SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
|☒||ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934|
For the fiscal year ended: September 25, 2021
|☐||TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934|
For the transition period from to
Commission File Number: 1-36214
(Exact name of registrant as specified in its charter)
|(State or Other Jurisdiction of|
Incorporation or Organization)
| ||(I.R.S. Employer Identification No.)|
250 Campus Drive, Marlborough, Massachusetts 01752
(Address of Principal Executive Offices) (Zip Code)
Registrant’s Telephone Number, Including Area Code (508) 263-2900
Securities registered pursuant to Section 12(b) of the Act:
|Title of Each Class||Trading Symbol(s)||Name of Each Exchange on which Registered|
|Common Stock, $0.01 par value||HOLX||The NASDAQ Global Select Market|
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☒ No ☐
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐ No ☒
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act (Check one).
|Large accelerated filer|| ||☒|| ||Accelerated filer|| ||☐|
|Non-accelerated filer|| ||☐|| ||Smaller reporting company|| ||☐|
|Emerging growth company||☐|
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. §7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☒
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act.) Yes ☐ No ☒
The aggregate market value of the registrant's Common Stock held by non-affiliates of the registrant as of March 27, 2021 was $18,639,078,720 based on the price of the last reported sale on NASDAQ Global Select Market on that date.
As of November 11, 2021, 251,420,529 shares of the registrant’s Common Stock, $0.01 par value, were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant’s Proxy Statement for the registrant’s annual meeting of stockholders to be filed within 120 days of the end of its fiscal year ended September 25, 2021 are incorporated into Part III (Items 10, 11, 12, 13 and 14) of this Annual Report on Form 10-K where indicated.
ANNUAL REPORT ON FORM 10-K
For the Fiscal Year Ended September 25, 2021
TABLE OF CONTENTS
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Some of the statements contained in this report and documents incorporated by reference herein are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the "Securities Act") and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). These statements involve known and unknown risks, uncertainties and other factors which may cause our or our industry’s actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by the forward-looking statements. Forward-looking statements may include, but are not limited to, statements regarding:
•the ongoing and possible future effects of the global COVID-19 pandemic and associated economic disruptions, including supply chain constraints and inflation, on our business, financial condition, results of operations and cash flows and our ability to further draw down our revolver;
•the ongoing and possible future effects of the global COVID-19 pandemic on our customers and suppliers;
•continued demand for our COVID-19 assays;
•the timing, scope and effect of further U.S. and international governmental, regulatory, fiscal, monetary and public health responses, including emerging vaccine mandates, to the COVID-19 pandemic;
•our ability to manufacture, on a scale necessary to meet demand, our COVID-19 assays as well as the systems on which the assays run;
•our ability to predict accurately the demand for our products, and products under development and to develop strategies to address markets successfully;
•the effect of the continuing worldwide macroeconomic uncertainty, including the UK’s decision to leave the European Union (known as Brexit), on our business and results of operations;
•the effect of the worldwide political and social uncertainty and divisions throughout the world, including the impact on trade regulation and tariffs, that may adversely impact the cost and sale of our products in certain countries, or increase the costs we may incur to purchase materials, parts and equipment from our suppliers;
•the development of new competitive technologies and products;
•the impact and anticipated benefits of completed acquisitions and acquisitions we may complete in the future;
•the ability to consolidate certain of our manufacturing and other operations on a timely basis and within budget, without disrupting our business and to achieve anticipated cost synergies related to such actions;
•the ability to successfully manage ongoing organizational and strategic changes, including our ability to attract, motivate and retain key employees and maintain engagement and efficiency in remote work environments;
•our ability to obtain regulatory approvals and clearances for our products, including the implementation of the new European Union Medical Device Regulations, and maintain compliance with complex and evolving regulations;
•potential cybersecurity threats and targeted computer crime;
•the coverage and reimbursement decisions of third-party payors;
•the uncertainty of the impact of cost containment efforts and federal healthcare reform legislation on our business and results of operations;
•the guidelines, recommendations, and studies published by various organizations relating to the use of our products;
•the effect of consolidation in the healthcare industry;
•the possibility of interruptions or delays at our manufacturing facilities, or the failure to secure alternative suppliers if any of our sole source third-party manufacturers fail to supply us;
•our ability to meet production and delivery schedules for our products;
•our ability to protect our intellectual property rights;
•the possibility that products may contain undetected errors or defects or otherwise not perform as anticipated;
•the anticipated development of markets we sell our products into and the success of our products in these markets;
•the anticipated performance and benefits of our products;
•estimated asset and liability values;
•the impact of future tax legislation;
•conducting business internationally;
•the impact and costs and expenses of any litigation we may be subject to now or in the future;
•our compliance with covenants contained in our debt agreements;
•anticipated trends relating to our financial condition or results of operations, including the impact of interest rate and foreign currency exchange fluctuations, including the potential impact of the phase out of LIBOR by June 30, 2023; and
•our liquidity, capital resources and the adequacy thereof.
In some cases, you can identify forward-looking statements by terms such as “may,” “will,” “should,” “could,” “would,” “expects,” “plans,” "intends," “anticipates,” “believes,” “estimates,” “projects,” “predicts,” "likely," "future," "strategy," “potential,” "seeks," "goal" and similar expressions intended to identify forward-looking statements. These statements are only predictions and involve known and unknown risks, uncertainties, and other factors that may cause our actual results, levels of activity, performance, or achievements to be materially different from any future results, levels of activity, performance, or achievements expressed or implied by such forward-looking statements. Given these uncertainties, you should not place undue reliance on these forward-looking statements. Also, these forward-looking statements represent our estimates and assumptions only as of the date of this report. Except as otherwise required by law, we expressly disclaim any obligation or undertaking to release publicly any updates or revisions to any forward-looking statement contained in this report to reflect any change in our expectations or any change in events, conditions or circumstances on which any of our forward-looking statements are based. Factors that could cause or contribute to differences in our future financial results include the cautionary statements set forth herein and in our other filings with the Securities and Exchange Commission, including those set forth under “Risk Factors” set forth in Part I, Item 1A of this Annual Report on Form 10-K (this "Annual Report"). We qualify all of our forward-looking statements by these cautionary statements.
Hologic is a trademark of Hologic, Inc. Other trademarks, logos, and slogans registered or used by Hologic and its divisions and subsidiaries in the United States and other countries include, but are not limited to, the following: 3Dimensions, 3D Mammography, 3D Performance, 3DQuorum, Acessa, Acessa Health, Acessa ProVu, AccuProbe, Aixplorer, Affirm, Affirm Prone, Alpha Imaging, Amplidiag, Aptima, ATEC, Biotheranostics, BioZorb, Brevera, Celero, Clarity HD, C-View, Definity, DirectRay, Emsor, Eviva, Faxitron, Faxitron Bioptics, Fluent, Fluoroscan, Focal, Focal Therapeutics, Genius 3D, Genius 3D Mammography, Genius AI, Health Beacons, Hitec-Imaging, Hologic, Horizon DXA, Insight, Intelligent 2D, ImageChecker CAD, LOCalizer, Medicor, Mobidiag, MyoSure, NovaSure, Novodiag, NXC Imaging, Panther, Panther Fusion, Progensa, Quantra, Rapid Ffn, SecurViewDX, Selenia, Selenia Dimensions, Sertera, SmartCurve, Smart-Depth, SmartSlices, SuperSonic Imagine, ThinPrep, Tigris, Tomcat, UltraFast, and Unify Workspace.
All other brand names or trademarks appearing in this Annual Report on Form 10-K are the property of their respective owners. Hologic’s use or display of other parties’ trademarks, trade dress or products in this Annual Report does not imply that Hologic has a relationship with, or endorsement or sponsorship of, the trademark or trade dress owners.
Item 1. Business
We are a developer, manufacturer and supplier of premium diagnostics products, medical imaging systems, and surgical products focused on women's health and well-being through early detection and treatment. We sell and service our products through a combination of direct sales and service personnel and a network of independent distributors and sales representatives. We operate in four segments: Diagnostics, Breast Health, GYN Surgical and Skeletal Health. Until December 30, 2019, our product portfolio included aesthetic and medical treatment systems sold by our former Medical Aesthetic business. We completed the sale of our Medical Aesthetics segment on December 30, 2019 (the first day of the second quarter of fiscal 2020).
Through our Diagnostics segment, we offer a wide range of diagnostic products, which are used primarily to aid in the screening and diagnosis of human diseases. Our primary Diagnostics products include our molecular diagnostic assays, which run on our advanced instrumentation systems (Panther, Panther Fusion and Tigris), our ThinPrep cytology system, and the Rapid Fetal Fibronectin Test. Our Aptima family of molecular diagnostic assays is used to detect, among other things, the infectious microorganisms that cause common sexually transmitted diseases, or STDs, such as chlamydia and gonorrhea, or CTGC, certain high-risk strains of human papillomavirus, or HPV; and Trichomonas vaginalis, the parasite that causes trichomoniasis; Mycoplasma genitalium; and Herpes Simplex viruses 1 and 2. We also offer viral load tests for HIV, Hepatitis C and Hepatitis B for use on our Panther instrument system. Our assay portfolio also includes diagnostic tests for a range of acute respiratory infections, including SARS-CoV-2, as well as a test for the detection of Group B Streptococcus, or GBS, that are run on the Panther Fusion system, a field upgradeable instrument addition to the base Panther system. In response to the COVID-19 pandemic, we developed and launched the Aptima SARS-CoV-2 assay (which runs on our standard Panther system) and the Panther Fusion SARS-CoV-2 assay (which runs on our Panther Fusion system). The Panther Fusion SARS-CoV-2 assay and the Aptima SARS-CoV-2 assay were launched at the end of our second quarter and in the third quarter of fiscal 2020, respectively. The ThinPrep System is primarily used in cytology applications, such as cervical cancer screening, and the Rapid Fetal Fibronectin Test assists physicians in assessing the risk of pre-term birth.
Our Breast Health segment offers a broad portfolio of solutions for breast cancer care primarily in the areas of radiology, breast surgery, pathology and treatment. These solutions include 3D digital mammography systems, image analytics software utilizing artificial intelligence, reading workstations, ultrasound imaging, minimally invasive breast biopsy guidance systems, breast biopsy site markers, localization, specimen radiology, connectivity solutions and breast conserving surgery products. Our most advanced breast imaging platforms, Selenia Dimensions and 3Dimensions, utilize tomosynthesis to produce 3D images that show multiple contiguous slice images of the breast, which we refer to as the Genius 3D Mammography exam.
Our GYN Surgical products include our NovaSure endometrial ablation system, or NovaSure, our MyoSure hysteroscopic tissue removal system, or MyoSure, our Fluent fluid management system, or Fluent, as well as our Acessa ProVu laparoscopic radiofrequency ablation system, or Acessa. The NovaSure portfolio is comprised of the NovaSure CLASSIC and NovaSure ADVANCED devices and, most recently, the NovaSure V5 device for the treatment of abnormal uterine bleeding. The MyoSure suite of devices offers four options to provide incision-less removal of fibroids, polyps, and other pathology within the uterus. The Fluent system is a fluid management system that provides liquid distention during diagnostic and operative hysteroscopic procedures. The Acessa system is a fully integrated system that uses laparoscopic ultrasound, guidance mapping and radiofrequency ablation to treat nearly all types of fibroids.
Our Skeletal Health segment's products include the Horizon DXA, a dual energy x-ray system, which evaluates bone density and performs body composition assessments, and the Fluoroscan Insight FD mini C-arm, which assists in performing minimally invasive orthopedic surgical procedures on a patient's extremities, such as the hand, wrist, knee, foot, and ankle.
Unless the context otherwise requires, references to we, us, Hologic or our company refer to Hologic, Inc. and its consolidated subsidiaries.
Our internet website address is www.hologic.com. Through our website, we make available, free of charge, our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and any amendments to those reports, as well as proxy statements, and, from time to time, other documents as soon as reasonably practicable after we electronically file such material with, or furnish it to, the Securities and Exchange Commission (SEC). These SEC reports can be accessed through the investor relations section of our website. The information found on our website is not part of this or any other report we file with or furnish to the SEC.
Investors and others should note that we announce material financial information to our investors using our investor relations website (investors.hologic.com), SEC filings, press releases, public conference calls and webcasts. We use these channels as well as social media to communicate with our members and the public about our Company, our services and other issues. It is possible that the information we post on social media could be deemed to be material information. Therefore, we encourage investors, the media, and others interested in our Company to review the information we post on the social media channels listed on our investor relations website. We have used, and intend to continue to use, our investor relations website, as well as our Twitter account (@Hologic), as means of disclosing material non-public information and for complying with our disclosure obligations under Regulation FD. Additional corporate governance information, including our certificate of incorporation, bylaws, governance guidelines, board committee charters, and code of business conduct and ethics, is also available on our investor relations website under the heading “Corporate Governance.” The contents of our websites are not intended to be incorporated by reference into this Annual Report or in any other report or document we file with the SEC, and any references to our websites are intended to be inactive textual references only.
The SEC maintains an internet website that contains reports, proxy and information statements, and other information regarding Hologic and other issuers that file electronically with the SEC. The SEC’s internet website address is www.sec.gov.
We view our operations and manage our current business in four principal reporting segments: Diagnostics, Breast Health, GYN Surgical and Skeletal Health. Financial information concerning these segments is provided in Note 16 to our audited consolidated financial statements contained in Item 15 of this Annual Report. The following describes our principal products in each of our segments.
Diagnostics Product Offerings
Molecular Diagnostic Assay Portfolio
Aptima Family of Molecular Diagnostic Assays. Our Aptima molecular diagnostic assays are used to detect, among other things, the infectious microorganisms that cause common sexually transmitted diseases, or STDs, such as chlamydia and gonorrhea, or GTGC; certain high-risk strains of human papillomavirus, or HPV; Trichomonas vaginalis, the parasite that causes trichomoniasis; Mycoplasma genitalium; and Herpes simplex viruses 1 and 2. In addition, we also offer viral load assays for the quantitation of Hepatitis B virus, or HBV, Hepatitis C virus, or HCV, and human immunodeficiency virus, or HIV-1, for use on our Panther instrument system. All three of these viral load assays are both CE-marked and FDA approved. Our fourth viral load assay for the quantitation of human cytomegalovirus, or CMV, was CE-marked in June 2021, and we have submitted an application to the FDA for approval of our Aptima CMV Quant assay in the U.S. We also offer our Aptima BV and Aptima CV/TV assays for the diagnosis of vaginitis, a common and complex ailment affecting millions of women a year. In response to the COVID-19 pandemic, we developed and launched our Aptima SARS-CoV-2 assay for the detection of SARS-CoV-2, the virus that causes COVID-19 disease, which runs on our standard Panther and Panther Fusion systems. The Aptima SARS-CoV-2 assay for our standard Panther system was granted Emergency Use Authorization by the FDA in May 2020 and is also CE-marked. Our Aptima products integrate a number of proprietary core technologies, including our target capture technology, our Transcription Mediated Amplification, or TMA, technology, and our hybridization protection assay, or HPA, and dual kinetic assay, or DKA, technologies, to produce highly sensitive amplification assays. Each of these technologies is described in greater detail below.
Target Capture/Nucleic Acid Extraction Technology. The detection of target organisms that are present in small numbers in a large-volume clinical sample requires that target organisms be concentrated to a detectable level. One way to accomplish this is to isolate the particular nucleic acid of interest by binding it to a solid support. This support, with the target bound to it, can then be separated from the original sample. We refer to such techniques as “target capture.” We have developed target capture techniques to immobilize nucleic acids on magnetic beads by using a “capture probe” that binds to the bead and to the target nucleic acid. We use magnetic separation to concentrate the target by drawing the magnetic beads to the sides of a sample tube, while the remainder of the sample is removed from the tube. When used in conjunction with our amplification procedures, target capture techniques concentrate the nucleic acid target(s) and also remove materials in the sample that might otherwise
interfere with amplification.
Transcription-Mediated Amplification (TMA) Technology. The goal of amplification technologies is to increase the copy number of a target nucleic acid sequences that may be present in samples in small numbers. These copies can then be detected using nucleic acid probes. Amplification technologies can yield results in only a few hours versus the several days or weeks required for traditional culture methods. TMA is a transcription-based amplification system that uses two different enzymes to drive the process. The first enzyme is a reverse transcriptase that creates a double-stranded DNA copy from an RNA or DNA template. The second enzyme, an RNA polymerase, makes thousands of copies of the complementary RNA sequence, known as the “RNA amplicon,” from the double-stranded DNA template. Each RNA amplicon serves as a new target for the reverse transcriptase and the process repeats automatically, resulting in an exponential amplification of the original target that can produce over a billion copies of the RNA amplicon in less than thirty minutes.
Hybridization Protection Assay (HPA) and Dual Kinetic Assay (DKA) Technologies. With our HPA technology, we have simplified testing, further increased test sensitivity and specificity, and increased convenience. In the HPA process, the acridinium ester, or AE, molecule is protected within the double-stranded helix that is formed when the probe binds to its specific target. Prior to activating the AE molecule, known as “lighting off,” a chemical is added that destroys the AE molecule on any unhybridized probes, leaving the label on the hybridized probes largely unaffected. When the “lighting off” or detection reagent is added to the specimen, only the label attached to the hybridized probe is left to produce a signal indicating that the target organism’s DNA or RNA is present. All of these steps occur in a single tube and without any wash steps, which were required as part of conventional probe tests. Our DKA technology uses two types of AE molecules that can be differentiated from each other — one that “flashes” and another one that “glows.” By using DKA technology, we have created nucleic acid test, or NAT, assays that can detect two separate targets simultaneously.
