lot of history to be written regarding this pandemic, and things can change very quickly in COVID time. But we’re very pleased with the significant contributions Hologic has made to human health thus far, and excited about our ability to do even more. I am just so proud of our team, who are working day and night with customers, regulators, suppliers, elected officials, and others to address the most pressing problem facing the world today. In the last couple of years, we’ve talked a lot about social responsibility and Hologic’s corporate purpose, to enable healthier lives everywhere, every day. It is this purpose that inspired our people to do more than seemed possible in the third quarter of fiscal 2020. Never before have we lived into our mission more completely or touched more human lives than during the COVID-19 pandemic. Indeed, our results flow from the positive impact we’re making on human health. Karleen will cover the details, but let’s start by saying that while the quarter began with great uncertainty and painful decisions to preserve cash flow, it ended with results that were better than we ever envisioned. We posted total revenue of $822.9 million and earnings per share of $0.75. Revenue grew 8.1% organically, and EPS increased 19%. These growth rates, our best organic performance in a very long time, significantly beat our expectations at the start of the quarter. Outperformance was driven by unprecedented demand for our COVID tests on the Panther system, as well as the quicker-than-expected strengthening of our surgical division. In addition, COVID testing surged late in the quarter, so our results also far exceeded the update we provided via the 8-K in June. We’ll now highlight three primary points related to COVID, then Karleen will cover the rest of the business. First, our manufacturing and supply chain team did an amazing job in the quarter to ramp up production of our COVID assays, helping more labs and doctors deliver diagnostic insights when and where they are needed. Second, we believe our diagnostic response to COVID will have short, medium, and long-term benefits for the company as a whole. And third, the strengthening of our international franchises over the years is enabling us to make a big difference in the COVID fight today, which in turn will further accelerate our international business going forward. Let’s start with manufacturing and supply chain, an area that doesn’t get a lot of attention on the typical earnings call. That’s unfortunate because delivering high-quality, highly precise products that doctors rely on to make critical decisions is at the core of our business. In the case of COVID, we are producing millions of tests that weren’t even invented a few short months ago, and each test has to meet exactingly high performance and quality standards. In this unique time when demand for COVID tests is exceeding supply, high-quality, high-volume manufacturing is critical. Although you’d never know it from the media stories, the diagnostics industry as a whole has done an unbelievable job of ramping up COVID production capacity. As a nation, we are on pace to conduct about 23 million tests in July. This is more than double the level of testing as recently as May, and more than 20 times the number of tests performed in March. In total, more than 52 million COVID tests have been performed in the United States. For perspective, this is about 50% more than in the other G7 countries combined. Never before has a molecular diagnostic test been scaled up to these volumes this fast. In fact, the amount of COVID testing being done today is about seven times greater than the next most common molecular diagnostic test. Our industry and its employees have a lot to be proud of, and we are striving to do more. In Hologic’s case, as soon as we launched our first COVID assay in March, a PCR test that runs on Panther Fusion, we were overwhelmed with calls from customers everywhere. So we immediately activated three key projects, working closely with our suppliers and partners around the world. First, we began developing a second COVID assay to leverage our proprietary Aptima technologies and manufacturing capacity, and to run on our large installed base of Panther instruments. Pre-COVID, we produced about 20 million molecular diagnostic tests a quarter, with the vast majority of this comprising TMA assays for infectious diseases like chlamydia, HPV, and HIV. Since the pandemic reduced demand for these tests, we were able to redirect human and technological capacity to produce our Aptima COVID assay. In essence, we merged the supply chains for our COVID tests and our legacy products to increase COVID production capacity. Second, we set out to double our molecular diagnostics manufacturing capacity by the fall, to 40 million tests or more per quarter as we move into fiscal '21. We essentially established a goal to achieve our 10-year expansion plan in about six months. And third, we began working with our partner Stratec to roughly double production of our Panther instruments. Based on these actions, in our earnings call three months ago, we shared our goal to produce at least 1 million COVID tests a week, on average, starting in late May. This would have enabled us to realize revenue of $150 million or more in the second quarter. Thanks to Herculean efforts by our operations team, we’re proud to report that we significantly exceeded this goal, and were able to increase our total molecular diagnostics test production by about 50% in the third quarter, to roughly 30 million tests. This enabled us to ship almost 13 million COVID tests to customers, including an extra production lot, leading to sales of $324 million. Based on data from the COVID Tracking Project, we estimate that we provided one-fourth to one-third of the test results delivered in the United States during the quarter. How did we get there? Through a combination of ingenuity, investment, and brute force. In terms of ingenuity, we validated the use of one of our specimen transfer tubes, one that is typically used with our ThinPrep Pap tests, for COVID testing. This helped total kit capacity catch up to our underlying production of reagents and enabled us to ship millions of additional tests. And we validated a new sample collection and loading method that reduces the use of penetrable caps, a short-term constraint that we discussed last quarter. In terms of investment, we currently expect to spend over $50 million in capital to expand COVID production, with about $14 million of that spent through the third quarter. Some of this is being used to install new high-speed filling lines, and we are also investing in new, custom machinery to produce more penetrable caps. As announced this week, this effort is also being supported by HHS and DoD. In terms of brute force, we are producing 24/7 at our facility in San Diego. Employees from areas like IS and finance were trained to work on the packaging lines, while we hire over 150 new operations employees here, more than a 50% increase. We also expanded capabilities at our diagnostics plant in Manchester, United Kingdom, which began producing COVID tests at the end of June. Overall, these actions have provided the capacity to produce at least 1.5 million COVID tests per week, on average, and should enable COVID sales to increase sequentially in the fourth quarter, over and above our very strong Q3 even while accommodating higher volumes of our women’s health tests. And there is the potential to do more if we are able to work through some remaining supply chain constraints on certain instrument components. The second point is that our diagnostic response to COVID will have short, medium, and long-term benefits for Hologic as a whole. In the short term, the benefits are obvious. Over the next several quarters, COVID testing will help drive strong overall corporate growth even before the base business fully recovers. In the medium term, we expect that the record number of Panther and Panther Fusion instruments that we are placing now will turbo-charge our razor-razor blade business model, and dramatically increase pull-through of other assays. These include our new women’s health tests, our quantitative virology products, and our respiratory mini-panels. To illustrate this, over the last several years, we have placed an average of 228 new Panther systems globally per year. In the third quarter alone, we placed 208 systems. This was made possible by a significant expansion of production capacity at Stratec and even by refurbishing more than 50 Panthers from our own research labs. At the end of June, our installed base stood at more than 2,000 systems, with almost 45% of these outside the United States. And over this fiscal year, we expect to place about 500 Panthers, more than doubling our recent annual run-rate. Of the 152 systems shipped this quarter in the United States, we estimate that more than 60% will replace one of our older, workhorse TIGRIS systems over time. This will enable those customers to access our full menu of 16 FDA-authorized tests on Panther, rather than the four that are cleared on TIGRIS. The other 40% of systems either displaced a competitor or enabled a new customer to begin testing. And some of these new customers are specifically targeting nascent growth opportunities such as home sample collection. One way we measure new customer adoption internally, as well as incentivize our sales force, is by tracking what we call TORs, or Tests of Record, and the contracted year-one revenue associated with them. A TOR is achieved when a customer goes live with a new assay on our system. In 2020, even as COVID is driving tremendous interest in Panther, our sales team has been focused on securing downstream revenue from other tests. Based on their excellent work and motivated by double the payout on non-COVID TORs, we have already set a record for TOR revenue. And we have even more signed and waiting to go live over the next couple of quarters. Since Panther was cleared in 2012, we have seen over and over again that as customers come to know and love the system, they adopt additional tests that drive even more pull-through, and we would expect the same dynamic to play out here. This will drive growth in the long term, even as multiple COVID vaccines are hopefully commercialized. While everyone at Hologic is rooting for successful vaccine development, it’s important to note that the strength and duration of immunity still have to be established. And consumer surveys indicate that many people may choose not to be vaccinated. For these reasons, we also forecast there will be a long-term market for COVID testing on a global basis, just as testing co-exists with vaccines today for pathogens such as HPV, hepatitis B, and influenza. The third point we want to make is that the strengthening of our international franchises over the years is enabling us to make a big difference in the fight against COVID today, which in turn will reshape our international businesses going forward. Let us give you a little more color on that. Over the last three years, international sales have been a major growth driver for the company, with our base businesses growing at a low double-digit CAGR organically. Within this, molecular diagnostics has been leading the charge, with growth rates often exceeding 20%. Underpinning this growth, we have invested methodically in our leadership and commercial infrastructure. We also divested Cynosure, which enabled our leaders to focus on the businesses they know best. For example, in our European region specifically, we had an installed base of about 220 Panthers in 2016, just before our regional president Jan Verstreken joined the company. By the end of the third quarter, however, that number had doubled. By leveraging this installed base, our team has signed contracts in about a dozen countries that secure about $500 million of COVID testing revenue over the next four quarters, with opportunities to grow this further. The largest contract is with the UK Department of Health, which is worth nearly $190 million. While the vast majority of our COVID revenues in the third quarter came from the United States, expanding production capacity will enable us to serve more global customers going forward. In the third quarter alone, we shipped almost 60 Panther instruments to lab customers outside the United States. And like in the U.S., our commercial teams are capitalizing on the intense demand for COVID tests to drive pull-through of our other assays, which is a robust opportunity given our lower market shares globally. Before turning the call over to Karleen, let me conclude by saying that the COVID-19 pandemic has really highlighted the importance of diagnostics within the healthcare system. In the future, we hope that this will lead to a strengthening of the public health infrastructure, more favorable reimbursement for diagnostic testing, and hopefully even more appreciation for the value of early detection, which is our core focus. At the same time, our response to the pandemic is also making Hologic a much more successful and influential player within the diagnostics industry, both domestically and overseas. This is based on the power of our technology and automation, and the ability of our people to quickly and effectively respond to public health needs. There is absolutely no doubt that our diagnostics division, and therefore our company as a whole, is becoming a stronger organization through this challenging time. Now, we’ll turn the call over to Karleen.