Panther Fusion Family of Molecular Diagnostic Assays. The Panther Fusion molecular diagnostic assays are performed on the Panther Fusion system and utilize polymerase chain reaction, or PCR, technology to amplify target nucleic acid sequences for easier detection. Our Panther Fusion assay portfolio includes diagnostic tests for a range of acute respiratory infections (influenza A virus, influenza B virus, respiratory syncytial virus, adenovirus, human metapneumovirus, rhinovirus and parainfluenza), as well as a test for the detection of Group B Streptococcus, or GBS. In addition, in response to the COVID-19 pandemic, in fiscal 2020 we developed and launched the Panther Fusion SARS-CoV-2 assay for the detection of SARS-CoV-2. The Panther Fusion SARS-CoV-2 assay was granted Emergency Use Authorization by the FDA in March 2020.
Molecular Diagnostic Instrumentation
We have developed and continue to develop instrumentation and software designed specifically for use with certain of our molecular diagnostic assays. We also provide technical support and service to maintain these instrument systems in the field. By placing our proprietary instrumentation in laboratories and hospitals, we can establish a platform for future sales of our assays.
Our instrumentation includes the Tigris system, an integrated, fully-automated testing instrument for high-volume laboratories which is approved for use with a number of our Aptima assays; the Panther instrument system, an integrated, fully-automated testing instrument capable of serving high-, medium- and low-volume laboratories; and our semi-automated direct tube sampling, or DTS, instruments which are used to run a number of infectious disease assays. Our instrumentation also includes the Tomcat instrument, a fully automated general-purpose instrument designed to improve pre-analytical sample processing by eliminating the inefficient and error-prone activities associated with manually transferring samples from one tube to another. In addition, our Panther Fusion system, including the related Fusion assays for flu and respiratory testing, extends the capabilities of our Panther system by adding the flexibility of PCR, functionality to our existing TMA-based technology. The Panther Fusion systems is available as a modular in-lab upgrade to our base Panther system. We received CE-mark approval for the Panther Fusion system in the third quarter of fiscal 2017 and FDA clearance in October 2017.
The ThinPrep System is the most widely used method for cervical cancer screening in the U.S. The ThinPrep System has multiple configurations, including one or more of the following: the ThinPrep 2000 Processor, ThinPrep 5000 Processor, ThinPrep5000 Processor with Autoloader, ThinPrep Genesis Processor, ThinPrep Imaging System, ThinPrep Integrated Imager, and related reagents, filters and other supplies, such as the ThinPrep Pap Test and our ThinPrep PreservCyt Solution.
The ThinPrep Process. The ThinPrep process begins with the patient’s cervical sample being obtained by the physician using a cervical sampling device that, rather than being smeared on a microscope slide as in a conventional Pap smear, is inserted into a vial filled with our proprietary ThinPrep PreservCyt Solution. This enables most of the patient’s cell samples to be preserved before the cells can be damaged by air drying. The ThinPrep specimen vial is then labeled and sent to a laboratory equipped with a ThinPrep Processor for slide preparation. At the laboratory, the ThinPrep specimen vial is inserted into a ThinPrep Processor, a proprietary sample preparation device, which automates the process of preparing cervical slides for staining and microscopic examination. Additionally, an aliquot used for subsequent molecular testing can be produced using the ThinPrep Genesis Processor.
In the case of manual screening, the cytotechnologist screens each Pap test slide with a microscope to first determine the adequacy of the slide and then to examine the entire slide to differentiate diseased or abnormal cells from normal cells. With the ThinPrep Imaging Systems, the screening process has been automated to combine the power of computer imaging technology with human interpretive skills. Prior to human review, the ThinPrep Imaging Systems rapidly scan, locate and highlight areas of interest for review. By directing the cytotechnologist to areas of interest on a slide, these systems may increase a cytology laboratory’s screening productivity and diagnostic accuracy.
Additional Applications. In addition to serving as a replacement for the conventional Pap smear, the ThinPrep System can also be used for non-gynecological cytology screening applications including fine-needle aspiration specimens (e.g., breast, thyroid, lung or liver), body fluids (e.g., urine, pleural fluid, ascitic fluid or pericardial fluid), respiratory specimens (e.g., sputum or brushing of respiratory tracts) and ancillary testing (e.g., cell blocks, immunocytochemistry or special stains).
Rapid Fetal Fibronectin Test
The Rapid Fetal Fibronectin Test is a single-use disposable test used to determine a woman’s risk of pre-term birth by detecting the presence of a specific protein, fetal fibronectin, in vaginal secretions during pregnancy. The test utilizes a single-use, disposable cassette and is analyzed on our instrument, the TLI IQ System.
Oncology Product Offerings
In February 2021, we completed the acquisition of Biotheranostics, Inc., or Biotheranostics, and now offer two proprietary laboratory developed tests, or LDTs, that support physicians in the treatment of cancer: the Breast Cancer Index test and the CancerTYPE ID test. The Breast Cancer Index, or BCI, test is a PCR-based gene expression test used for determining which patients with early-stage, hormone-receptor positive, or HR+, breast cancer is likely to benefit from extended endocrine therapy. In January 2021, the National Comprehensive Cancer Network revised its clinical practice guidelines to include BCI as the only gene expression assay to predict benefit from extended endocrine therapy for patients with early-stage HR+ breast cancer. The CancerTYPE ID test is a PCR-based gene expression test that is designed to identify the source of metastatic cancer in order to improve diagnostic accuracy and inform treatment decisions. Both of these LDTs are offered as a service solely out of our Biotheranostics' licensed, CLIA-certified, CAP-accredited laboratory in San Diego, California.
Mobidiag Product Offerings
In June 2021, we completed the acquisition of Mobidiag Oy, or Mobidiag, a developer of innovative molecular diagnostic tests and instrumentation, headquartered in Espoo, Finland. Mobidiag develops and markets PCR-based tests for acute care conditions such as gastrointestinal and respiratory infections (including SARS-CoV-2), antimicrobial resistance management, and healthcare associated infections. The Amplidiag and Novodiag platforms are automated instruments that deliver rapid turnaround times ranging from 50 minutes to two hours. The Novodiag instrument combines real-time PCR and microarray capabilities to provide high level multiplexing, assisting clinicians in efficiently identifying which organism is responsible for an infection. Although Mobidiag currently does not offer any of its products in the U.S., we intend to invest in assay development to drive growth of the Novodiag instrument, including seeking clearance for the Novodiag instrument and related assays in the U.S.
Breast Health Products
Our Dimensions platform includes the Selenia Dimensions and 3Dimensions systems capable of performing both 2D and 3D tomosynthesis image acquisition and display. When operating in tomosynthesis mode, each system acquires a series of low dose x-ray images taken in a scanning motion at various angles. The images are mathematically processed into a series of small slices, allowing for visualization of the breast in multiple contiguous slices. Our clinical results for FDA approval demonstrated that conventional 2D digital mammography with the addition of our Genius 3D Mammography is superior to 2D digital mammography alone for both screening and diagnostics. Hologic Clarity HD technology provides our highest resolution
imaging, and our C-View and Intelligent 2D software products provide 2D images that are mathematically synthesized from the data within a tomosynthesis exam. Elimination of the 2D exposure reduces the breast compression time and patient dose compared to the current "combo" exam, which includes a tomosynthesis exam and a conventional digital 2D exam.
Our 3DQuorum technology, powered by Genius AI, is an artificial intelligence, or AI, powered algorithm that expedites mammography exam reading time without compromising image quality, sensitivity or accuracy. The 3DQuorum technology uses Genius AI-powered analytics to uniquely reconstruct high-resolution 3D data to produce 6 mm “SmartSlices.” By utilizing 3DQuorum technology the number of 3D images to review is reduced by two-thirds, saving an estimated average of one hour per eight hours of daily image interpretation time. The 3DQuorum technology also reduces the typical Hologic Clarity HD and Intelligent 2D study size by approximately 50%, bringing the storage space and network impact back down to that of standard resolution 3D imaging.
The images captured by digital mammography systems are typically transmitted electronically for review by a radiologist at a reading workstation. To address this process, we offer the SecurViewDX workstation approved for interpretation of mammograms from most vendors as well as images from other diagnostic breast modalities. We also offer image analytic products such as Genius AI Detection (Hologic's first artificial intelligence cancer detection algorithm utilizing deep-learning technology) and ImageChecker CAD to provide markings of suspicious areas of the breast that may be cancerous, as well as Quantra software to automate breast density measurement tools for our mammography systems. These technologies provide reviewers with the potential to focus on key patients that might otherwise be overlooked during the review process, thus potentially increasing cancer detection.
Stereotactic Breast Biopsy Systems
We provide clinicians with the flexibility of choosing prone or upright systems for breast biopsy by offering two minimally invasive stereotactic breast biopsy guidance systems: the Affirm Prone breast biopsy table and the Affirm upright system. The Affirm upright attachment is used with our Dimensions systems. These breast biopsy systems provide an alternative to open surgical biopsy and can be performed as an outpatient procedure under local anesthesia, allowing shorter recovery times. The Affirm tomosynthesis option provides faster lesion targeting and reduced patient procedure time compared to traditional stereotactic biopsy procedures. The Affirm system is pre-programmed for use with our Brevera, Eviva and ATEC vacuum-assisted breast biopsy devices.
Ultrasound is used extensively by clinicians across the breast health continuum including screening, diagnosis, interventions, and surgical treatments. Ultrasound is commonly used as a complement to 3D mammography screening for women with dense breast tissue, as a diagnostic tool to further characterize lesions prior to biopsy, and for interventional and surgical guidance. Our UltraFast technology enables innovative imaging modes and frame rates of up to 20,000 images per second resulting in high performance and image quality. Our portfolio consists of premium ultrasound carts including the Aixplorer, Mach 20, Mach 30, and Mach 40 ultrasound system. The Supersonic Mach 40 ultrasound systems offers integration benefits with our existing breast health portfolio.
Breast Biopsy and Surgery Products
We offer a wide range of minimally invasive products for breast biopsy and breast surgery. Our breast biopsy portfolio includes three types of tethered vacuum-assisted breast biopsy products; the Brevera, ATEC, and Eviva devices. Each tethered device is powered by a console and utilizes our fluid management system. The ATEC device can be used under all standard imaging guidance modalities (stereotactic x-ray, ultrasound, MRI and molecular breast imaging) whereas our Brevera and Eviva devices are used exclusively under stereotactic x-ray guidance. We also offer the Celero and Sertera biopsy devices, both of which are non-tethered (no separate console), spring-loaded, disposable core biopsy devices, which are used exclusively under ultrasound-guidance. We also have products for marking, localizing and filling the void after surgery in addition to specimen imaging products for radiology, surgery and pathology.
GYN Surgical Products
The NovaSure CLASSIC endometrial ablation system allows physicians to treat women suffering from abnormal uterine bleeding. The system features Smart-Depth technology that continuously monitors and measures tissue impedance to provide a more customized, reliable and reproducible depth of ablation for every patient. The NovaSure system consists of a disposable device and a controller that delivers RF energy to ablate the endometrial lining of the uterus in order to eliminate or reduce the
patient’s abnormal bleeding. The NovaSure disposable device is a hand-held, single-use device that incorporates a flexible gold-plated mesh electrode used to deliver the RF energy to the endometrial tissue. The NovaSure RF Controller generates and delivers RF energy customized for each patient, monitors several critical treatment and safety parameters, and automatically controls the endpoint of the procedure. We also offer the NovaSure ADVANCED and NovaSure V5 device which have a slimmer diameter. These devices are designed to improve patient comfort and physician ease-of-use while maintaining the clinical efficacy of the NovaSure system.
The MyoSure system is designed to provide efficient and effective hysteroscopic removal of tissue within the uterus, including fibroids and polyps. Removal of fibroids can provide effective relief from heavy menstrual bleeding commonly attributed to such pathology. Unlike other methods of tissue removal, the excavated tissue samples remain intact, which allows them to be tested for abnormalities. The MyoSure system consists of a tissue removal device, control unit, and hysteroscope. The MyoSure tissue removal device is single-use and features simultaneous tissue cutting and removal. The device incorporates a rapidly rotating and reciprocating cutting blade. During the procedure, the tissue removal device is inserted through the MyoSure hysteroscope. This tissue removal device is powered by a control unit, which features a simple user interface and is foot pedal activated. We offer multiple handpiece devices that differ in size and are focused on addressing different pathology types.
Fluent Fluid Management System
Our Fluent Fluid Management System is utilized for diagnostic and operative hysteroscopic procedures. Fluent is designed for simplified setup and operation, and streamlined workflow for the operating room team.
Acessa ProVu System
The Acessa ProVu System is used by laparoscopic surgeons to treat fibroids using controlled radiofrequency energy (heat) to cause coagulative necrosis. The treated tissue softens and shrinks over time, allowing fibroid symptoms to resolve without more invasive treatment. The Acessa System includes an ultrasound probe to locate the fibroids, guidance mapping that provides visual cues, and a percutaneous handpiece that deploys radiofrequency energy.
Skeletal Health Products
Horizon DXA Systems
Bone densitometry is the measurement of bone density to assist in the diagnosis and monitoring of osteoporosis and other metabolic bone diseases that can lead to frailty and debilitating bone fractures. Osteoporosis is a disease that is most prevalent in post-menopausal women. Our Horizon line of x-ray bone densitometers incorporates advanced features designed for bone health screening and body composition assessment. Body composition assessment is the precise measurement of bone, lean mass, and fat mass within the body. These measurements are valued within the health and wellness and human performance categories, informing nutrition and exercise programming decisions.
Fluoroscan Insight FD
Our Fluoroscan Insight FD is a mini C-arm imaging system that provides low intensity, real-time x-ray imaging, with high-resolution images at radiation levels and at a cost below those of conventional x-ray and standard sized fluoroscopic equipment. Mini C-arm systems are used primarily by orthopedic surgeons to assist in performing minimally invasive surgical procedures on a patient’s extremities, such as the hand, wrist, knee, foot and ankle.
Marketing, Sales and Service
We sell and service our products through a combination of direct sales and service forces and a network of independent distributors and sales representatives. In fiscal 2021, 2020, and 2019, no customer accounted for more than 10% of our consolidated revenues. In fiscal 2020 revenues from two customers accounted for 12.5% and 10.9%, respectively, of our Diagnostics segment revenue, and in fiscal 2019 revenues from one customer accounted for 14.5% of our Diagnostics segment revenue. These customers were all large clinical laboratories reflecting the consolidation in that industry. No other customer accounted for more than 10% of our revenues in any other business segment in fiscal 2021, 2020, or 2019.
Our U.S. sales force is structured to specifically target the customers in each of our business segments. We maintain distinct teams focused on the Diagnostics, Breast Health, GYN Surgical, and Skeletal Health markets. Our end customers include clinical laboratories, hospitals, healthcare providers and surgeons in both hospital and office settings, and we target various specialists at healthcare entities who use our products, such as ob-gyns, radiologists and breast surgeons.
A critical element of our strategy in the U.S. for our Diagnostics, Breast and Skeletal Health, and GYN Surgical divisions has been to utilize the results of our clinical trials and expanded FDA labeling to demonstrate safety, efficacy and productivity improvements to our target customers. Our U.S. sales efforts for these divisions also includes the use of national account managers focused on obtaining purchasing contracts from large purchasing entities, such as managed care organizations, integrated delivery networks and government healthcare facilities. In addition, in certain regions of the U.S., we use a limited number of independent dealers or distributors to sell and service certain of our products. Internationally, our products in all divisions are marketed and sold through a combination of a direct sales force and a network of distributors.
Our service organization is responsible for installing our products and providing warranty and repair services, applications training and biomedical training. Products sold by our direct sales force typically carry limited warranties covering parts and labor for twelve months. Products sold through dealers also carry limited warranties that are typically for twelve months and cover only parts and components. We also offer service contracts that generally cover one to three years after the original warranty period. We provide both repair services and routine maintenance services under these arrangements, and also offer repair and maintenance services on a time and materials basis to customers that do not have service contracts. Our Breast Health business generates a majority of our service revenue, primarily relating to service contracts for our digital mammography and related products. Internationally, we primarily use distributors, sales representatives and third parties to provide maintenance service for our products, however we do provide direct service in countries where we have a subsidiary (Germany, UK, France, Spain, Japan, China, and Australia).
The healthcare industry is highly competitive and characterized by continual change and improvements in technology. This is particularly the case in the market segments in which we operate. A number of companies have developed or are expected to develop products that compete or will compete with our products. Many of these competitors offer a broader product portfolio and have greater brand recognition than we do, which may make these competitors more attractive to hospitals, radiology clients, group purchasing organizations, laboratories, physicians and other potential customers. Competitors may develop superior products or products of similar quality for sale at the same or lower prices. Moreover, our products could be rendered obsolete by changes to industry standards or guidelines or advances in technology. We can give no assurance that we will be able to compete successfully with existing or new competitors.
In the current environment of managed care, economically motivated buyers, consolidation among healthcare providers, increased competition and declining reimbursement rates, we have been increasingly required to compete on the basis of price, value, reliability and efficiency. We believe the current global economic conditions and healthcare reform measures are putting additional competitive pressure on us, including on our average selling prices, overall procedure rates and market sizes.