Karleen Oberton, CFO

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 our income statement, briefly touch on a few other key financial metrics, and finish by reinstating our financial guidance for the fourth quarter. Let me start by summarizing our third quarter results. Revenue of $822.9 million declined 3.1% due to the divestiture of Cynosure. Organically, we grew 8.1%, as strong sales of our COVID-19 diagnostic assays offset weakness in the rest of the business as a result of the pandemic. Profitability improved, with EPS of $0.75 increasing 19%, well ahead of our expectations. We entered the third quarter facing unprecedented uncertainty, and we acted prudently and decisively to reduce expenses and preserve cash. However, the hard work and ingenuity of our teams helped maximize the value of our two COVID assays, and the rest of our business is recovering better than expected. As a result, we generated strong cash flow in the quarter, which enabled us to repay $250 million that we had borrowed on our revolver as a precautionary measure. Our balance sheet and liquidity are stronger than ever. For all these reasons, we are optimistic that we are in position for a very successful fourth quarter. With that introduction, I will now provide some more detail on our divisional revenue results. Diagnostics, our largest division, grew an outstanding 74.9% in the third quarter driven by molecular, where sales increased 170.3%. As Steve mentioned, in response to the unprecedented need for COVID testing, we increased our production capacity substantially in the third quarter. This enabled us to ship about 13 million COVID tests to customers, generating revenue of $324 million. Outside of COVID-19 testing, our base molecular and cytology businesses declined, but trends improved as the quarter went on. Breast health revenue was negatively affected by the pandemic, but the division performed in line with our expectations. Global breast health sales of $224 million decreased 30.9%. Excluding $3.9 million of sales from SuperSonic Imagine, sales decreased 32.1% organically. Demand for many of our products was negatively impacted by COVID-19, especially in the United States, as our customers focused on responding to the pandemic, delayed or reduced purchases of capital equipment, and rescheduled routine screening appointments. However, service revenue and international sales declined much less, cushioning the overall decline. In surgical, sales of $51.5 million decreased 53.9%, better than our internal forecast as the business has begun to recover more rapidly than anticipated. Weekly demand declined close to 90% early in the quarter as elective procedures were postponed. However, we saw steady and substantial improvement in May and more so in June. Overall, in terms of geography, domestic sales of $660.8 million increased 2.9% on a reported basis, as strong sales of COVID tests more than offset the impact of the Cynosure divestiture and reductions across our other product lines. But on an organic basis, U.S. revenue was up 11.2%. Outside the United States, reported sales of $162.1 million decreased 21.2% on a reported basis and 2.8% organically. As you know, many countries began to emerge from the COVID pandemic earlier than the U.S. did, which helped our results. In addition, we began shipping our COVID-19 assays to our international customers in June, and expect these to be significant contributors to future growth. Moving on to the rest of the P&L for the third quarter. Gross margin of 64.7% increased 310 basis points, driven primarily by sales of COVID tests and the divestiture of the lower-margin Cynosure business. These benefits were partially offset by lower sales in our other divisions as a result of the pandemic. Total operating expenses of $261.1 million decreased 5.5% in the third quarter, driven mainly by the divestiture of Cynosure. However, expenses were significantly higher than our expectations entering the quarter, when we were planning for worst-case scenarios that thankfully never materialized. This was driven mainly by higher compensation expense, as accruals for incentive compensation increased in line with our financial results. In addition, we experienced higher than normal bad debt expense in the quarter, most notably a write-off associated with a change in a breast health distributor in Latin America. Lastly, we made a $10 million charitable contribution to the company’s donor-advised fund, and accelerated spending on some R&D and marketing programs to bolster future growth. Putting all this together, operating margin increased 380 basis points to 33%, and net margin increased 360 basis points to 23.7%, both recent highs. As a result, this led to non-GAAP net income of $194.7 million, and non-GAAP earnings per share of $0.75, well ahead of our expectations. Before we cover our 2020 fourth quarter guidance, I’ll quickly touch on a few other financial metrics. At the end of the third quarter, our leverage ratio stood at 2.4 times, and we had $744 million of cash. Cash flow from operations was $223 million in the third quarter, a very strong result. Based on this cash flow, we repaid $250 million of debt under our revolving credit facility. We also believe we are well-positioned to take advantage of still uncertain market conditions to pursue tuck-in acquisitions in each of our divisions. Our business development goals have not changed; we continue to look for deals that accelerate growth and deliver attractive economic returns, either by leveraging an existing commercial channel or helping us expand into near adjacencies. Finally, ROIC was 12.8% on a trailing 12-month basis, an increase of 30 basis points. And adjusted EBITDA of $299 million increased 8.2%. Before we open the call for questions, I would like to discuss our expectations for the fourth quarter of fiscal 2020. While our business environment remains uncertain due to the COVID-19 pandemic, we are pleased that visibility has increased compared to last quarter. This is enabling us to provide quarterly guidance again, albeit in much wider ranges than usual. For the fourth quarter of fiscal 2020, we expect total revenue in the range of $925 million to $1,025 million. This represents organic revenue growth of 17.4% to 30.3% for the quarter. Due to the divestiture of Cynosure, revenue compared to the prior year period equates to an increase of 6.7% to 18.3% on a constant currency basis. On the bottom line, we expect EPS of $0.95 to $1.15 in the fourth quarter. This implies growth rates of between 46.2% and 76.9%, significantly outpacing revenue. I’d also like to point out that we expect other expenses net to increase to about $30 million in the fourth quarter, as we don’t forecast gains related to certain investments that resulted from equity markets rebounding in the third quarter. This fourth quarter guidance is based on a full-year tax rate of 22.75%, and diluted shares outstanding of approximately 265 million for the full year. Now, let’s turn briefly to our divisional expectations. In diagnostics, we expect that demand for our two COVID assays will continue to exceed supply in the fourth quarter of fiscal 2020. As Steve said, our efforts to increase manufacturing capacity should enable us to increase COVID sales compared to the third quarter level. And overall, we forecast that diagnostics revenue could double or more compared to the prior year period. In breast and skeletal health, recurring revenue such as service should continue to partially cushion a steeper decline in capital sales, reflecting the diversification strategy that we’ve been pursuing for several years. Revenue should perform better outside the United States than domestically. We continue to believe that Breast Health will recover from COVID pressures more slowly than our other divisions. So, while fourth quarter results should be better than the third quarter, we still forecast that Breast and Skeletal Health revenue will decline in the range of 20% or more. In surgical, we believe revenue will continue to improve, based on both the clinical need for our products and the desire of our hospital customers to shore up their finances by addressing pent-up demand. However, there remains some uncertainty around the pace of this recovery, especially if COVID cases continue to spike in specific geographic regions and customers are forced to suspend elective procedures again. Overall, we expect surgical sales in the fourth quarter to be down around 20% compared to the prior year period. As you update your forecasts, let me remind you that macro uncertainty remains much higher than normal due to the virus we’re all dealing with. That’s why we’re providing wide guidance ranges, and we would encourage you to model at the middle of these ranges, which incorporate both potential upsides and downsides. Before we open the call for questions, let me conclude by saying that Hologic’s financial performance in the third quarter was excellent, and our financial condition remains rock-solid. As I look back, it’s hard to describe how much our financial situation improved over the course of the quarter. For this we can thank an R&D team that quickly developed new COVID tests, and an operations and supply chain team that found a way to knock down just about every barrier to increased production. As Steve said, it’s especially gratifying that we did well by doing good in the third quarter. What’s more, we expect this performance to get even better in our fourth quarter. With that, I will ask the operator to open the call for questions. Please limit your questions to one plus a related follow-up, then return to the queue.