We believe that the success of our products depends on our ability to differentiate ourselves and to demonstrate that our products deliver the clinical and operational attributes that are most important and cost-effective to customers. These attributes include, but are not limited to, superiority in efficacy, ease of use, reliability, accuracy, quality and cost. We believe our continued success depends in large part upon our ability to invest in product enhancements and technologies that will help us distinguish ourselves from our competitors.
Diagnostics. Our ThinPrep liquid-based cytology product faces direct competition in the U.S. primarily from Becton, Dickinson and Company, or BD, which manufactures a competitive offering. We also compete with the conventional Pap smear and other alternative methods for detecting cervical cancer and/or its precursors. Internationally, our ThinPrep product competes with a variety of companies and other non-FDA approved tests, since fewer regulatory barriers exist in most international markets as compared to the U.S. Additionally, testing volume in this category is also under pressure due to clinical guideline changes, which lengthen the interval between screenings and increasingly afford the option of HPV testing as the primary means of detection.
We believe that our Rapid Fetal Fibronectin Test is currently the only available in vitro diagnostic test for predicting the risk of pre-term birth in the U.S. Internationally, our Rapid Fetal Fibronectin Test competes with Actim Partus manufactured by Medix Biochemical and PartoSure manufactured by Qiagen GmbH, or Qiagen. However, our Rapid Fetal Fibronectin Test could also experience competition from companies that manufacture and market pregnancy-related diagnostic products and services. In addition, healthcare providers use diagnostic techniques such as clinical examination and transvaginal ultrasound to help diagnose the likelihood of pre-term birth and may use these techniques together with the Rapid Fetal Fibronectin Test or instead of using the Rapid Fetal Fibronectin Test.
In the molecular diagnostics market, our products compete with many companies in the U.S. and abroad engaged in the development, commercialization and distribution of similar products intended for clinical molecular diagnostic applications. Clinical laboratories also may offer testing services that are competitive with our products and may use reagents purchased
from us or others to develop their own lab developed tests. The market for our COVID-19 assays is new and rapidly evolving both in the United States and in the rest of the world. For example, in the United States over 400 assays have received Emergency Use Authorization from the FDA, and we compete with the providers of all of these tests, including manufacturers of molecular diagnostic tests (including so-called high throughput nucleic acid tests, rapid antigen tests and at-home testing solutions), and antibody tests, as well clinical laboratories making their own lab developed tests for the detection of SARS-CoV-2.
In the global clinical diagnostics market, we compete with several companies offering alternative technologies to our diagnostic products. For example, in the U.S., our Aptima Combo 2 test competes against BD and Roche Diagnostics Corporation, or Roche, and our Aptima HPV test competes with tests marketed by BD, Qiagen and Roche.
Breast Health. Our mammography and related products and subsystems compete on a worldwide basis with products offered by a number of competitors, including General Electric Company, or GE, Siemens AG, or Siemens, Koninklijke Philips NV, or Philips, Planmed Oy, or Planmed, Carestream Health, Inc., or Carestream, FUJIFILM Holdings Corporation, or Fuji, Internazionale Medico Scientifica Srl, or I.M.S., and Toshiba Corporation. In the U.S., our digital mammography systems compete with digital mammography systems from GE, Siemens, Fuji, I.M.S., Philips and Planmed. Our digital mammography systems also compete with Fuji’s and Carestream's Computed Radiography, or CR mammography systems, and other lower-priced alternatives to 2D digital mammography and analog mammography systems. In the U.S., GE, Siemens and Fuji have received FDA approval for their breast tomosynthesis systems, and we believe that other competitors are developing tomosynthesis systems for commercial use in the U.S. Our Dimensions tomosynthesis systems also compete in certain countries outside of the U.S. with tomosynthesis systems developed by GE, Siemens, Fuji, and I.M.S.
The primary competitor for our breast biopsy product line is Devicor Medical Products, Inc., part of Danaher Corporation's Leica Biosystems division. In addition, other competitors include CareFusion, a BD company, Sanarus Technologies, LLC and Intact Medical Corporation.
GYN Surgical. Our NovaSure system currently faces direct competition from The Cooper Companies, Inc., or CooperSurgical, and Minerva Surgical, Inc., or Minerva, each of which currently markets an FDA-approved endometrial ablation device for the treatment of abnormal uterine bleeding. In addition to these devices, we also compete with alternative treatments to our NovaSure system, such as drug therapy, intrauterine devices, hysterectomy, dilation and curettage and rollerball ablation. Because drug therapy is an alternative to our NovaSure procedure, NovaSure’s competitors also include many major pharmaceutical companies that manufacture hormonal drugs for women.
Our MyoSure product competes directly with hysteroscopic loop resection, as well as hysteroscopic tissue removal systems such as Medtronic plc’s TruClear device and Minerva's (formerly Boston Scientific Corporations') Symphion device. The MyoSure product also competes with alternative therapeutic techniques such as hysteroscopic resection with a monopolar or bipolar loop, which is currently the most common technique for removing intrauterine fibroids and polyps.
Our Acessa ProVu System competes directly with Gynesonics, Inc., which currently markets a radiofrequency ablation device for treating uterine fibroids. The Acessa ProVu System also competes with alternative fibroid treatment options such as hysterectomy, laparoscopic myomectomy, and uterine artery embolization.
Skeletal Health. GE is our primary competitor in the bone densitometry market, and we also compete with Orthoscan Inc. in the mini-C arm market.
We purchase many of the components, subassemblies, and raw materials used in our products from numerous suppliers worldwide. For reasons of quality assurance, scarcity and/or cost effectiveness, certain components, subassemblies, and raw materials used in our products are available only from one or a limited number of suppliers. We work closely with our suppliers to develop contingency plans to ensure continuity of quality and reliable supply. We established long-term supply contracts with many of our suppliers, and in other instances, we developed in-house capability to offset potential shortages caused by sole source suppliers. Due to the high standards and FDA requirements applicable to manufacturing our products, such as the FDA's Quality System Regulation and Good Manufacturing Practices, we may not be able to quickly establish additional or replacement sources for certain components or materials. In addition, the COVID-19 pandemic and associated economic disruptions have had an adverse impact on our supply chains. Moreover, we use certain components in our products, including semiconductor chips, that have been the subject of recent global supply chain shortages and disruptions. In the event that we are unable to obtain sufficient quantities of raw materials or components or subassemblies on commercially reasonable terms or in a timely manner, our ability to manufacture our products on a timely and cost-competitive basis may be compromised, which may have a material adverse effect on our business, financial condition and results of operations.
Our current supplier of certain key raw materials for certain of our amplified NAT diagnostic assays is Roche, a direct competitor of our Diagnostics business. Our Diagnostic business has two supply agreements with GE Healthcare Bio-Sciences Corp., an affiliate of GE, for membranes used in connection with our ThinPrep product line and for primers used in the manufacture of Aptima, Fusion, Progensa and AccuProbe product lines. GE is a direct competitor with our Breast Health and Skeletal Health businesses.
We have sole source third-party contract manufacturers for each of our molecular diagnostics instrument product lines and for our Skeletal Health products. KMC Systems, Inc., or KMC Systems, is the only manufacturer of the Tigris instrument spare parts; Stratec Biomedical AG, or Stratec, is the only manufacturer of the Panther instrument, and Flextronics Medical Sales and Marketing, LTD, or Flextronics, is the only manufacturer of our Skeletal Health finished goods products. We are dependent on these sole source third-party manufacturers, and this dependence exposes us to increased risks associated with production delays, delivery schedules, manufacturing capability, quality control, quality assurance and costs. We have no firm long-term volume commitments with either KMC Systems, Stratec or Flextronics. If KMC Systems, Stratec, Flextronics or any of our other third-party manufacturers experiences delays, disruptions, capacity constraints or quality control problems in its development or manufacturing operations, curtails operations or otherwise fails to supply us with products in sufficient quantities, instrument and equipment shipments to our customers could be delayed or cancelled, which would decrease our revenues and may harm our competitive position and reputation. Further, because we place orders with our manufacturers based on forecasts of expected demand for our instruments and Skeletal Health products, if we inaccurately forecast demand, we may be unable to obtain adequate manufacturing capacity or adequate quantities of components to meet our customers' delivery requirements.
We, and our contract manufacturers, manufacture our products at a limited number of different facilities located in the U.S. and throughout the world. In most cases, the manufacturing of each of our products is concentrated in one or a few locations. An interruption in manufacturing capabilities at any of these facilities, as a result of equipment failure or other reasons, could reduce, delay or prevent the production of our products. Some of our manufacturing operations are located outside of the U.S., including in Costa Rica and the United Kingdom. Those manufacturing operations are also subject to additional challenges and risks associated with international operations described under the caption “Risk Factors” set forth in Part I, Item 1A of this Annual Report.
From time-to-time new regulations are enacted that can affect the content and manufacturing of our products. We evaluate the necessary steps for compliance with regulations as they are enacted. In August 2012, the SEC adopted a rule requiring disclosures of specified minerals, known as conflict minerals, that are necessary to the functionality or production of products manufactured or contracted to be manufactured by public companies. The conflict minerals rule requires companies annually to disclose and report whether or not such minerals originate from the Democratic Republic of Congo or an adjoining country. The conflict minerals rule could affect sourcing at competitive prices and availability in sufficient quantities of certain minerals used in the manufacture of our products, including tantalum, tin, gold and tungsten. The number of suppliers who provide conflict-free minerals may be limited. In addition, there may be material costs associated with complying with the disclosure requirements, such as costs related to determining the source of certain minerals used in our products, as well as costs of possible changes to products, processes, or sources of supply as a consequence of such verification activities. Since our supply chain is complex, we may not be able to sufficiently verify the origins of the relevant minerals used in our products through the due diligence procedures that we implement, which may harm our reputation. In addition, we may encounter challenges to satisfy those customers who require that all of the components of our products be certified as conflict-free, which could place us at a competitive disadvantage if we are unable to do so.
Other regulations which affect the content and manufacturing of our products include, for example, the Registration, Evaluation, Authorization and Restriction of Chemical substances, or REACH, the Restriction on the Use of Certain Hazardous Substances in Electrical and Electronic Equipment Directive, or RoHS, and the Waste Electrical and Electronic Equipment Directive, or WEEE, enacted in the European Union which require the registration of and regulate the use of certain hazardous substances and chemicals in, and require the collection, reuse and recycling of waste from, certain products we manufacture. Similar legislation that has been or is in the process of being enacted in Japan and China and various states of the U.S. may require us to re-design our products to ensure compliance with the applicable standards, for example by requiring the use of different types of materials. These redesigns or alternative materials may detrimentally impact the performance of our products, add greater testing lead-times for product introductions, result in additional costs or have other similar negative effects.
Research and Development
The markets in which we participate are characterized by rapid technological change, frequent product introductions and evolving customer requirements. Investment in research and development is critical to driving our future growth. Our research and development efforts are focused on the further development and improvement of our existing products, the design and
development of new innovative medical technologies and regulatory compliance across all our business segments. In fiscal 2020, in response to the COVID-19 pandemic, we developed and launched the Aptima SARS-CoV-2 assay (which runs on our Panther system) and the Panther Fusion SARS-CoV-2 assay (which runs on our Panther Fusion system).
In addition to product development, our research and development personnel play an active role in the review of product specifications, clinical protocols and FDA submissions, as well as ensuring that certain of our products conform to European health, safety and environmental requirements, or CE-marking.
Patents and Proprietary Rights
We rely primarily on a combination of trade secrets, patents, copyrights, trademarks and confidentiality procedures to protect our products and technology. Due to the rapid technological changes that characterize the markets we operate in, we believe that trade secrets and other unpatented know-how relied upon in connection with the development of new products and the enhancement of existing products are generally as important as patent protection in establishing and maintaining a competitive advantage. Nevertheless, we have obtained patents and will continue to make efforts to obtain patents, when available, in connection with our product development programs. We do not consider our business to be materially dependent upon any individual patent.
We own numerous U.S. patents and have applied for numerous additional U.S. patents relating to our technologies. We also own or have applied for corresponding patents in selected foreign countries. These patents relate to various aspects of most of our products. We do not know if current or future patent applications will be issued with the full scope of the claims sought, if at all, or whether any patents issued will be challenged or invalidated. There is a risk that our patent applications will not result in granted patents or that granted patents will not provide significant protection for our products and technology. Third parties may infringe, misappropriate or otherwise violate our intellectual property rights, or copy or reverse engineer portions of our technology. Our competitors may independently develop similar or superior technology that our patents do not cover. In addition, because patent applications in the U.S. are not generally publicly disclosed until eighteen months after the application is filed, unpublished applications may have been filed by third parties that relate to our technology. Moreover, there is a risk that foreign intellectual property laws will not protect our intellectual property rights to the same extent as intellectual property laws in the U.S. The rights provided by a patent are finite in time. Over the coming years, certain patents relating to current products will expire in the U.S. and abroad which may allow third parties to exploit those technologies. In the absence of significant patent protection, we may be vulnerable to competitors who attempt to copy our products, processes or technology.
In addition to the patents we have been issued or we have acquired, we license patents from others on a variety of terms and conditions.
We are engaged in intellectual property litigation as described in Note 14 to our consolidated financial statements entitled "Litigation and Related Matters," and as may also be described herein, and we may be notified in the future of claims that we may be infringing, misappropriating or otherwise violating the intellectual property rights of third parties. In connection with any such claims, we may seek to enter into settlement and/or licensing arrangements. There is a risk in these situations that no license will be available or that a license will not be available on reasonable terms. Alternatively, we may decide or be required to litigate such claims. A successful claim against us may require us to remove the alleged infringing product from the market or to design around the third party's patent, potentially resulting in less market demand for the product.
The manufacture, sale, lease and service of medical diagnostic and surgical devices intended for commercial use are subject to extensive governmental regulation by the FDA in the U.S. and by a variety of regulatory agencies in other countries. Under the Federal Food, Drug and Cosmetic Act, known as the FD&C Act, manufacturers of medical products and devices must comply with certain regulations governing the design, testing, manufacturing, packaging, servicing and marketing of medical products. Some of our products are also subject to the Radiation Control for Health and Safety Act, administered by the FDA, which imposes performance standards and record keeping, reporting, product testing and product labeling requirements for devices that emit radiation, such as x-rays. FDA product approvals may be withdrawn or suspended if compliance with regulatory standards is not maintained or if problems occur following initial marketing.
The FDA classifies medical devices into three classes based on risk. Regulatory control increases from Class I (lowest risk) to Class III (highest risk). The FDA generally must clear or approve the commercial sale of new medical devices in Classes II and III. Commercial sales of our Class II (except for Class II exempt devices) and Class III medical devices within the U.S. must be preceded by either a pre-market notification filing pursuant to Section 510(k) of the FD&C Act (Class II) or the granting of a pre-market approval, or PMA (Class III). Our Class I and Class II exempt medical devices must follow Hologic’s internal Quality System processes prior to commercialization and throughout their product lifecycle. All classes of devices must meet FDA's quality system (QS), establishment registration, medical device listing, labeling and medical device
reporting (MDR) regulations. The FDA can authorize the emergency use of an unapproved medical product or an unapproved use of an approved medical product, referred to as Emergency Use Authorization, or EUA, for certain emergency circumstances after the Health and Human Services Secretary has made a declaration of emergency justifying authorization of emergency use. An EUA allows use in an emergency to diagnose, treat, or prevent serious or life-threatening diseases or conditions caused by emerging infectious disease threats when there are no adequate, approved, and available alternatives. The FDA may also waive otherwise-applicable current good manufacturing practice (CGMP) requirements to accommodate emergency response needs. In March 2020, the FDA granted EUA for our Panther Fusion SARS-CoV-2 assay for testing for the COVID-19 virus. In May 2020, the FDA granted EUA for our Aptima SARS-CoV-2 assay for use on our standard Panther instrument.
A 510(k) pre-market notification filing must contain information establishing that the device to be sold is substantially equivalent to a device commercially distributed prior to May 28, 1976 or to a device that has been determined by the FDA to be substantially equivalent. The PMA procedure involves a complex and lengthy testing process that is subject to review by the FDA and may require several years to obtain. We may need to first obtain an investigational device exemption (for significant risk devices), known as an IDE, in order to conduct extensive clinical testing of the device to obtain the necessary clinical data for submission to the FDA. The FDA will approve a PMA only if after evaluating the supporting technical data it finds that the PMA contains sufficient, valid scientific evidence to assure that the device is safe and effective for its intended use(s). This approval may be granted with post-approval requirements including inspection of manufacturing facilities and/or additional patient follow-up for an indefinite period of time.
Our Biotheranostics laboratory in San Diego, California and the laboratories that purchase certain of our products, including the Aptima SARS-CoV-2 EUA, Aptima Flu Multiplex EUA, Fusion SARS-CoV-2 EUA, ThinPrep System, ThinPrep Imaging System, Rapid Fetal Fibronectin Test, Aptima Combo 2, Aptima HPV tests and Aptima HIV-1 Quant, HCV Quant Dx, HBV Quant, Aptima Trichomonas Vaginalis (Trich), Aptima Mycoplasma Genitalium (MGen), Aptima HSV 1 & 2, Aptima BV, Aptima CV/TV, and Panther Fusion Assays are subject to extensive regulation under the Clinical Laboratory Improvement Amendments of 1988, or CLIA, which requires laboratories to meet specified standards in the areas of personnel qualifications, administration, participation in proficiency testing, patient test management, quality control, quality assurance and inspections. Adverse interpretations of current CLIA regulations or future changes in CLIA regulations could have an adverse effect on sales of any affected products or services. These laboratories are also licensed by the appropriate state agencies in the states in which they operate, where such licensure is required. In addition, our laboratories hold state licenses or permits, as applicable, from various states to the extent that they accept specimens from one or more of these states, each of which requires out-of-state laboratories to obtain licensure. If a laboratory is out of compliance with CLIA or with state laws or regulations governing licensed laboratories, penalties may include suspension, limitation or revocation of the license or CLIA certificate, assessment of financial penalties or fines, or imprisonment. Loss of a laboratory's CLIA certificate or state license may also result in the inability to receive payments from state and federal health care programs as well as private third party payors.