Operator, Operator

Thank you. We’ll take our first question from Patrick Donnelly with Citi. Please go ahead.

Patrick Donnelly, Analyst

Great. Thanks, guys. Steve, I’m not sure where to start. You got through a ton of impressive numbers. So, congratulations on that.

Steve MacMillan, CEO

Thanks. It’s a team effort.

Patrick Donnelly, Analyst

Yes, absolutely. I know, you kind of called out things can change quickly in these times. I certainly appreciate that. But, maybe looking ahead, can you talk through your views on the durability of testing into 2021? I mean, it certainly sounds like you’re pretty bullish on the opportunity, but maybe we focus on the U.S. International, you kind of gave some good color there. But, you guys have obviously ran capacity nicely. How are you thinking about the setup into fiscal '21? I mean, it seems like demand is only increasing recently. You gave those numbers on June. Any reason to think things don’t continue to accelerate as we head into 1Q and 2Q next year? As you guys have talked about, 4Q certainly looks better than 3Q. Maybe just talk though the setup there from the testing side with the visibility we have today?

Steve MacMillan, CEO

Sure. And again, Patrick, as you well know, hard to put long-range forecasting, but here’s the way we think about it. And it was really around the decision we made in March to double our capacity by the fall, which when people first looked at it, it was not. Now, here’s the simple reality. We’re going to be going into a cold and flu season. I think every single person that sneezes or coughs from September through the next season is going to end up getting tested for COVID. And it’s not just U.S., it’s globally. And even all the talk of the vaccines, let’s say a vaccine comes, there’s still so many unknowns. There’s also the fundamental reality that it’s going to take months to get everybody vaccinated. Even after that, people are going to be still getting this thing. And particularly on a global basis, we’re not going to vaccinate the world. And there’s only so long we can shut the world down and have people stay at home and not traveling and everything else. So, I think we really see this. Again, can’t exactly quantify the magnitude. But you know what, I mean, look at all the universities, right, everybody needs to get back to work. Testing is the key area to help get people comfortable. So, I think we see this at least going well through the next season. And beyond that, this thing is so voracious that we really believe there’s going to probably, at a bare minimum, be an ongoing trail of testing just for prevalence or something else and population screening for at least another year or two. I mean, I think even Pfizer announced as it relates to a vaccine, they see a vaccine market continuing for years. So, we really see there are a lot more durability there. Having said that, if it’s not, we got our base businesses as well. But, fundamentally, we think this thing is going to be far more persistent than I think where a lot of people necessarily thought at the beginning.

Patrick Donnelly, Analyst

That’s helpful. And maybe on the marketing side, can you just talk through expectations there? Obviously, you guys are investing a lot for areas like capacity expansion. And are you plugging money into other growth initiatives, just capitalizing again on these near-term tailwinds and big cash flow numbers, etc.? And then, quickly on the margin as well. Anything to call out on the profile of the international COVID testing, is that a bit lower just given how massive those orders are?

Karleen Oberton, CFO

Yes. So, this is Karleen. So, a couple of things. So, yes, certainly, we are investing in capacity but also in our R&D, for sure, to accelerate future products. And on your point on ASPs outside of the U.S., yes, those will be a little lower than what we’ve seen at this point in the U.S.

Operator, Operator

We’ll now take our next question from Chris Lin with Cowen. Go ahead.

Chris Lin, Analyst

Steve, in your prepared remarks, you stated that Hologic has increased manufacturing even more if you can work through some of the supply chain constraints? Could you just help us understand what these constraints are? And if you are able to overcome them, how much would your manufacturing capacity increase over 1.5 million per week?

Steve MacMillan, CEO

Sure, Chris. The constraints primarily affect the supply chain, including some components used in Panther. Our ability to produce test kits and everything else is strong, but there have been reports of pipette tip shortages and similar issues that are outside of our control, as vendors purchase these directly. We are collaborating with manufacturers of some ancillary ingredients. It may be too early to determine the impact, but we believe there is potential for exceeding the upper range of our guidance if we can address these challenges. Overall, we feel confident in the guidance we have provided.

Karleen Oberton, CFO

Yes. And I would just add that if we think about increasing capacity, we’re seeing our base business and diagnostics come back as well. So, it’s going to be a challenge balancing on the two products.

Chris Lin, Analyst

Got it. And for my follow-up, I believe your Panther shipment forecast of 500 total placements in fiscal 2020 implies that placements declined sequentially in Q4 from the eight systems that you placed in Q3. If this is right, could you just provide a bit more detail on this decline? Is it a function of Stratec manufacturing constraints and depleting your refurbished research lab systems? And just looking ahead, can you give us a sense of the Panther instrument backlog? Thank you.

Steve MacMillan, CEO

Sure. Chris, the numbers will be somewhat lower. As you pointed out, around 50 of the units we shipped were refurbished. Those are all gone now. We've removed every one from our buildings that we didn’t need. We also started the quarter with some inventory. As you can imagine, we shipped every last one. I often joke that whenever there was a press conference at the White House and different customers were there promising more volume, they came back the next day asking us what else we could do for them. We depleted all our inventory. We're currently building at about double the rate, although there will be a slight sequential decline. However, we made significant progress this quarter, which puts us in a good position moving forward.

Operator, Operator

We’ll hear next from Tycho Peterson with JP Morgan.

Tycho Peterson, Analyst

Hey, thanks. Steve, there’s been a lot of talk about pooling samples. Can you just talk a little bit about what you think pooling will do to Panther utilization? And then, any thoughts on flu test for legacy cancer to have a syndromic panel on the larger installed base?