Certain analyte specific reagents, referred to as ASR products, as with other Class I products, may be sold without 510(k) clearance or PMA approval. However, ASR products are subject to significant restrictions. The manufacturer may not make clinical or analytical performance claims for the ASR product, may not promote their use with specific laboratory equipment and may only sell the ASR product to clinical laboratories that are qualified to run high complexity tests under CLIA. Each laboratory must validate the ASR product for use in diagnostic procedures as a laboratory developed test.
We are also subject to a variety of federal, state and foreign laws which broadly relate to our interactions with healthcare practitioners and other participants in the healthcare system, including, among others, the following:
•anti-kickback and anti-bribery laws, such as the Foreign Corrupt Practices Act, or the FCPA, the UK’s Bribery Act 2010, or the UK Anti-Bribery Act;
•laws regulating the confidentiality of sensitive personal information and the circumstances under which such information may be released and/or collected, such as the Health Insurance Portability and Accountability Act of 1996, or HIPAA, the Health Information Technology for Economic and Clinical Health Act, or HITECH Act, and the European Union General Data Protection Regulation, or GDPR; and
•healthcare reform laws, such as the Patient Protection and Affordable Care Act and the Health Care and Education Affordability Reconciliation Act of 2010, which we refer to together as PPACA, which include new regulatory mandates and other measures designed to constrain medical costs, as well as stringent new reporting requirements of financial relationships between device manufacturers and physicians and teaching hospitals.
In addition, we are subject to numerous federal, state, foreign and local laws relating to safe working conditions, manufacturing practices, environmental protection, fire hazard control and disposal of hazardous or potentially hazardous
substances, data privacy and protection among others. We may be required to incur significant costs to comply with these laws and regulations in the future and complying with these laws may result in a material adverse effect upon our business, financial condition and results of operations.
Sales of medical devices outside of the U.S. are subject to foreign requirements that vary widely from country to country. For example, our ability to market our products outside of the U.S. is contingent upon maintaining our International Standards Organization, or ISO, Quality System certification, complying with European directives and in some cases receiving specific marketing authorization from the appropriate foreign regulatory authorities. Foreign registration is an ongoing process as we register additional products and/or product modifications.
The time required to obtain approval from a foreign country to market and sell our products may be longer or shorter than that required for FDA approval and the requirements may differ. In addition, we may be required to meet the FDA’s export requirements or receive FDA export approval for the export of our products to foreign countries.
Our products are also subject to approval and regulation by foreign regulatory and safety agencies. For example, the EU has adopted the EU Medical Device Regulation (the "EU MDR") and the In Vitro Diagnostic Regulation (the "EU IVDR"), each of which impose stricter requirements for the marketing and sale of medical devices, including in the area of clinical evaluation requirements, quality systems and post-market surveillance. Manufacturers of currently approved medical devices had until May 2021 to meet the requirements of the EU MDR and will have until May 2022 to meet the EU IVDR. Complying with the requirements of these regulations may require us to incur significant expenditures. Failure to meet these requirements could adversely impact our business in the EU and other regions that tie their product registrations to the EU requirements. The recently rebranded National Medical Products Administration (formerly CFDA), or the NMPA, has historically been conservative leading to extended review times. However, more recently, the NMPA has been more interactive, which we attribute to its response to the long delays in getting lifesaving medical devices into China. If this continues, this could favorably affect our ability to introduce new products in the Chinese market.
The regulatory environment in China continues to evolve, and officials in the Chinese government exercise broad discretion in deciding how to interpret and apply regulations. It is possible that the Chinese government's current or future interpretation and application of existing or new regulations will negatively impact our China operations, result in regulatory investigations or lead to fines or penalties.
We anticipate that governmental authorities will continue to scrutinize the healthcare industry closely and that changes in laws, regulations or policies by governmental authorities may cause increases in uncertainties and compliance costs, exposure to litigation and other adverse effects to our business and operations. Delays in receipt of, or failure to obtain, clearances or approvals for future products could delay or preclude realization of product revenues from new products or result in substantial additional costs which could decrease our profitability.
For additional information about the regulations to which our business is subject and the impact such regulations may have on our business, see the disclosures under the captions “Manufacturing” and “Reimbursement” in this Item 1, and “Risk Factors” in Item 1A below.
Market acceptance of our medical products in the U.S. and other countries is dependent upon the purchasing and procurement practices of our customers and patient need for our products and procedures and, the coverage and reimbursement of patients’ medical expenses by government healthcare programs, private insurers or other healthcare payors. In the U.S., the Centers for Medicare & Medicaid Services, known as CMS, establishes coverage policies and payment rates for Medicare beneficiaries. CMS publishes payment rates for physician, hospital, laboratory and ambulatory surgical center services on an annual basis. Under current CMS policies and regulations, varying payment levels have been established for tests and procedures performed using our products. Coverage policies for Medicare patients may vary by regional Medicare contractor in the absence of a national coverage determination and payment rates for procedures will vary based on the geographic price index. Coverage policies and reimbursement rates for Medicaid patients are dependent on each state Medicaid plan and will vary. Coverage policies and reimbursement rates for patients with private insurance is dependent on the individual private payor’s decisions. Moreover, private insurance carriers may choose not to follow the CMS coverage policies or payment rates. The use of our products outside of the U.S. is similarly affected by reimbursement policies adopted by foreign regulatory authorities and insurance carriers.
Healthcare policy and payment reform proposals and medical cost containment measures are being adopted in the U.S. and in many foreign countries. The ability of our customers to obtain adequate reimbursement for our products and services
from private and governmental third-party payors is critical to the success of medical technology companies because it may affect which products customers purchase and the prices they are willing to pay. Reimbursement and coverage vary by country and can significantly impact acceptance of new products and technologies. Even if we develop a promising new product, we may find limited demand for the product unless reimbursement approval and coverage is obtained from private and governmental third-party payors. Further, ongoing legislative or administrative reform to the reimbursement system in the U.S. and other countries may impact reimbursement for procedures using our medical products and/or limit coverage for those procedures facilitated by our products. This includes price regulation, competitive bidding and tendering, coverage and payment policies, comparative effectiveness of therapies, technology assessments and managed-care arrangements. These trends could have a material adverse effect on our business, financial condition or results of operations.
We view human capital management and the strength of our employees as integral to the long-term success of our business and the strengthening of our communities. We understand that we rely on our employees worldwide to propel our organization forward with great ideas, innovations and leadership.
As of September 25, 2021, we had 6,705 full-time employees, including 1,965 in manufacturing operations, 1,666 in sales and marketing, 1,424 in support services, 913 in research and development, and 737 in general administration. Approximately 3,920 of these employees are in the U.S. and approximately 2,785 were outside the U.S. In various countries outside the U.S., certain of our employees are unionized and, where local law requires, participate in works councils.
Our goal is to develop and maintain a talented, engaged and diverse workforce that has a positive impact on our performance, and on our customers and their patients. We have been conducting an annual engagement survey since 2015 in which most of employees regularly participate. We believe our foundation of employee engagement, our commitment to our employees, and their commitment to each other fortifies our leaders and teams and improves their business performance. We also offer a range of programs to develop our managers and enhance our leadership across the Company. Our professional development efforts are aimed at increasing organizational talent and capabilities and identifying and developing potential successors for key leadership positions.
Compensation and Benefits
We invest in the physical, emotional and financial well-being of our employees through our robust compensation and benefit programs. These programs (which vary by country/region) include a variety of health plan options, tax-favorable savings accounts and other wellness offerings.
COVID-19 Pandemic Response
Starting at the beginning of the COVID-19 pandemic, we took precautions to protect the health and safety of our employees by instituting robust hygiene practices, implementing temperature scanning stations, installing temporary safety structures, and increasing our cleaning protocols. For the front-line employees who came to work throughout the COVID-19 pandemic to develop and manufacture our COVID-19 tests, or who installed Panther instruments in locked-down hospitals during the most uncertain times of the COVID-19 pandemic, we were able to provide extraordinary financial awards.
We continue to actively monitor the COVID-19 pandemic, and respond based on guidance from U.S. and global health organizations, relevant governmental guidance and evolving practices. In addition, in response to the continuing challenges stemming from the COVID-19 pandemic, we developed several employee-focused initiatives to support the physical, mental, and financial well-being of our employees. These initiatives include providing enhanced accident and critical illness insurance, increasing access to telehealth services, developing an employee assistance program that provides mental health therapy, wellness coaching, and medication management, and offering subscriptions to self-care mobile apps.
Diversity Drives Performance
We are committed to creating an inclusive and diverse work environment that promotes equal opportunity, dignity and respect, starting with our Board and our Leadership team. Of our eight directors, three are women, three were born outside of the U.S., and two were predominantly educated outside of the U.S. We believe that our focus on the lives of women has helped us to attract a diverse workforce and build an inclusive ethos where different perspectives are valued and respected. Building a diverse workforce begins with our hiring practices and extends to our access to opportunities, strategic development and promotion of internal talent. We seek to identify and develop high-potential women and other diverse individuals within the Company. In addition to women holding several key roles within the Company (Chief Financial Officer; Chief Human Resources Officer; Division President, Breast and Skeletal Health; Vice President of Tax; Treasurer; and Chief of Staff), African American leaders have assumed important leadership roles as Division President, GYN Surgical, Vice President of Sales, Breast and Skeletal Health, Corporate Secretary, and Chief Information Security Officer. Additionally, given that our commercial teams are an important pipeline for senior management, we are pleased that a significant number of our commercial
team members below the level of vice president are women and/or people of color.
We strive to hire the most qualified person for the job and believe that, over time, this will lead to an increasingly diverse workforce. As a part of finding the most qualified people, we are committed to ensuring that diverse slates of candidates are identified and considered for all roles, from the boardroom and c-suite to all levels of the workforce. We believe our focus on talent identification, development, engagement and succession planning has been particularly successful in developing a deep and diverse talent pipeline.
Health and Safety
We seek to comply in letter and in spirit with applicable health and safety laws and regulations and implement programs, policies and procedures to achieve compliance throughout the Company. We also establish our own environmental health and safety standards in addition to those that are legally required. We employ management systems and procedures designed to protect human safety, health, and the environment. We seek to reduce risk and protect our employees and communities by employing safe technologies and operating procedures, and by maintaining a business continuity program to stay prepared for emergencies. We have also developed safety rules and procedures to address behaviors and work practices that can lead to accidents and injuries. Safety performance is assessed throughout the year by management and during annual performance reviews.
Community Engagement and Volunteerism
We take the role we play as leaders in the communities where we live and work seriously. Our philanthropic and charitable efforts are an important part of our culture. We center our giving efforts in three specific areas to maximize our impact in ways that align with the values of our employees and customers: (i) women's health, and other healthcare fields in which Hologic operates; (ii) science, technology, engineering, and math education (STEM), especially for underprivileged groups; and (iii) social and racial equality, especially in healthcare. We also support employees in giving back to community organizations through volunteering and matching donations.
Worldwide sales, including U.S. sales, do not reflect any significant degree of seasonality; however, customer purchases of our GYN Surgical products have been historically lower in our second fiscal quarter compared to our other fiscal quarters. Our respiratory infectious disease product line within our Diagnostics segment is also subject to significant seasonal and year-over-year fluctuations. In addition, the summer months, which occur during our fourth fiscal quarter, typically have had lower order rates internationally for most of our products.
Item 1A. Risk Factors
In evaluating our business, the risks described below, as well as other information contained in this Annual Report and in our other filings with the SEC should be considered carefully. Additional risks not presently known to us or that we currently deem immaterial may also adversely affect our business. The occurrence of any of these events or circumstances could individually or in the aggregate have a material adverse effect on our business, financial condition, cash flow or results of operations. This report contains forward-looking statements; please refer to the cautionary statements made under the heading "Special Note Regarding Forward-Looking Statements" for more information on the qualifications and limitations on forward-looking statements.
THE COVID-19 GLOBAL PANDEMIC
The extent to which the COVID-19 pandemic and associated economic disruptions could have a material adverse impact on our business and the demand for many of our products will depend on future developments that are highly uncertain and difficult to predict.
The COVID-19 pandemic has created significant volatility, uncertainty and economic disruption in the markets we sell our products into and operate in, primarily the U.S., Europe, and Asia-Pacific and negatively impacted business and healthcare activity globally. We believe that the COVID-19 pandemic's impact on our operating results, cash flows and financial condition remains uncertain and will be primarily driven by the severity and duration of the COVID-19 pandemic (including the extent of future surges, variants and the efficacy of vaccination); the COVID-19 pandemic's impact on the U.S. and international healthcare systems, the U.S. economy and worldwide economy; the timing, scope and effectiveness of U.S. and international governmental responses to the COVID-19 pandemic and associated economic disruptions; and the impact of the COVID-19 pandemic on the health, well-being and productivity of our employees. As healthcare systems continue to respond to the demands of managing COVID-19 and the resulting economic uncertainties, governments around the world have imposed measures designed to reduce the transmission of COVID-19 and individuals continue to respond to the fear of contracting COVID-19. In particular, elective procedures and exams were delayed or cancelled, there has been a significant reduction in physician office visits, and hospitals postponed or canceled capital purchases as well as limited or eliminated services. While
elective procedures and exams and capital purchases have increased from initially depressed levels, the reduction in elective procedures, exams and capital purchases has had, and we believe may continue to have, a negative impact on the sales of most of our products (other than our COVID-19 assays and related systems and ancillaries) which has adversely affected our operating results, cash flows and financial condition. Additionally, governments and other third-party payors around the world facing tightening budgets could move to further reduce the reimbursement rates or the scope of coverage offered, which could further adversely affect sales of our products.
We may not realize anticipated revenue from our COVID-19 diagnostic assays.
We have developed assays to detect COVID-19. While we have seen significant demand for our COVID-19 assays, other companies are working to produce or have produced tests for COVID-19 which may lead to the diversion of customers away from us and toward other companies. Moreover, considerable uncertainty remains as to the demand for ongoing COVID-19 testing, and thus, for our COVID-19 assays. There is no guarantee that current or anticipated demand will continue, or if demand does continue or increases, that we will be able to produce in quantities to meet the demand. A significant decline in demand for our COVID-19 assays without a corresponding increase in our other businesses could have a material, adverse effect on our results of operations, cash flow and financial position.
The COVID-19 pandemic and associated economic disruptions have had and may continue to have a material adverse effect on manufacturing, distribution and supply chain.
The COVID-19 pandemic and associated economic disruptions have had an adverse impact on our manufacturing capacity, supply chains and distribution systems, including as a result of impacts associated with preventive and precautionary measures that we, other businesses and governments are taking. A number of our suppliers and manufacturers have been adversely affected by the COVID-19 pandemic. Delays or disruptions experienced by our suppliers and manufacturers caused by the COVID-19 pandemic and associated economic disruptions may prevent us from obtaining raw materials, components and subassemblies for our products in a timely manner. In addition, government and customer vaccine mandates may lead to employee attrition for us and our suppliers. Any resulting reduction or interruption in our manufacturing and distribution processes could result in a reduction in our revenues and harm our competitive position and reputation.
Continuing worldwide political and social uncertainty, as well as tariffs and social tensions, may adversely affect our business and prospects, both domestically and internationally.
Political and social uncertainty and divisions are rife in the U.S. and throughout the world, impairing political, trade and economic relations worldwide. This impacts how we are able to do business and expand our global footprint. Changes in policy in the U.S. and other countries regarding international trade, including import and export regulation and international trade agreements, could negatively impact our business. In recent years, the U.S. has imposed tariffs on goods imported from China and certain other countries, which has resulted in retaliatory tariffs by China and other countries. Changes or uncertainty in tariffs or further retaliatory trade measures taken by China or other countries in response, could affect the demand for our products and services, impact the competitive position of our products, prevent us from being able to sell products in certain countries or otherwise adversely impact our results of operations. The implementation of more restrictive trade policies, such as more detailed inspections, higher tariffs or new barriers to entry, could negatively impact our business, results of operations and financial condition.
Our international operations and foreign acquisitions expose us to additional operational challenges that we might not otherwise face.
International expansion is a key component of our growth strategy. In fiscal 2021, 30.7% of our revenue came from outside of the U.S. As we grow internationally, our future and existing international operations may subject us to a number of additional risks and expenses, any of which could harm our operating results. These risks and expenses include:
•political and economic changes and disruptions, export/import controls and tariff regulations;
•difficulties in developing staffing and simultaneously managing operations in multiple locations as a result of, among other things, distance, language and cultural differences;
•governmental currency controls;
•multiple, conflicting and changing government laws and regulations (including, among other things, antitrust and tax requirements);
•protectionist laws and business practices that favor local companies;
•difficulties in the collection of trade accounts receivable;
•difficulties and expenses related to implementing internal controls over financial reporting and disclosure controls and procedures;
•expenses associated with customizing products for clients in foreign countries;
•possible adverse tax consequences;
•the inability to obtain and maintain required regulatory approvals or favorable third-party reimbursement;
•operation in parts of the world where strict compliance with anti-bribery laws may conflict with local customs and practices;
•the inability to effectively obtain, maintain, protect or enforce intellectual property rights, reduced protection for intellectual property rights in some countries, and the inability to otherwise protect against clone or “knock off” products;
•the lack of ability to enforce non-compete agreements with former owners of acquired businesses competing with us in China and other foreign countries; and
•lower margins on a number of our products sold outside of the U.S.