Steve MacMillan, CEO

Sure. As a leader in this space, we’re closely collaborating with the FDA and our customers to find solutions. Regarding pooling, we are actively engaging with both the FDA and our customers to explore some claims, and we believe we will certainly be a player in that area. It could help increase overall capacity, especially since many people still want to be tested. We anticipate a lot of testing that is more about screening than diagnosis, particularly in the fall as universities and others prepare to return. We foresee a role for pooling, drawing on our experience from blood screening. Additionally, we are evaluating combo products for the fall, given our strong presence in this field. Customers continue to express that COVID remains the primary concern. Unfortunately, while the flu may also be a concern, we believe that this year, people will feel a sense of relief when they do have the flu compared to the ongoing worries about COVID. We're prepared to address both issues.

Tycho Peterson, Analyst

And then, for the follow-up, just can you talk a little bit more about the women’s health recovery? How you think about that beyond the fiscal fourth quarter? Mammography may start to come back. Is that more of a 2021 event, or could you see some uptick in the year-end?

Steve MacMillan, CEO

Yes. I think part of what we’re not totally sure about yet, we’ve seen a significant strengthening, certainly June, Julyish of both our surgical and women’s health businesses and diagnostics. We think a chunk of that was catch up, people that delayed and kind of got rescheduled. So we’re not yet sure exactly what the trajectory will be, particularly as you have any additional hotspots and this and that. But, I think overall, we feel pretty good about the progress there. And really, our Breast Health business, the diversification that we have in that business, so much more disposable and recurring service revenue and everything else. That is probably still going to be the slower climb out. But, we’re seeing some real positive signs in that business as well. But, having said that, we’re obviously forecasting, as Karleen said, still to be down somewhat in the current quarter and continuing probably to strengthen here over time.

Operator, Operator

Our next question comes from Dan Leonard with Wells Fargo.

Dan Leonard, Analyst

A couple of questions on COVID, surprise, surprise. So, first off, Steve, you talked about the opportunity to use your COVID test to capture other test volume longer term. Can you elaborate on the mechanics of that? Is that contractual, and how confident are you that customers aren’t acquiring Panthers with the intent to mothball in 12 months?

Steve MacMillan, CEO

I believe there are several important points to discuss. We are quite confident, as many of our contracts are in place both in the U.S. and internationally. On the international front, we are closely associating our COVID tests with the transition to our women’s health assays as COVID testing demand declines. This will lead to a significant influx of new customers. Another key observation is that while Hologic may not be present at press conferences, we are very much active in the market. Everyone is enthusiastic about the Panther system. The more it gets utilized, the greater the demand becomes. Lab technicians are consistently expressing admiration for it; we’ve even had various governors reaching out to Kevin Thornal, mentioning how their visits to labs in their states have been filled with praise for the Panther. This growing familiarity and affection for the system is becoming increasingly evident.

Dan Leonard, Analyst

Okay. And then, for my follow-up, you talked about where the Panthers are going between TIGRIS competitive wins and some new customers, new to automated molecular diagnostics. That latter group, could you elaborate on what these customers look like? I think you hinted at some nascent opportunities. But really what does the demographic in this new to automated molecular diagnostic customer look like?

Steve MacMillan, CEO

There’s one we mentioned, which is a company called LetsGetChecked. They are heavily involved in direct patient services where they utilize our sample, send it out, and receive it back for testing on our Panther system. They started as a nascent customer with our basic products, but with the onset of COVID, it became a significant opportunity. We know several local individuals who have used their services. I believe this is one of the examples we will be highlighting.

Operator, Operator

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

Brian Weinstein, Analyst

Steve, that was quite a door slam that you guys just did. So, congrats on that.

Steve MacMillan, CEO

Thank you. Our Panthers were born to run.

Brian Weinstein, Analyst

Yes, they were. I appreciate that. But, not bad on your part, nice job. As we think about that 1.5 million per week and all the demand that’s there. You mentioned U.S., you mentioned international, and gave some details on those international supply agreements that you have signed. Do you need to increase the capacity in order to meet those U.S. supply agreements? And how are you allocating this between the U.S. and international at this point?

Steve MacMillan, CEO

Yes, we’ve only committed to what we know we can produce. The 500 million number we mentioned for the next four quarters internationally is part of our production plans. If we can grow beyond that, we recognize that there are opportunities for more business, both in the U.S. and internationally. One advantage we have is our manufacturing facility in Manchester, UK, which serves as our diagnostics hub for Europe. It’s not just about San Diego; our facility is now fully operational, and we successfully ramped them up in late June for the COVID test.

Brian Weinstein, Analyst

Okay. And then, if I could just kind of press on the previous question a little bit here, from the idea of the combo test. I wasn’t sure if you were committing to being in the market before the proceeding and that that would be sort of a true combo test that would be COVID flu, or if you’re going to get a flu test sort of approved onto Panther, then have kind of a way of doing flu and COVID by running two separate tests or just how you’re thinking about pursuing that and just to confirm, if you would be on the market you thought by the flu season or not?