BUSINESS DEVELOPMENT AND COMPETITION
Our long-term success will depend upon our ability to integrate acquired businesses and execute on business development activities.
During fiscal 2021, we made a number of tactical acquisitions which complemented our existing businesses. Any inability to successfully integrate new businesses, decreases in customer loyalty or product orders, failure to retain or develop the acquired workforce, failure to realize anticipated economic, operational and other benefits and synergies in a timely manner, failure to establish and maintain appropriate controls or unknown or contingent liabilities could adversely affect our ability to realize the anticipated benefits of any new product or acquisition. The integration of an acquired business, whether or not successful, requires significant efforts which may result in additional expenses and divert the attention of our management and technical personnel from other projects. Acquisitions, in particular, are inherently risky, and we cannot guarantee that any past or future transaction will be successful. As part of our long-term strategy, we are also engaged in business development activities including evaluating future acquisitions, joint development opportunities, technology licensing arrangements and other opportunities to further expand our presence in or diversify into priority growth areas by accessing new products and technologies. We may not be able to identify appropriate business development activities or acquisition candidates, consummate transactions or obtain agreements with favorable terms, if at all. We may also be subject to increasing regulatory scrutiny from competition and antitrust authorities in connection with acquisitions. If we are successful in pursuing future acquisitions, we may be required to expend significant funds, incur additional debt or other obligations, or issue additional securities, which may negatively affect our operating results and financial condition. If we spend significant funds or incur additional debt or obligations, our ability to obtain financing for working capital or other purposes could be adversely affected, and we may be more vulnerable to economic downturns and competitive pressures. If we fail to identify, acquire and integrate complementary businesses and products, our business, results of operations and/or financial condition could be adversely affected.
We face intense competition from other companies and may not be able to compete successfully.
The markets in which we sell our products are intensely competitive, subject to rapid technological change and may be significantly affected by new product introductions and other market activities of industry participants, and these competitive pressures may reduce the demand and prices for our products. Other companies may develop products that are superior to and/or less expensive than our products. Improvements in existing competitive products or the introduction of new competitive products may reduce our ability to compete for sales, particularly if those competitive products demonstrate better safety or effectiveness, clinical results, ease of use or lower costs.
Some companies may have significant competitive advantages over us, which may make them more attractive to hospitals, clinics, radiology clients, group purchasing organizations, laboratories, and physicians, including:
•greater brand recognition;
•larger or more established distribution networks and customer bases;
•a broader product portfolio, resulting in the ability to offer rebates or bundle products to offer discounts or incentives to gain a competitive advantage;
•higher levels of automation and greater installed bases of such equipment;
•more extensive research, development, sales, marketing, and manufacturing capabilities and greater financial resources; and
•greater technical resources positioning them to continue to improve their technology in order to compete in an evolving industry.
Challenges in the development of our products could materially impact our long-term success.
Our growth depends in large part on our ability to identify and develop new products or new indications for or enhancements of existing products. The development of new products and enhancement of existing products requires significant investment in research and development, clinical trials and regulatory approvals. The results of our product development efforts may be affected by a number of factors, including our ability to anticipate customer needs, innovate and develop new products, complete clinical trials, obtain regulatory clearances and approvals and reimbursement in the U.S. and abroad, manufacture products in a cost-effective manner, obtain, maintain, protect and enforce appropriate intellectual property protection for our products, gain and maintain market approval of our products and access capital. If we are not able to successfully enhance existing products or develop new products, our products may be rendered obsolete or uncompetitive by changing technology or new industry standards. We cannot assure that any products now in development or that we may seek to develop in the future will achieve technological feasibility, obtain regulatory approval or gain market acceptance, and we may be unable to recover all or a meaningful part of our investment in such products and technologies.
The markets for our newly developed products and newly introduced enhancements to our existing products may not develop as expected.
The successful commercialization of our newly developed products and newly introduced enhancements to our existing products are subject to numerous risks, both known and unknown, including:
•uncertainty of the development of a market for such product;
•trends relating to, or the introduction or existence of, competing products or technologies that may be more effective, safer or easier to use than our products or technologies;
•the perception of our products as compared to other products;
•recommendation and support for the use of our products by influential customers, such as highly regarded hospitals, physicians and treatment centers;
•the availability and extent of data demonstrating the clinical efficacy of our products or treatments;
•competition, including the presence of competing products sold by companies with longer operating histories, more recognizable names and more established distribution networks; and
•other technological developments.
Often, the development of a significant market for a product will depend upon the establishment of a reimbursement code or an advantageous reimbursement level for use of the product. Moreover, even if addressed, such reimbursement codes or levels frequently are not established until after a product is developed and commercially introduced, which can delay the successful commercialization of a product. If we are unable to successfully commercialize and create a significant market for our newly developed products and newly introduced enhancements to our existing products our business and prospects could be harmed.
If we cannot maintain our current corporate collaborations and enter into new corporate collaborations, our product development could be delayed and our revenue could be adversely impacted.
We have relied and/or expect to rely on corporate collaborators for funding development, marketing, distribution, and the commercialization of certain products. If any of our corporate collaborators were to breach, terminate, fail to renew our agreements or otherwise fail to properly conduct its obligations in a timely manner, the development or commercialization and subsequent marketing of the products contemplated by the collaboration could be delayed or terminated. Further, we would be required to devote additional resources to product development or marketing, to terminate some development programs or to seek alternative corporate collaborations with certain partners or companies that could make it more difficult for us to enter into advantageous business transactions or relationships with others. Any of the foregoing risks could harm our business and prospects.
BUSINESS CONTINUITY AND RELIANCE ON THIRD PARTIES
Supply Chain and Manufacturing
Our reliance on one third-party manufacturer for certain of our product lines and a limited number of suppliers for some key raw materials, components and subassemblies for our products exposes us to increased risks associated with production delays, delivery schedules, manufacturing capability, quality control, quality assurance and costs.
We have sole source third-party manufacturers for each of our Panther and Tigris molecular diagnostics instruments and for our Skeletal Health products. Similarly, we rely on one or a limited number of suppliers for some key components or subassemblies for our products due to cost, quality, expertise or other considerations. We have no firm long-term volume commitments with certain of our sole source suppliers, including the manufacturers of our Panther or Tigris instruments.
Similarly, we rely on one or a limited number of suppliers for some key raw materials for our products due to cost, quality, expertise or other considerations, and some of these suppliers are competitors. For example, F. Hoffmann-LaRoche Ltd, a direct competitor of our Diagnostics business, is the parent company of Roche, our current supplier of certain key raw materials for certain of our amplified NAT diagnostic assays. GE Healthcare Bio-Sciences Corp., an affiliate of GE, supplies us with the membranes used in connection with our ThinPrep product line. GE is a direct competitor with our Breast Health and Skeletal Health businesses. Moreover, we use certain components in our products, including semiconductor chips, that have been the subject of recent global supply chain shortages and disruptions. If any of our sole source manufacturers or suppliers, or other third-party manufacturers or suppliers, experiences delays, disruptions, capacity constraints or quality control problems in its development or manufacturing operations or becomes insolvent or otherwise fails to supply us with goods in sufficient quantities, including as a result of disruptions caused by the COVID-19 pandemic (as described above) or otherwise, then shipments to our customers could be delayed, which would decrease our revenues and harm our competitive position and reputation. Moreover, the failure of a supplier to provide sufficient quantities, acceptable quality and timely delivery of goods at an acceptable price, or an interruption in the delivery of goods from such a supplier could adversely affect our business and results of operations. Obtaining alternative sources of supply of products, components, subassemblies or raw materials could involve significant delays and other costs and regulatory challenges and may not be available to us on reasonable terms, if at all.
We may in the future need to find new contract manufacturers or suppliers to replace existing manufacturers or suppliers, increase our volumes or reduce our costs. We may not be able to find contract manufacturers or suppliers that meet our needs, including regulatory requirements, and even if we do, the process of qualifying such alternative manufacturers and suppliers is often expensive and time consuming. As a result, we may lose revenues and our customer relationships may suffer.
Interruptions, delays, shutdowns or damage at our manufacturing or laboratory facilities could harm our business.
In most cases, the manufacturing of each of our products is concentrated in one or a few locations. In addition, we rely on a single laboratory facility to process each of our Biotheranostics gene expression tests for breast cancer. An interruption in manufacturing or testing capabilities at any of these facilities, as a result of equipment failure, transportation interruptions, disruptions caused by the COVID-19 pandemic, other pandemics or other reasons, could reduce, delay or prevent the production of our products. Our facilities and those of our contract manufacturers or suppliers are subject to the risk of catastrophic loss due to unanticipated events, such as fires, earthquakes, explosions, floods or weather conditions. Our facilities may experience plant shutdowns, strikes or other labor disruptions, or periods of reduced production as a result of equipment failures, loss of power, gray outs, delays in deliveries or extensive damage, which could harm our business and prospects. Some of our manufacturing operations are located outside the U.S., including in Costa Rica and the United Kingdom. Those manufacturing operations are also subject to additional challenges and risks associated with international operations described herein.
Customer Concentration and Distributors
Our Diagnostics segment depends on a small number of customers for a significant portion of its product sales, and the loss of any of these customers or any cancellation or delay of a large purchase by any of these customers could significantly reduce revenues in our Diagnostics segment.
Although we do not currently have any customers that represent more than 10% of our consolidated revenues, or more than 10% of a business segment's revenue in fiscal 2021, historically a material portion of product sales in our Diagnostics segment came from (and we anticipate will continue to come from) a limited number of customers, two of which accounted for 12.5% and 10.9%, respectively, of our Diagnostics segment revenue in fiscal 2020. The loss of any of these key customers, or a significant reduction in sales volume or pricing to these customers, could significantly reduce our Diagnostics segment revenues or profitability.
We utilize distributors for a portion of our sales, the loss of which could harm our revenues in the territory serviced by these distributors.
We rely on strategic relationships with a number of key distributors for sales and service of our products. If any of our strategic relationships terminate without replacement or if our strategic partners fail to perform their contractual obligations, our revenues and/or ability to service our products in the territories serviced by these distributors could be adversely affected. We do not control our distributors, and these parties may not be successful in marketing our products. These parties may fail to commit the necessary resources to market and sell our products to the level of our expectations.
If we elect to distribute new products directly, we will have to invest in additional sales and marketing resources, including additional field sales personnel, which would significantly increase future selling, general and administrative expenses. If we fail to successfully market our products, our product sales will decrease. We may also be exposed to risks as a result of transitioning a territory from a distributor sales model to a direct sales model, such as difficulties maintaining relationships with specific customers, hiring appropriately trained personnel or ensuring compliance with local product
registration requirements, any of which could result in lower revenues than previously received from the distributor in that territory.
TALENT AND EMPLOYEE RETENTION
Our success depends on our ability to attract, motivate and retain key personnel and plan for future executive transitions.
The loss of any of our key personnel, particularly executive management or key research and development personnel, could harm our business and prospects and could impede the achievement of our research and development, operational or strategic objectives. We also continue to face the challenges of maintaining employee well-being, recognizing that the additional financial, family and health burdens that many employees may be experiencing due to the COVID-19 pandemic and related economic uncertainties may adversely impact job performance and employee retention. Government and customer vaccine mandates that apply to us may also lead to employee attrition, challenges securing future labor needs, inefficiencies connected to employee turnover and costs associated with implementation and on-going compliance, which could have a material adverse effect on our business, financial condition, and results of operations. Additionally, in our industry, there is substantial competition for key personnel in the regions in which we operate. We face intense competition for employees, particularly as employees are increasingly able to work remotely. Also, facilitating seamless leadership transitions for key positions is a critical factor in sustaining the success of our organization. If our succession planning efforts are not effective, it could adversely impact our business. We continue to assess the key personnel that we believe are essential to our long-term success. Future organizational changes could also cause our employee attrition rate to increase. If we fail to effectively manage any organizational and/or strategic changes, our financial condition, results of operations, and reputation, as well as our ability to successfully attract, motivate and retain key employees, could be harmed.
CYBERSECURITY AND DATA PRIVACY
Increased cybersecurity requirements, vulnerabilities, threats and more sophisticated and targeted computer crime could pose a risk to our systems, networks, products, solutions, services and data.
Increased global cybersecurity vulnerabilities, threats, computer viruses, ransomware and phishing attacks and more sophisticated and targeted cyber-related attacks, as well as cybersecurity failures resulting from human error and technological errors, pose a risk to the security of Hologic and its customers, business partners' and suppliers' products, systems and networks and the confidentiality, availability and integrity of data on these products, systems and networks. As the perpetrators of such attacks become more capable, as cybercrime becomes commoditized, and as critical infrastructure is increasingly becoming digitized, the risks in this area continue to grow. While we attempt to mitigate these risks by employing a number of measures, including employee training, monitoring and testing, and maintenance of protective systems and contingency plans, we remain potentially vulnerable to additional known or unknown threats, and we cannot assure that the impact from such threats will not be material. In addition to existing risks, the adoption of new technologies and acquisitions of new businesses may also increase our exposure to cybersecurity breaches and failures. We also have access to sensitive, confidential or personal data or information that is subject to privacy and security laws, regulations or customer-imposed controls. Despite our implementation of controls to protect our systems and sensitive, confidential or personal data or information, we may be vulnerable to material security breaches, theft, misplaced, lost or corrupted data, employee errors and/or malfeasance (including misappropriation by departing employees) that could potentially lead to the compromising of sensitive, confidential or personal data or information, improper use of our systems, software solutions or networks, unauthorized access, use, disclosure, modification or destruction of information, defective products, production downtimes and operational disruptions. In addition, a cyber-related attack could result in other negative consequences, including damage to our reputation or competitiveness, remediation or increased protection costs, litigation or regulatory action. Although we have experienced occasional actual or attempted breaches of our computer systems, to date we do not believe any of these breaches has had a material effect on our business, operations or reputation.
Failure to comply with laws relating to the confidentiality of sensitive personal information or standards related to the transmission of electronic health data, may require us to make significant changes to our products, or incur penalties or other liabilities.
State, federal and foreign laws, such as the federal Health Insurance Portability and Accountability Act of 1996, or HIPAA, regulate the confidentiality of sensitive personal information and the circumstances under which such information may be released. These measures may govern the disclosure and use of personal and patient medical record information and may require users of such information to implement specified security measures, and to notify individuals in the event of privacy and security breaches. Evolving laws and regulations in this area could restrict the ability of our customers to obtain, use or disseminate patient information, or could require us to incur significant additional costs to re-design our products in a timely manner, either of which could have an adverse impact on our results of operations. Other health information standards, such as regulations under HIPAA, establish standards regarding electronic health data transmissions and transaction code set rules for
specified electronic transactions, for example transactions involving submission of claims to third-party payors. These standards also continue to evolve and are often unclear and difficult to apply. Outside the U.S., we are impacted by privacy and data security requirements at the international, national and regional level, and on an industry specific basis. More privacy and security laws and regulations are being adopted, and more are being enforced, with potential for significant financial penalties. In the EU, increasingly stringent data protection and privacy rules have been enacted. The EU General Data Protection Regulation (GDPR) applies uniformly across the EU and includes, among other things, a requirement for prompt notice of data breaches to data subjects and supervisory authorities in certain circumstances. The GDPR also requires companies processing personal data of individuals residing in the EU to comply with EU privacy and data protection rules. Failure to maintain the confidentiality of sensitive personal information in accordance with the applicable regulatory requirements, or to abide by electronic health data transmission standards, could expose us to breach of contract claims, fines and penalties, costs for remediation and harm to our reputation.
THIRD-PARTY REIMBURSEMENT AND GUIDELINES
Healthcare cost containment legislation and the failure of third-party payors to provide appropriate levels of coverage and reimbursement for the use of products and treatments facilitated by our products could harm our business and prospects.
Sales and market acceptance of our diagnostics, breast and skeletal health and surgical products and the treatments facilitated by these products are dependent upon the coverage decisions and reimbursement policies established by government healthcare programs and private health insurers. These policies affect which products customers purchase and the prices they are willing to pay. Reimbursement varies by country and can significantly impact the acceptance of new products and technologies. Even if we develop a promising new product, we may find limited demand for the product unless appropriate reimbursement approval is obtained from private and governmental third-party payors. Further legislative or administrative reforms to the reimbursement systems in the U.S. and other countries in a manner that significantly reduces reimbursement for procedures using our diagnostics, breast and skeletal health and surgical products or denies coverage for those procedures facilitated by our products, including price regulation, competitive bidding and tendering, coverage and payment policies, comparative effectiveness of therapies, technology assessments and managed-care arrangements, could have a material adverse effect on our business, financial condition or results of operations.
Guidelines, recommendations and studies published by various organizations may reduce the use of our products.
Professional societies, government agencies, practice management groups, private health/science foundations, and organizations involved in healthcare issues may publish guidelines, recommendations or studies to the healthcare and patient communities. Organizations like these have in the past made recommendations about our products and those of our competitors. If followed by healthcare providers and insurers, such publications could result in decreased use of our products. For example, in November 2012, the American Congress of Obstetrics and Gynecologists, known as the ACOG, released updates in which it recommended less frequent cervical cancer screening similar to guidelines released in March 2012 by the U.S. Preventative Services Task Force, or the USPSTF, and the American Cancer Society. We believe that these recommendations and guidelines may have contributed to increased screening intervals for cervical cancer, which we believe has and may continue to adversely affect our ThinPrep revenues. Our ThinPrep revenues may also be adversely affected by the July 2020 American Cancer Society cervical cancer screening recommendation for a primary human papillomavirus (HPV) test rather than a Pap test. In addition, on October 20, 2015, the American Cancer Society issued guidelines recommending that women start annual mammograms at age 45 instead of 40 and have a mammogram every two years instead of annually. This recommendation could result in a decrease in purchases of our mammography systems.
REGULATORY AND LEGAL
Changes in tax laws or exposures to additional tax liabilities could negatively impact the Company's operating results.
We are subject to income taxes, as well as taxes that are not income-based, in both the U.S. and jurisdictions outside of the U.S. Our future effective tax rate could be unfavorably affected by numerous factors including a change in, or the interpretation of, tax rules and regulations in the jurisdictions in which we operate (including changes in legislation currently being considered), a change in our geographic earnings mix, and/or to the jurisdictions in which we operate, or a change in the measurement of our deferred taxes. We are also subject to ongoing tax audits in various jurisdictions, and tax authorities may disagree with certain positions we have taken and assess additional taxes.
We operate in a highly regulated industry, and changes in healthcare laws and regulations or our inability to obtain in a timely manner or at all U.S. or foreign regulatory clearances or approvals for our current and newly developed products and services or product or service enhancements, could adversely affect our business and prospects.
We operate in a highly regulated industry. As a result, governmental actions may adversely affect our business, operations or financial condition, including:
•new laws, regulations or judicial decisions, or new interpretations of existing laws, regulations or decisions, related to healthcare availability, method of delivery and payment for healthcare products and services;
•changes in the FDA and foreign regulatory approval processes that may delay or prevent the approval of new products and result in lost market opportunity;
•changes in FDA and foreign regulations that may require additional safety monitoring, labeling changes, restrictions on product distribution or use, or other measures after the introduction of our products to market, which could increase our costs of doing business, adversely affect the future permitted uses of approved products, or otherwise adversely affect the market for our products; and
•new laws, regulations and judicial decisions affecting pricing or marketing practices.
Given the high level of regulatory oversight to which our products are subject, the process of obtaining clearances and approvals can be costly and time consuming. In addition, there is a risk that any approvals or clearances, once obtained, may be withdrawn. Most medical devices cannot be marketed in the U.S. without 510(k) clearance or pre-market approval by the FDA. Any modifications to a device that has received a pre-market approval that affect the safety or effectiveness of the device require a pre-market approval supplement or possibly a separate pre-market approval, either of which is likely to be time consuming, expensive and uncertain to obtain. If the FDA requires us to seek one or more pre-market approval supplements or new pre-market approvals for any modification to a previously approved device, we may be required to cease marketing or to recall the modified device until we obtain approval, and we may be subject to significant criminal and/or civil sanctions, including, but not limited to, regulatory fines or penalties. States may also regulate the manufacture, sale and use of medical devices, particularly those that employ x-ray technology.
Our products are also subject to approval and regulation by foreign regulatory and safety agencies. For example, the EU has adopted the EU Medical Device Regulation (the “EU MDR”) and the In Vitro Diagnostic Regulation (the “EU IVDR”), each of which impose stricter requirements for the marketing and sale of medical devices, including in the area of clinical evaluation requirements, quality systems and post-market surveillance. Manufacturers of currently approved medical devices will have until May 2022 to meet the EU IVDR. Complying with the requirements of these regulations may require us to incur significant expenditures. Failure to meet these requirements could adversely impact our business in the EU and other regions that tie their product registrations to the EU requirements.
We anticipate that governmental authorities will continue to scrutinize the healthcare industry closely and that changes in laws, regulations or policies by governmental authorities may cause increased uncertainties and compliance costs, exposure to litigation and other adverse effects to our business and operations. Delays in receipt of, or failure to obtain or maintain, clearances or approvals for future products could delay or preclude realization of product revenues from new or existing products or result in substantial additional costs which could decrease our profitability.
In addition, maintaining compliance with multiple regulators, and multiple centers within the FDA, adds complexity and cost to our manufacturing processes. Our manufacturing facilities and those of our contract manufacturers are subject to periodic regulatory inspections by the FDA and other regulatory agencies, and these facilities are subject to the FDA's Quality System Regulation and Good Manufacturing Practices. We or our contractors may fail to satisfy these regulatory requirements in the future, and any failure to do so may prevent us from selling our products.
Some of our activities may subject us to risks under federal and state laws prohibiting “kickbacks” and false or fraudulent claims.
We are subject to the provisions of a federal law commonly known as the anti-kickback statute, and several similar state laws, which prohibit payments intended to induce physicians or others either to refer patients or to acquire or arrange for or recommend the acquisition of healthcare products or services. While the federal law applies only to products or services for which payment may be made by a federal healthcare program, state laws often apply regardless of whether federal funds may be involved. These laws constrain the sales, marketing and other promotional activities of manufacturers of medical devices by limiting the kinds of financial arrangements, including sales programs that may be used with hospitals, physicians, laboratories and other potential purchasers of medical devices. Other federal and state laws generally prohibit individuals or entities from knowingly presenting, or causing to be presented, claims for payment from Medicare, Medicaid, or other third-party payors that are false or fraudulent, or are for items or services that were not provided as claimed. Similarly, the Patient Protection and Affordable Care Act also includes stringent reporting requirements of financial relationships between device manufacturers and physicians and teaching hospitals. Specifically, under one provision of the law, which is commonly referred to as the Physician Payment Sunshine Act, we are required to collect data on and annually report to CMS certain payments or other transfers of value to physicians and teaching hospitals and annually report certain ownership and investment interests held by physicians or
their immediate family members. Anti-kickback and false claims laws and the Physician Payment Sunshine Act prescribe civil and criminal penalties (including fines) for noncompliance that can be substantial.
Similarly, our international operations are subject to the provisions of the U.S. Foreign Corrupt Practices Act of 1977, as amended ("FCPA"), which prohibits U.S. companies and their representatives from offering or making improper payments to foreign officials for the purpose of obtaining or retaining business. In many countries, the healthcare professionals we regularly interact with may meet the definition of a foreign official for purposes of the FCPA. Our international operations are also subject to various other international anti-bribery laws such as the UK Anti-Bribery Act. Despite meaningful measures that we undertake to facilitate lawful conduct, which include training and compliance programs and internal policies and procedures, we may not always prevent unauthorized, reckless or criminal acts by our employees or agents, or employees or agents of businesses or operations we may acquire. Violations of these laws, or allegations of such violations, could disrupt our operations, involve significant management distraction and have a material adverse effect on our business, financial condition and results of operations. We also could be subject to adverse publicity, severe penalties, including criminal and civil penalties, disgorgement, further changes or enhancements to our procedures, policies and controls, personnel changes and other remedial actions. Moreover, our failure to comply with domestic or foreign laws could result in various adverse consequences, including possible delay in approval or refusal to approve a product, recalls, seizures, and withdrawal of an approved product from the market.
We are subject to the risk of product liability claims relating to our products for which we may not have adequate insurance.
Our business involves the risk of product liability and other claims inherent to the medical device business. If even one of our products is found to have caused or contributed to injuries or deaths, we could be held liable for substantial damages. We maintain product liability insurance subject to deductibles and exclusions. There is a risk that the insurance coverage will not be sufficient to protect us from product and other liability claims, or that product liability insurance will not be available to us at a reasonable cost, if at all. An under-insured or uninsured claim could harm our business and prospects. In addition, claims could adversely affect the reputation of the related product, which could damage that product’s competitive position in the market.
The sale and use of our diagnostic products could also lead to product liability claims if someone were to allege that one of our products contained a design or manufacturing defect that resulted in inaccurate test results or the failure to detect a disorder for which it was being used to screen, or caused injuries to a patient. Any product liability claim brought against us, with or without merit, could result in an increase in our product liability insurance rates or the inability to secure additional coverage in the future. Also, even a meritless or unsuccessful product liability claim could be time consuming and expensive to defend. This could result in a diversion of management’s attention from our business and adversely affect the perceived safety and efficacy of our products, which could harm our business and prospects.
We are subject to environmental, health and safety laws and regulations, including related to our use and recycling of hazardous materials and the composition of our products.
Our research and development and manufacturing processes involve the controlled use of hazardous materials, such as toxic and carcinogenic chemicals and various radioactive compounds, and the risk of contamination or injury from these materials cannot be eliminated. In such event, we could be held liable for any resulting damages, and any such liability could be extensive. From time to time new regulations are enacted, and it is difficult to anticipate how such regulations will be implemented and enforced. We continue to evaluate the necessary steps for compliance with regulations as they are enacted. These regulations include, for example, regulations enacted in the EU such as the Registration, Evaluation, Authorization and Restriction of Chemical Substances, or REACH, which requires the registration of and regulates use of certain chemicals, the Restriction on the Use of Certain Hazardous Substances in Electrical and Electronic Equipment Directive, or RoHS, which regulates the use of certain hazardous substances in certain products we manufacture, and the Waste Electrical and Electronic Equipment Directive, or WEEE, which requires the collection, reuse and recycling of waste from certain products we manufacture. These and similar legislation that has been or is in the process of being enacted in Japan, China and various states of the U.S. may require us to re-design our products to ensure compliance with the applicable standards, for example by requiring the use of different types of materials. These redesigns or the use of alternative materials may detrimentally impact the performance of our products, add greater testing lead times for product introductions, result in additional costs or have other similar effects. We are also subject to other substantial regulation relating to environmental, health and safety matters, including occupational health and safety, environmental protection, hazardous substance control, and waste management and disposal. The failure to comply with such regulations could subject us to, among other things, fines and criminal liability. We may also be required to incur significant costs to comply with these and future regulations, which may result in a material adverse effect upon our business, financial condition and results of operation.
Our business is dependent on technologies we license, and if we fail to maintain these licenses or license new technologies and rights to particular nucleic acid sequences for targeted diseases in the future, we may be limited in our ability to develop new products.
Our business is dependent on licenses from third parties for some of our key technologies. For example, our patented TMA technology is based on technology we licensed from Stanford University. We anticipate that we will enter into new licensing arrangements in the ordinary course of business to expand our product portfolio and access new technologies to enhance our products and develop new products. Many of these licenses will provide us with exclusive rights to the subject technology or disease marker. If our license with respect to any of these technologies or markers is terminated for any reason, we may not be able to sell products that incorporate that technology. Similarly, we may lose competitive advantages if we fail to maintain exclusivity under an exclusive license.
Our ability to develop additional diagnostic tests for diseases may depend on the ability of third parties to discover particular sequences or markers and correlate them with disease, as well as the rate at which such discoveries are made. Our ability to design products that target these diseases may depend on our ability to obtain the necessary rights from the third parties that make any of these discoveries. In addition, there are a finite number of diseases and conditions for which our NAT diagnostic assays may be economically viable. If we are unable to access new technologies or the rights to particular sequences or markers necessary for additional diagnostic products on commercially reasonable terms, we may be limited in our ability to develop new diagnostic products.
Our products and manufacturing processes may require access to technologies and materials that may be subject to patents or other intellectual property rights held by third parties. Our business could be adversely affected if we are unable to obtain the additional intellectual property rights necessary to commercialize our products.
Our business could be harmed if we are unable to protect our proprietary technology.
We have relied primarily on a combination of trade secrets, patents, copyrights, trademarks and confidentiality procedures to protect our products and technology. Despite these precautions, unauthorized third parties may infringe, misappropriate or otherwise violate our intellectual property, or copy or reverse engineer portions of our technology. The pursuit and assertion of a patent right, particularly in areas like nucleic acid diagnostics and biotechnology, involve complex determinations and, therefore, are characterized by substantial uncertainty. We do not know if current or future patent applications will be issued with the full scope of the claims sought, if at all, or whether any patents that are issued will be challenged or invalidated. The patents that we own or license could also be subjected to invalidation proceedings or similar disputes, and an unfavorable outcome could require us to cease using the related technology or to attempt to license rights to the technology from the prevailing party. There is also a risk that intellectual property laws outside of the U.S. will not protect our intellectual property rights to the same extent as intellectual property laws in the U.S. Even if our proprietary information is protected by patents or otherwise, the initiation of actions to protect our proprietary information could be costly and divert the efforts and attention of our management and technical personnel, and the outcome of such litigation is often uncertain. As a result of these uncertainties, we could also elect to forego such litigation or settle such litigation without fully enforcing our proprietary rights. In the absence of significant patent protection, we may be vulnerable to competitors who attempt to copy our products, processes or technology. Additionally, rights provided by a patent are finite in time. Over the coming years, certain patents relating to current products will expire in the U.S. and abroad thus allowing third parties to utilize certain of our technologies.
Our business could be harmed if we infringe upon the intellectual property rights of others.
There has been substantial litigation regarding patent and other intellectual property rights in the medical device, diagnostic products and related industries. We are and have been involved in patent litigation and may in the future be subject to further claims of infringement of intellectual property rights possessed by third parties. In connection with claims of patent infringement, we may seek to enter into settlement and/or licensing arrangements. There is a risk in these situations that no license will be available or that a license will not be available on reasonable terms. Alternatively, we may decide to litigate such claims or to design around the technology. These actions could be costly and would divert the efforts and attention of our management and technical personnel. As a result, any infringement claims by third parties or claims for indemnification by customers resulting from infringement claims, whether or not proven to be true, may harm our business and prospects.
We have a significant amount of indebtedness outstanding, which limits our operating flexibility, and could adversely affect our operations and financial results and prevent us from fulfilling our obligations.
As of September 25, 2021, we had approximately $3.05 billion aggregate principal of indebtedness outstanding (exclusive of additional funds that would be available to draw under our revolver and any funds that we may draw under our accounts
receivable securitization program). We also have other contractual obligations and deferred tax liabilities, which as of September 25, 2021, are described under “Notes to Consolidated Financial Statements — Income Taxes, and Non-cancelable Purchase Commitments.” This significant level of indebtedness and our other obligations may:
•make it more difficult for us to satisfy our obligations with respect to our outstanding indebtedness;
•increase our vulnerability to general adverse economic and industry conditions, including increases in interest rates;
•require us to dedicate a substantial portion of our cash flow from operations to interest and principal payments on our indebtedness, which would reduce the availability of our cash flow to fund working capital, capital expenditures, expansion efforts, strategic transactions and other general corporate purposes;
•limit our flexibility in planning for, or reacting to, changes in our business and the markets in which we participate;
•place us at a competitive disadvantage compared to our competitors that have less debt; and
•limit our ability to borrow additional funds for working capital, capital expenditures, expansion efforts, strategic transactions or other general corporate purposes.
In addition, the terms of our financing obligations contain certain covenants that restrict our ability, and that of our subsidiaries, to engage in certain transactions and may impair our ability to respond to changing business and economic conditions, including, among other things, limitations on our ability to:
•incur indebtedness or issue certain preferred equity;
•pay dividends, repurchase our common stock, or make other distributions or restricted payments;
•make certain investments;
•agree to payment restrictions affecting the restricted subsidiaries;
•sell or otherwise transfer or dispose of assets, including equity interests of our subsidiaries;
•enter into transactions with our affiliates;
•designate our subsidiaries as unrestricted subsidiaries;
•consolidate, merge or sell substantially all of our assets; and
•use the proceeds of permitted sales of our assets.
Our amended and restated credit facilities also require us to satisfy certain financial covenants. Our ability to comply with these provisions may be affected by general economic conditions, political decisions, industry conditions and other events beyond our control. Our failure to comply with the covenants contained in our amended and restated credit facilities, including financial covenants, could result in an event of default, which could materially and adversely affect our results of operations and financial condition.
If there were an event of default under one of our debt instruments or a change of control, the holders of the defaulted debt could cause all amounts outstanding with respect to that debt to be due and payable immediately and may be cross-defaulted to other debt, including our outstanding notes. Our assets or cash flow may not be sufficient to fully repay borrowings under our outstanding debt instruments if accelerated upon an event of default or a change of control, and there is no guarantee that we would be able to repay, refinance or restructure the payments on such debt. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations-Liquidity and Capital Resources.”
We may not be able to generate sufficient cash flow to service all of our indebtedness and other obligations.
Our ability to make payments on and to refinance our indebtedness and to fund planned capital expenditures, strategic transactions and expansion efforts will depend on our ability to generate cash in the future. This, to a certain extent, is subject to general economic, financial, competitive, legislative, regulatory and other factors that are beyond our control. Our business may not be able to generate sufficient cash flow from operations, and we cannot assure that future borrowings will be available to us in amounts sufficient to enable us to pay our indebtedness as such indebtedness matures and to fund our other liquidity needs. If this occurs, we will need to refinance all or a portion of our indebtedness on or before maturity, and there can be no assurance that we will be able to refinance any of our indebtedness on commercially reasonable terms, or at all. We may need to adopt one or more alternatives, such as reducing or delaying planned expenses and capital expenditures, selling assets, restructuring debt, or obtaining additional equity or debt financing. These alternative strategies may not be affected on satisfactory terms, if at all. Our ability to refinance our indebtedness or obtain additional financing, or to do so on commercially reasonable terms, will depend on, among other things, our financial condition at the time, restrictions in agreements governing our indebtedness, and other factors, including the condition of the financial markets and the markets in which we compete. If we do not generate sufficient cash flow from operations, and additional borrowings, refinancings or proceeds from asset sales are not available to us, we may not have sufficient cash to enable us to meet all of our obligations.