Mike Watts, Vice President, Investor Relations and Corporate Communications

Hey, Brian, it’s Mike. I’m going to skip the Springsteen reference. Just a couple of reminders: we can currently perform multiple flu and COVID tests on our fusion instrument. This will be an important part of our offerings. We are also developing a second test for the Panther system that will combine flu and COVID. I can’t speculate on the availability of that test as it's difficult to predict, but the aim is to have it ready for the fall flu season.

Operator, Operator

Thank you. We’ll take our next question from Jack Meehan with Nephron Research.

Jack Meehan, Analyst

Thank you. Good afternoon. I’ll continue on the diagnostic theme. I was curious if you could just comment on how you expect customers to use their Panther systems as the routine volumes start to improve, but the COVID testing sustains. Sorry, can you hear me?

Steve MacMillan, CEO

Yes.

Jack Meehan, Analyst

Sorry. I thought I could hear something in the background. Yes. Just how you expect customers use the Panther systems? As the COVID testing sustains, do the routine volumes come back? And is there any cannibalization of the existing testing that you expect?

Steve MacMillan, CEO

It's part of the magic with the random access Panther. It's incredibly easy to run both the women’s health test and the COVID test simultaneously without any delays or extra steps that can slow things down. We're truly seeing our key customers utilizing it for both purposes. We are committed to maintaining our core business in women's health, which is the foundation of this company. All the figures we're sharing reflect strong performance in our women's health division, alongside an increase in COVID testing volume. Customers can effectively use both, which highlights the remarkable capabilities of our system.

Karleen Oberton, CFO

And Jack, I would just add that, I think we had talked about prior to COVID that on average, a Panther was only 35% utilized. So, there was capacity already within that installed base to add additional testing.

Operator, Operator

Great. And then, Steve, I was wondering if everything going on with COVID-19, if it changes your philosophy around M&A in the diagnostic space at all. Historically, I don’t think you guys have looked at point-of-care as closely given your positioning in the hospital and regional labs. But, do you think it makes sense with the focus on early detection to push further that way?

Steve MacMillan, CEO

Jack, that’s a great question. I believe we will continue to advance our bolt-on strategy, particularly in surgical and diagnostics areas, with several opportunities we are currently evaluating. We expect this will enhance our ability to make acquisitions. However, we recognize that some valuations within the diagnostics sector are quite high at the moment, so we are prepared to be patient and don’t feel rushed to act. This situation also gives us greater flexibility. Additionally, having Kevin Thornal leading this business is beneficial; he has a strong background in business development from his time at Stryker, and he is doing an excellent job in running our diagnostics unit. His approach brings a more strategic mindset focused on business development, leading to increased activity in the division under his leadership.

Operator, Operator

We’ll take our next question from Anthony Petrone with Jefferies.

Anthony Petrone, Analyst

I had just a couple of math questions on some of the numbers you threw out here Steve and Karleen. And so, first thing would be, is the 500 million you referenced over the next four quarters for Europe, I guess, how much of that is baked into fiscal 4Q? Should we just expect that evenly loaded until a quarter of that goes into next Q? And then, how much is baked in there I guess for the fourth quarter for back to school? And you referenced it earlier, Steve, but that just strikes us as being a big driver next quarter. And then, last, just to get it in there, if we do it another way for looking at your production capacity, at a minimum, we’re coming up with 400 million for just 4Q. Is that a good starting point when we think about the next 90 days?

Steve MacMillan, CEO

Certainly, regarding the 500 million, which pertains to international markets, primarily in Europe and Asia Pacific, it's important to clarify that. A good way to view this is that it is expected to be fairly level over the next four quarters, reflecting the nature of the contracts. Concerning back to school, we've been focused on increasing production in preparation for the September-October timeframe. Therefore, we anticipate continued growth during this period, which is incorporated into our guidance.

Operator, Operator

We’ll here next from Dan Brennan with UBS.

Dan Brennan, Analyst

So, Steve, I guess, could you help us think through maybe how you’re thinking about where the market for testing goes? I think, you mentioned we’re somewhere in the low-20s in the U.S. right now. Where do you think that goes by the fall? Any sense, and how you’re kind of planning your business? And I’d be interested to know if you could provide what your split is as well between U.S. I know U.S. COVID testing, because it’s hard to get a sense of what the OUS COVID testing number is.

Steve MacMillan, CEO

Yes. We've provided a figure, and if you take that 500 million and divide it across the next four quarters, it should give you an idea of what the international component might look like. However, more will still be directed toward the U.S. It's challenging to predict precisely where this market is heading. I recall being part of an AdvaMed call in late April or early May, where they mentioned the country's testing capacity could reach a maximum of 400,000 tests per day. Now, according to your daily report, we're seeing between 750,000 to 800,000 tests, and we've even reached 900,000 in a day. I would be surprised if we don't hit 1 million a day around September. To put it into perspective, in April we conducted 5 million tests, 10 million in May, and 15 million in June. July is projected to exceed 20 million, which puts us on track for around 30 million tests in the U.S. by September, especially as we move through the cold and flu season.

Dan Brennan, Analyst

Thank you for that. I have one more question about the vaccine. You provided some insights on consumer survey data and your thoughts on the ongoing demand for testing, even after a vaccine is available. We'll need to see how effective the vaccine really is. However, it seems like you mentioned strong ongoing demand in 2021, particularly for HPV and influenza. We also believe that there could be significantly higher vaccination rates due to the economic conditions brought about by this situation. Some investors are concerned that if an effective vaccine is introduced, the testing market might quickly decline if there is a much greater adherence to vaccination.

Steve MacMillan, CEO

Yes. Especially in the first half of 2021, while the vaccine is being distributed, many people will still become ill. In the U.S., with approximately 350 million people, there has been significant focus on COVID. However, we won't be able to vaccinate 7 billion people globally. Given the persistence of the virus, even Vietnam, which had not seen any cases for 90 days, recently reported new infections. This virus will continue to circulate worldwide. None of us can predict precisely what this means for the future, including organizations like the CDC and WHO. It's important to apply common sense and to recognize the realities we face. For instance, those who are likely to be vaccinated first are probably individuals with higher incomes living in suburban areas, whereas the migrant worker population and others who are also essential may not be prioritized initially. This could result in numerous reasons for the virus to remain prevalent. Moreover, in the next five to six months before a vaccine becomes available, we will improve our understanding of how to manage this situation. It would be beneficial for public officials to emphasize the need to learn to live with the virus, using diagnostics as a valuable resource to identify outbreaks and guide safety measures. We're gradually becoming more knowledgeable to avoid complete lockdowns. If you are a university president, many people require information that we can provide to assist them.

Mike Watts, Vice President, Investor Relations and Corporate Communications

Operator, I think we can take two more questions. Let's limit these last two to one question each, please.

Operator, Operator

We’ll take the next question from Ivy Ma with Bank of America.

Ivy Ma, Analyst

So, I’ll be quick on the question. So, I appreciate the color on the 40 million tests per quarter in terms of COVID capacity. So, I’m curious, would you expect that one-fourth to one-third market share to persist in the next several quarters? And related to that, I mean, do you expect point-of-care to take share from what’s currently being going on? And what percentage are you selling to hospitals or other facilities that might have some POC installed during this time?

Steve MacMillan, CEO

Great job getting in about 14 questions, Ivy. That's impressive. I'll try to address as many of those as possible. To clarify, the 40 million we are working towards for production capacity reflects our total molecular volumes, with more than half allocated to our base business. I want to ensure there’s no misunderstanding that this is related to COVID production volume. Regarding market share, we are not particularly focused on that right now since none of us can provide concrete details. The real challenge we face is not just competing with our rivals, but collectively fighting the pandemic and coronavirus. I believe there will be ample opportunities for us going forward. As for point-of-care, it does have its place, but testing large volumes of people is difficult manually. While it's quick to get results for one person or a few people, it's challenging to test hundreds in a point-of-care setting. Given the current testing levels in the country of 700,000 to 900,000 tests per day, we need high-throughput, high-volume systems. We are in a unique position where point-of-care will continue to expand, and so will we.

Operator, Operator

We’ll take our final question from Richard Newitter from SVB Leerink. Please go ahead.

Richard Newitter, Analyst

Thank you for including me, and congratulations on the quarter. Steve, could you provide more details about the non-COVID segment of your surgical business as you transition from June to July? I appreciate that you've noted some backlog work or deferred procedures being rescheduled. What was the trend in the last two weeks? Did it improve compared to the exit rate at the end of June? Additionally, could you share some insights on new patient visits and what you're observing regarding patients seeking care? Thank you.

Steve MacMillan, CEO

Yes, Rich, we won’t delve into how the past two weeks compared to others. It’s already included in our guidance. We expect our surgical business to be down about 20 percent this quarter, which is a significant improvement from over 50 percent last quarter. We are encouraged by this recovery. However, we experience fluctuations; for instance, when Texas or Florida implements temporary lockdowns, we notice some setbacks. Hence, we don't have complete clarity on the trend moving forward, but we are optimistic about the direction. Regarding your second question about new visits versus backlog, we are monitoring that and seeing a mix of both, leaning more towards new visits. We don't have precise figures yet. However, MyoSure is drawing in both new and existing patients with fibroid cases. Additionally, NovaSure initially had some catch-up, but we are now beginning to welcome new patients as well.

Operator, Operator

That is all the time we have for questions today. This now concludes Hologic’s third quarter fiscal 2020 earnings conference call. Have a good evening.