A significant portion of our indebtedness is subject to floating interest rates, which may expose us to higher interest payments.
A significant portion of our indebtedness is subject to floating interest rates, which makes us more vulnerable in the event of adverse economic conditions, increases in prevailing interest rates, or a downturn in our business. As of September 25, 2021, approximately $1.6 billion aggregate principal of our indebtedness, which represented the outstanding principal under our amended and restated credit facilities and asset securitization agreement, was subject to floating interest rates. We currently have limited hedging arrangements in place to mitigate the impact of higher interest rates, including an interest rate swap agreement, which expires on December 17, 2023. We cannot assure that we would be able to extend this hedge at an attractive price and terms.
The proposed discontinuation or replacement of LIBOR would require us to amend certain agreements and may otherwise adversely affect our business.
The UK Financial Conduct Authority announced in 2017 that it intends to phase out LIBOR. It is currently anticipated that LIBOR will be completely phased out by June 30, 2023. Changes in the method of calculating LIBOR, or the replacement of LIBOR with an alternative rate or benchmark, may adversely affect interest rates and result in higher borrowing costs. This could materially and adversely affect our results of operations, cash flows and liquidity. If changes are made to the method of calculating LIBOR or LIBOR ceases to exist, we may need to amend certain contracts, and we cannot predict what alternative rate or benchmark would be negotiated. This may result in an increase to our interest expense.
GENERAL RISK FACTORS
Provisions in our charter, bylaws, and indebtedness may have the effect of discouraging advantageous offers for our business or common stock and limit the price that investors might be willing to pay in the future for shares of our common stock.
Our charter, bylaws, and the provisions of the Delaware General Corporation Law include provisions that may have the effect of discouraging or preventing a change of control. Our indebtedness also contains provisions which either accelerate or require us to offer to repurchase the indebtedness at a premium upon a change of control. These provisions could limit the price that our stockholders might receive in the future for shares of our common stock.
Our stock price is volatile.
The market price of our common stock has been, and may continue to be, highly volatile. We believe that a variety of factors could cause the price of our common stock to fluctuate, perhaps substantially, including:
•new, or changes in, recommendations, guidelines or studies that could affect the use of our products;
•announcements and rumors of developments related to our business, including changes in reimbursement rates or regulatory requirements, proposed and completed acquisitions, or the industry in which we compete;
•published studies and reports relating to the comparative efficacy of products and markets in which we participate;
•quarterly fluctuations in our actual or anticipated operating results and order levels;
•general conditions in the U.S. or worldwide economy;
•our stock repurchase program;
•announcements of technological innovations;
•new products or product enhancements by us or our competitors;
•developments in patents or other intellectual property rights and litigation;
•developments in relationships with our customers and suppliers;
•the implementation of healthcare reform legislation and the adoption of additional reform legislation in the future; and
•the success or lack of success of integrating our acquisitions.
In addition, the stock market in general and the markets for shares of “high-tech” and life sciences companies, have historically experienced extreme price fluctuations which have often been unrelated to the operating performance of affected companies. Any such fluctuations in the future could adversely affect the market price of our common stock, and the market price of our common stock may decline.
Item 1B. Unresolved Staff Comments
Item 2. Properties
We own and lease real property to support our business, including manufacturing, marketing, research and development, logistical support and administration. The following lists those properties that we own or lease that we believe are material to our business. We believe that we have adequate space for our anticipated needs and that suitable additional space will be available at commercially reasonable prices as needed.
|Material Properties Owned:|| ||Primary Use|| |
|Newark, DE|| ||DirectRay digital detector research and development and plate manufacturing operations|| |
|Manchester, UK||Administrative and supply chain operations|
|Londonderry, NH|| ||Manufacturing operations|| |
|San Diego, CA || ||Diagnostics headquarters, including administrative and manufacturing operations|| |
|San Diego, CA|| ||Diagnostics research and development, administrative and manufacturing operations|| |
|Warstein, Germany|| ||Manufacturing operations, research and development and administrative functions|| |
|Material Properties Leased:||Primary Use||Lease|
|Danbury, CT||Manufacturing facility||2024||None|
|Danbury, CT||Manufacturing operations and research and development||2024||None|
|Marlborough, MA||Headquarters, including research and development, manufacturing and distribution operations||2025||2, five-yr. periods|
|Marlborough, MA||Manufacturing operations||2024||1, five-yr. period|
|Alajuela, Costa Rica||Manufacturing facility||2028||2, five-yr. periods|
|Manchester, England||Manufacturing operations and research and development||2035||None|
|Ougrée, Belgium||Manufacturing operations and research and development||2032||None|
We also lease various administrative and customer support centers throughout the world including in Brussels, Belgium, Kerpen, Germany, Madrid, Spain, Beijing, China, Wiesbaden, Germany, Aix-en-Provence, France, and Espoo, Finland, and also maintain specialized research and development and manufacturing operations at various additional locations.
Item 3. Legal Proceedings
For a discussion of legal matters as of September 25, 2021, please see Note 14 to our consolidated financial statements entitled “Litigation and Related Matters,” which is incorporated by reference into this item.
Item 4. Mine Safety Disclosures
Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Market Information. Our common stock is traded on the Nasdaq Global Select Market under the symbol “HOLX.”
Number of Holders. As of November 11, 2021, there were approximately 881 holders of record of our common stock, including multiple beneficial holders at depositories, banks and brokers listed as a single holder in the street name of each respective depository, bank or broker.
Dividend Policy. We have never declared or paid cash dividends on our capital stock, and we currently have no plans to do so. Our current policy is to retain all of our earnings to finance future growth (including acquisitions), pay down our existing indebtedness and repurchase our common stock. The existing covenants under certain of our credit facilities also place limits on our ability to issue dividends and repurchase stock.
Recent Sales of Unregistered Securities. We did not sell unregistered securities during the fourth quarter of fiscal 2021.
Issuer's Purchases of Equity Securities
|Period of Repurchase||Total Number of|
Paid Per Share
|Total Number of|
Shares Purchased As Part of Publicly
Announced Plans or
|Average Price Paid Per|
Share As Part of Publicly
Announced Plans or
Number (or Approximate Dollar Value) of Shares That May Yet Be Purchased Under Our
|June 27, 2021 – July 24, 2021||9,916 ||$||67.99 ||— ||$||— ||$||691.6 |
|July 25, 2021 – August 21, 2021||295 ||75.04 ||— ||— ||691.6 |
|August 22, 2021 – September 25, 2021||314 ||79.51 ||— ||— ||691.6 |
|Total||10,525 ||$||68.53 ||— ||$||— ||$||691.6 |
(1)For the majority of restricted stock units granted, the number of shares issued on the date that the restricted stock units vest is net of the minimum statutory tax withholding requirements that we pay in cash to the appropriate tax authorities on behalf of our employees. These repurchases of our common stock were to cover employee income tax withholding obligations in connection with the vesting of restricted stock units under our equity incentive plans.
(2)On December 9, 2020, the Board of Directors authorized a new share repurchase plan to repurchase up to $1.0 billion of the Company's outstanding common stock, effective December 11, 2020. In connection with this authorization, the prior plan was terminated.
Stock Performance Graph
The following information shall not be deemed to be "filed" with the SEC nor shall the information be incorporated by reference into any future filings under the Securities Act, except to the extent that we specifically incorporate it by reference into a document filed under the Securities Act or the Exchange Act.
The following graph compares cumulative total shareholder return on our common stock since September 24, 2016 with the cumulative total return of the Standard & Poor’s Health Care Supplies Index. This graph assumes the investment of $100 on September 24, 2016 in our common stock, and the S&P Health Care Supplies Index. Measurement points are the last trading day of each respective fiscal year.
Item 6. Reserved
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis should be read in conjunction with the Consolidated Financial Statements, the information described under the caption “Risk Factors” in Part I, Item 1A of this Annual Report and our Special Note Regarding Forward-Looking Statements at the outset of this Annual Report.
We are a developer, manufacturer and supplier of premium diagnostics products, medical imaging systems and surgical products focused on women's health and well-being through early detection and treatment. We sell and service our products through a combination of direct sales and service personnel and a network of independent distributors and sales representatives. We operate in four segments: Diagnostics, Breast Health, GYN Surgical and Skeletal Health. Until December 30, 2019, our product portfolio included aesthetic and medical treatments systems sold by our former Medical Aesthetic business. We completed the sale of our Medical Aesthetics segment on December 30, 2019 (the first day of the second quarter of fiscal 2020).
Through our Diagnostics segment, we offer a wide range of diagnostic products, which are used primarily to aid in the screening and diagnosis of human diseases. Our primary Diagnostics products include our molecular diagnostic assays, which run on our advanced instrumentation systems (Panther, Panther Fusion and Tigris), our ThinPrep cytology system, and the Rapid Fetal Fibronectin Test. Our Aptima family of molecular diagnostic assays is used to detect, among other things, the infectious microorganisms that cause common sexually transmitted diseases, or STDs, such as: chlamydia and gonorrhea, or GTGC; certain high-risk strains of human papillomavirus, or HPV; and Trichomonas vaginalis, the parasite that causes trichomoniasis; Mycoplasma genitalium; and Herpes simplex viruses 1 and 2. We also offer viral load tests for HIV, Hepatitis C and Hepatitis B for use on our Panther instrument system. Our assay portfolio also includes diagnostic tests for a range of acute respiratory infections, including SARS-CoV-2, as well as a test for the detection of Group B Streptococcus, or GBS, that are run on the Panther Fusion system, a field upgradeable instrument addition to the base Panther system. In response to the COVID-19 pandemic, we developed and launched the Aptima SARS-CoV-2 assay (which runs on our standard Panther system) and the Panther Fusion SARS-CoV-2 assay (which runs on our Panther Fusion system). The Panther Fusion SARS-CoV-2 assay and the Aptima SARS-CoV-2 assay were launched at the end of our second quarter and in the third quarter of fiscal 2020, respectively. The ThinPrep System is primarily used in cytology applications, such as cervical cancer screening, and the Rapid Fetal Fibronectin Test assists physicians in assessing the risk of pre-term birth.
Our Breast Health segment offers a broad portfolio of solutions for breast cancer care primarily in the areas of radiology, breast surgery, pathology and treatment. These solutions include 3D digital mammography systems, image analytics software utilizing artificial intelligence, reading workstations, ultrasound imaging, minimally invasive breast biopsy guidance systems, breast biopsy site markers, localization, specimen radiology, connectivity solutions and breast conserving surgery products. Our most advanced breast imaging platforms, Selenia Dimensions and 3Dimensions, utilize tomosynthesis to produce 3D images that show multiple contiguous slice images of the breast, which we refer to as the Genius 3D Mammography exam.
Our GYN Surgical products include our NovaSure Endometrial Ablation System, or NovaSure, and our MyoSure Hysteroscopic Tissue Removal System, or MyoSure, as well as our Fluent Fluid Management system, or Fluent. The NovaSure portfolio is comprised of the NovaSure CLASSIC and NovaSure ADVANCED devices and involves a trans-cervical procedure for the treatment of abnormal uterine bleeding. The MyoSure suite of devices offers four options to provide incision-less removal of fibroids, polyps, and other pathology within the uterus. The Fluent system is a fluid management system that provides liquid distention during diagnostic and operative hysteroscopic procedures.
Our Skeletal Health segment's products includes the Horizon DXA, a dual energy x-ray system, which evaluates bone density and performs body composition assessments, and the Fluoroscan Insight FD mini C-arm, which assists in performing minimally invasive orthopedic surgical procedures on a patient's extremities, such as the hand, wrist, knee, foot, and ankle.
Our Medical Aesthetics segment consisted of a portfolio of aesthetic treatment systems. We completed the sale of our Medical Aesthetics business on December 30, 2019.
Unless the context otherwise requires, references to we, us, Hologic or our company refer to Hologic, Inc. and its consolidated subsidiaries.
The global COVID-19 pandemic has created significant volatility, uncertainty, and economic disruption in the markets we sell our products into, primarily the U.S., Europe and Asia-Pacific. Starting in the second quarter of fiscal 2020, the spread of COVID-19 negatively impacted business and healthcare activity globally. In particular, due to government measures, elective
procedures and exams were delayed or cancelled, there were significant reductions in physician office visits, and hospitals postponed or canceled capital purchases as well as limited or eliminated services; however, in the second half of the third quarter of fiscal 2020, we started to see a recovery of elective procedures and exams as economies were opened back up and restrictions eased, which has continued through the fourth quarter of fiscal 2021. The reductions in testing and procedures had a negative impact on our operating results and cash flows in fiscal 2020, however, the impact of the commercial release of our COVID-19 assays more than offset those negative impacts as we generated significant revenue from the sales of these assays starting in the third quarter of fiscal 2020 through the fourth quarter of fiscal 2021.
While our results of operations and cash flows since the third quarter of fiscal 2020 have been positively impacted by the sale of our COVID-19 assays as well the continued recovery of our other primary product lines and businesses to pre-COVID levels, the COVID-19 pandemic could have an adverse impact on our operating results, cash flows and financial condition in the future. The factors that could create such adverse impact include: reduced demand for COVID-19 testing; competition from existing and new COVID-19 testing technologies and products as well as the timing and effectiveness of distributing vaccines; the severity and duration of the COVID-19 pandemic; the resurgence of COVID-19 infections; the emergence of new COVID strain variants; the COVID-19 pandemic's impact on the U.S. and international healthcare systems, the U.S. economy and worldwide economy; and the timing, scope and effectiveness of U.S. and international governmental, regulatory, fiscal, monetary and public health responses to the COVID-19 pandemic and associated economic disruptions. We expect that as the current COVID-19 pandemic subsides, there may be a significantly reduced demand for ongoing testing, and thus, for our COVID-19 assays. As expected in the third quarter of fiscal 2021, revenues generated from the sale of its COVID-19 assays decreased significantly in the U.S. compared to the prior year period and the first and second quarters of fiscal 2021 as the population of vaccinated people continues to grow in the U.S. In the fourth quarter of fiscal 2021, COVID-19 assay revenues increased compared to the preceding quarter primarily due to the impact of the delta strain of COVID-19 resulting in higher demand for testing. However, COVID-19 assay revenues decreased compared to the corresponding prior year period.
In response to the negative impact of COVID-19 on our business, in April 2020, we initiated cost-cutting measures, which included not only reducing discretionary and variable spend, such as travel, marketing programs and the use of contractors, consultants and temporary help, but we also implemented employee furloughs, salary cuts primarily in the U.S., reduced hours and in certain instances, effected employee terminations. Further in April 2020, we shut down certain manufacturing facilities temporarily and implemented reduced work-week schedules in response to lower near-term demand for many of our products. As of the end of the third quarter of fiscal 2020, substantially all of the Company's employee cost-cutting measures ceased During fiscal 2021 the majority of the impacted manufacturing facilities were back to pre-COVID levels.
We have also taken and continue to take measures to ensure the safety of our employees and to comply with governmental orders. These measures could require that our employees continue to work remotely or otherwise refrain from reporting to their normal workplace for extended periods of time, which in turn could result in a decrease in our commercial and marketing activities. In addition, complying with government and customer vaccine mandates that apply to us may lead to employee attrition, disrupt our workforce and result in additional costs associated with implementation and on-going compliance, which could have an adverse impact on our operating results, cash flows and financial condition.
Acquisitions and Disposition
The following sets forth a description of certain of our acquisitions and dispositions in our last two fiscal years:
On June 17, 2021, we completed the acquisition of Mobidiag Oy, or Mobidiag, for a purchase price of $729.6 million. Mobidiag, located in Finland, manufactures molecular diagnostic solutions for gastrointestinal infections, antimicrobial resistance management and other infections. This acquisition expanded our molecular diagnostics portfolio into the near-patient testing market. Based on our preliminary valuation, we allocated $399.9 million of the purchase price to the value of intangible assets and $432.6 million to goodwill. The remaining $102.9 million of the purchase price was allocated to the net acquired tangible assets and liabilities. The allocation of the purchase price is preliminary as we continue to gather information supporting the acquired assets and liabilities. Mobidiag's results of operations are reported in our Diagnostics segment.
On February 22, 2021, we completed the acquisition of Biotheranostics, Inc., or Biotheranostics, for a purchase price of $231.3 million. Biotheranostics, located in San Diego, California, manufactures molecular diagnostic tests for breast and metastatic cancers and performs lab testing procedures at its facility. Based on our preliminary valuation, we allocated $162.4 million of the purchase price to the value of intangible assets and $80.9 million to goodwill. The remaining $12.0 million of the purchase price was allocated to the net acquired tangible assets and liabilities. The allocation of the purchase price is
preliminary as we continue to gather information supporting the acquired assets and liabilities. Biotheranostics' results of operations are included in our Diagnostic segment and its revenues are reported within service and other revenues in our consolidated statements of operations.
On March 1, 2021, we completed the acquisition of Diagenode SA, or Diagenode, for a purchase price of $155.1 million. Diagenode, located in Belgium, is a developer and manufacturer of molecular diagnostic assays based on PCR technology to detect infectious diseases of bacterial, viral or parasite origin. Based on our preliminary valuation, we allocated $79.0 million of the purchase price to the value of intangible assets and $83.5 million to goodwill. The remaining $7.4 million of the purchase price was allocated to the net acquired tangible assets and liabilities. The allocation of the purchase price is preliminary as we continue to gather information supporting the acquired assets and liabilities. Diagenode's results of operations are included in our Diagnostics segment.
Somatex Medical Technologies
On December 30, 2020, we completed the acquisition of Somatex Medical Technologies GmbH, or Somatex, for a purchase price of $62.9 million. Somatex, located in Germany, is a manufacturer of biopsy site markers, including the Tumark product line of tissue markers, which were distributed by the Company in the U.S. prior to the acquisition. Based on our preliminary valuation, we allocated $40.1 million of the purchase price to the value of intangible assets and $32.4 million to goodwill. The remaining $9.6 million of the purchase price was allocated to the net acquired tangible assets and liabilities. The allocation of the purchase price is preliminary as we continue to gather information supporting the acquired assets and liabilities. Somatex' results of operations are included in our Breast Health segment.
On September 28, 2020, we completed the acquisition of assets from NXC Imaging, for a purchase price of $5.6 million. NXC Imaging was a long-standing distributor of our Breast and Skeletal products in the U.S.
On August 23, 2020, we completed the acquisition of Acessa Health, Inc., or Acessa for a purchase price of $162.0 million, which included contingent consideration and was estimated at $81.8 million as of the measurement date. Acessa, located in Austin, Texas, manufactures and markets its Acessa ProVu system, a laparoscopic radio frequency ablation system for use in treatment of uterine fibroids. Acessa's results of operations are included in our GYN Surgical segment. The contingent consideration is based on annual incremental revenue growth over a three-year period ending annually in December. The contingent consideration is payable after each annual measurement period. We remeasure the contingent consideration liability on a quarterly basis, and for fiscal year 2021 we recorded a gain of $6.7 million to decrease the liability to its fair value. The reduction in fair value was primarily due to a decrease in forecasted revenues over the measurement period, partially offset by lower discount rates and accretion of the liability. The liability was recorded at $75.1 million at September 25, 2021.
On February 3, 2020, we completed the acquisition of Health Beacons, Inc., or Health Beacons, for a purchase price of $19.7 million. Health Beacons manufactures the LOCalizer product. Health Beacon's results of operations are reported in our Breast Health segment.
On December 30, 2019, we completed the acquisition of assets from Alpha Imaging, LLC, or Alpha Imaging, for a purchase price of $18.0 million. Alpha Imaging was a long-standing distributor of our Breast and Skeletal products in the U.S.
On August 1, 2019, we acquired approximately 46% of the outstanding shares of SuperSonic Imagine SA, or SSI, which is headquartered in France. SSI specializes in ultrasound imaging and designs, develops and markets an ultrasound platform used in the non-invasive care path for the characterization of breast, liver or prostate diseases. We initially accounted for this investment as an equity method investment.
On November 21, 2019, we acquired an additional 7.6 million common shares of SSI for $12.6 million. As a result, we owned approximately 78% of the outstanding shares of SSI at November 21, 2019 and controlled SSI's voting interest and
operations. We performed purchase accounting as of November 21, 2019 and beginning on that date the financial results of SSI are included within our consolidated financial statements within our Breast Health segment. We remeasured the initial investment of 46% of the outstanding shares of SSI to its fair value at the acquisition date, resulting in a gain of $3.2 million in Other income (expense), net in the first quarter of fiscal 2020.
During the third quarter of fiscal 2021, we acquired the remaining 4.8 million shares outstanding of SSI for $8.5 million. As of September 25, 2021, we owned 100% of SSI. Accordingly we recorded an adjustment to our net income for the noncontrolling interest we did not own of $1.8 million and $4.7 million (both of which were losses) for the years ended September 25, 2021 and September 26, 2020, respectively.
Disposition - Medical Aesthetics
On December 30, 2019, we completed the sale of our Medical Aesthetics. At the closing, we received cash proceeds of $153.4 million. The sales price was finalized in the fourth quarter of fiscal 2020, and we repaid $3.4 million, resulting in a final sales price of $150.0 million. As a result of the sale, we recorded a $30.2 million impairment charge in the first quarter of fiscal 2020 to record the asset group at fair value less costs to dispose as it met the assets held-for-sale criteria. For additional information, see Note 15 to our consolidated financial statements included herein. Following the sale of our Medical Aesthetics business, we have not generated any further product revenue related to this business, although additional expenses have been and will be incurred primarily in connection with the indemnification of legal and tax matters that existed as of the date of disposition. In addition, we agreed to provide transition services for a period of up to 15 months, which ended in March 2021.
RESULTS OF OPERATIONS
Fiscal Year Ended September 25, 2021 Compared to Fiscal Year Ended September 26, 2020
| ||Fiscal Years Ended|
| ||September 25, 2021||September 26, 2020||Change|
| ||Amount||% of Total|
|Amount||% of Total|
|Diagnostics||$||3,596.1 ||63.9 ||%||$||2,073.8 ||54.9 ||%||$||1,522.3 ||73.4 ||%|
|Breast Health||815.1 ||14.5 ||%||672.1 ||17.8 ||%||143.0 ||21.3 ||%|
|GYN Surgical||486.8 ||8.6 ||%||374.9 ||9.9 ||%||111.9 ||29.8 ||%|
|Skeletal Health||69.3 ||1.2 ||%||56.5 ||1.5 ||%||12.8 ||22.7 ||%|
|Medical Aesthetics||— ||— ||%||49.7 ||1.3 ||%||(49.7)||(100.0)||%|
|$||4,967.3 ||88.2 ||%||$||3,227.0 ||85.4 ||%||$||1,740.3 ||53.9 ||%|
We generated a 53.9% increase in product revenues in fiscal 2021 compared to fiscal 2020 primarily due to the increase in the Diagnostics business from a full year of sales of our two COVID-19 assays, one of which was launched near the end of the second quarter of fiscal 2020 and the other in the third quarter of fiscal 2020. Excluding sales of our COVID-19 assays, product revenues in the prior year period were adversely impacted by the COVID-19 pandemic, and product revenues in the current year periods have increased across our divisions. We primarily attribute this increase to recovery of elective procedures and exams, including associated capital equipment spending, as economies were opened back up and restrictions eased, and to a lesser extent a portion of the increase was driven by our current year acquisitions. The increase in product revenues in fiscal 2021 compared to fiscal 2020 was partially offset by no revenues from the Medical Aesthetics business in the current fiscal year as we disposed of this business segment on December 30, 2019, the beginning of our second quarter of fiscal 2020.
Diagnostics product revenues increased 73.4% in fiscal 2021 compared to fiscal 2020 primarily due to increases in Molecular Diagnostics of $1,457.7 million, Cytology and Perinatal of $58.3 million, and an increase in blood-screening of $6.3 million. While we divested our blood screening business in the second quarter of fiscal 2017, we continue to provide long-term access to Panther instrumentation and certain supplies to the purchaser of that business. Molecular Diagnostics product revenue was $3.1 billion in fiscal 2021 compared to $1.6 billion in fiscal 2020. The increase was primarily attributable to revenues of $2.16 billion in fiscal 2021 compared to $929.3 million in fiscal 2020 from our two SARS-CoV-2 assays (primarily the Aptima SARS-CoV-2 assay and to a lesser extent the Panther Fusion SARS-CoV-2 assay), an increase in Panther and Panther Fusion instrument sales due to demand for increased testing capacity for COVID-19, and an increase of $150.2 million in Aptima assays sales, which primarily consist of our CTGC, HPV and Trichomonas vaginalis assays, and related collection kits due to a return to pre-COVID testing levels. Prior fiscal year sales of these assays were adversely impacted by the COVID-19 pandemic and related lockdowns across the globe. In addition, we had an increase of $9.4 million in worldwide sales of our virology products in the current fiscal year. We expect that sales of our COVID-19 assays will decline significantly in fiscal 2022 compared to the current fiscal year primarily due to the continued distribution of vaccines. Cytology & Perinatal product revenue increased $58.3 million in the current fiscal year primarily due to higher ThinPrep test volumes, which we primarily attribute to the recovery of wellness office visits that had previously been delayed or cancelled in the prior year in response to the COVID-19 pandemic, partially offset by lower average selling prices and lower Perinatal product volumes. The inclusion of Diagenode and Mobidiag contributed $29.9 million of product revenue in the current fiscal year. We also experienced an increase in revenue from the favorable foreign currency exchange impact of the weakened U.S. dollar against a number of currencies in current fiscal year.
Breast Health product revenues increased 21.3% in fiscal 2021 compared to fiscal 2020 as product revenues in the prior fiscal year were adversely impacted by the COVID-19 pandemic and related lockdowns across the globe. These increases were primarily due to an increase in sales volume of our digital mammography systems and related workflow products (primarily Intelligent 2D, Clarity HD and SmartCurve), Affirm Prone breast biopsy tables, and our interventional breast solutions products, primarily Eviva, ATEC, and Brevera disposables (relaunched in the fourth quarter of fiscal 2020). In addition, we had higher sales of our breast conserving surgery products and ultrasound imaging products. We primarily attribute the increase in revenues to hospitals and imaging centers purchasing capital equipment following a significant decline in such spending during fiscal 2020 and to the recovery of elective procedures and exams as elective procedures and wellness visits that had previously been delayed or cancelled in the prior year in response to the COVID-19 pandemic. We also experienced an increase in revenue from the favorable foreign currency exchange impact of the weakened U.S. dollar against a number of currencies in the current year.
GYN Surgical product revenues increased 29.8% in fiscal 2021 compared to fiscal 2020, primarily due to the recovery of elective medical visits and procedures that had previously been delayed or cancelled in response to the COVID-19 pandemic and to a lesser extent healthcare providers increasing their inventory levels. These revenue increases were primarily due to increases in the sales volumes of MyoSure systems, NovaSure systems, Fluent Fluid Management systems and to a lesser extent sales of ProVu systems acquired in the Acessa acquisition in the fourth quarter of fiscal 2020. We also experienced an increase in revenue from the favorable foreign currency exchange impact of the weakened U.S. dollar against a number of currencies in the current year.
Skeletal Health product revenues increased 22.7% in fiscal 2021 compared to fiscal 2020 primarily due to an increase in sales volume of both our Insight FD mini C-arm and Horizon DXA systems. We primarily attribute this increase to the increase in wellness visits and healthcare screenings in 2021 as a result of the ongoing recovery from the COVID-19 pandemic.
We divested the Medical Aesthetics segment on December 30, 2019, the beginning of our second quarter of fiscal 2020. We have generated no revenue from the segment since that date.
Product revenues by geography as a percentage of total revenues were as follows:
| ||Years ended|
| ||September 25,|
|United States||68.3 ||%||75.3 ||%|
|Europe||21.9 ||%||15.5 ||%|
|Asia-Pacific||6.7 ||%||6.0 ||%|
|Rest of world||3.1 ||%||3.2 ||%|
|100.0 ||%||100.0 ||%|
While our product revenue increased in all our geographic regions, our largest proportionate increase was in Europe, which we primarily attribute to strong sales of our SARS-CoV-2 assays in Europe, growth in our Aptima assays in Europe as we expanded our customer base, increased sales from the adoption of co-testing for cervical cancer screening in Germany and to a lesser extent in the UK, as well as the inclusion of revenue from Diagenode, Mobidiag and Somatex, which are predominantly in Europe. Asia-Pacific product revenue as a percentage of total product revenue increased primarily due to an increase in sales of our SARS-CoV-2 assays in the region, an increase in sales of our mammography systems and growth in ThinPrep and Molecular Diagnostics primarily due to the recovery of wellness office visits that had previously been delayed or cancelled in response to the COVID-19 pandemic.
Service and Other Revenues
| ||Years Ended|
| ||September 25, 2021||September 26, 2020||Change|
| ||Amount||% of|
|Service and Other Revenues||$||665.0 ||11.8 ||%||$||549.4 ||14.5 ||%||$||115.6 ||21.0 ||%|
Service and other revenues are primarily comprised of revenue generated from our field service organization to provide ongoing service, installation and repair of our products. The majority of these revenues are generated within our Breast Health segment. Service and other revenues increased 21.0% in fiscal 2021 compared to fiscal 2020 primarily due to an increase in Breast Health service contract revenue as the Breast Health business continued to convert a high percentage of our installed base of digital mammography systems to service contracts upon expiration of the warranty period, as well as additions from our distributor acquisitions. We also experienced an increase in spare parts revenue in the current fiscal year for services that had previously been delayed or cancelled due to the COVID-19 pandemic. In our Diagnostics business, we had additional royalty revenue in the current fiscal year of $34.4 million from Grifols related to licensing our intellectual property to our COVID-19 assays for their sale in Spain. In addition, the inclusion of Biotheranostics added $33.7 million in the current fiscal year. These increases were partially offset by the sale of the Medical Aesthetics business which contributed $15.6 million of service revenue in the prior fiscal year.
Cost of Product Revenues
| ||Years Ended|
| ||September 25, 2021||September 26, 2020||Change|
| ||Amount||% of Product|
|Amount||% of Product|
|Cost of Product Revenues||$||1,205.1 ||24.3 ||%||$||953.7 ||29.6 ||%||$||251.4 ||26.4 ||%|
|Amortization of Acquired Intangible Assets||276.7 ||5.5 ||%||253.2 ||7.8 ||%||23.5 ||9.3 ||%|
|Impairment of Intangible Assets and Equipment||— ||— ||%||25.8 ||0.8 ||%||(25.8)||(100.0)||%|
|$||1,481.8 ||29.8 ||%||$||1,232.7 ||38.2 ||%||$||249.1 ||20.2 ||%|
Product gross margin was 70.2% in fiscal 2021 compared to 61.8% in fiscal 2020.
Cost of Product Revenues. The cost of product revenues as a percentage of product revenues was 24.3% in the current year compared to 29.6% in the prior year. Cost of product revenues as a percentage of revenue decreased in fiscal 2021 primarily due to sales of our SARS-CoV-2 assays, which have higher gross margins compared to our other Diagnostic products, and comprised 43.5% and 28.8% of total product revenue in fiscal 2021 and fiscal 2020, respectively. Also benefiting gross margin in the current year were higher sales volumes from our other businesses and product lines as they have continued to recover from the COVID-19 pandemic as economies opened back up and restrictions eased and the disposition of Medical Aesthetics, which had lower gross margins compared to our remaining businesses. Partially offsetting these decreases were higher field service costs for our expanded instrument installed base for the Diagnostics business and higher freight costs.
Diagnostics' product costs as a percentage of revenue decreased in fiscal 2021 compared to fiscal 2020 primarily due to higher sales of our SARS-CoV-2 assays and higher overall production of our Aptima assays and ThinPrep Pap Test reducing fixed overhead on a unit basis. These increases were partially offset by increased international freight costs, increased inventory reserves, higher field service costs for our expanded instrument installed base, an increase in amortization of placed instruments, and a slight decline in average selling prices partially driven by geographic mix.
Breast Health’s product costs as a percentage of revenue decreased in fiscal 2021 compared to fiscal 2020 primarily due to the impact of the COVID-19 pandemic in the prior year, which resulted in decreased sales volume across the majority of our product lines, period costs for temporary facility shut-downs and reduced manufacturing utilization and higher inventory reserves. In the current fiscal year, sales volumes have increased for our higher margin 3Dimensions systems, higher-margin workflow products (primarily consisting of Intelligent 2D, Clarity HD and SmartCurve), and our breast biopsy and breast conserving surgery disposable products. Increased sales also improved manufacturing utilization.
GYN Surgical’s product costs as a percentage of revenue decreased in fiscal 2021 compared to fiscal 2020 primarily due to the impact of the COVID-19 pandemic in the prior year, which resulted in significant decreases in sales volume of our NovaSure and MyoSure devices, period costs for the temporary shutdown of our manufacturing facility and reduced manufacturing utilization. In the current fiscal year, the Surgical business has recovered to pre-COVID levels which significantly improved manufacturing utilization and margins, partially offset by the product mix of higher volumes of lower margin products, including our Fluent Fluid Management systems and Acessa ProVu systems.
Skeletal Health’s product costs as a percentage of revenue decreased in fiscal 2021 compared to fiscal 2020 due to higher sales volume of both our Insight FD mini C-arm and Horizon DXA systems and lower inventory reserves in the current year.
We divested the Medical Aesthetics segment on December 30, 2019, the beginning of our second quarter of fiscal 2020.
Amortization of Acquired Intangible Assets. Amortization of intangible assets included in cost of product revenues relates to acquired developed technology, which is generally amortized over its estimated useful life of between 5 and 15 years using a straight-line method or, if reliably determinable, based on the pattern in which the economic benefits of the assets are expected to be consumed. Amortization expense increased in fiscal 2021 compared to fiscal 2020 primarily due to intangible assets acquired in the Mobidiag, Acessa, Biotheranostics, Diagenode and Somatex acquisitions, partially offset by lower amortization of intangible assets acquired in the Cytyc acquisition which reduces over time.
Impairment of Intangible Assets and Equipment. As discussed in Note 2 to the consolidated financial statements, we recorded an aggregate impairment charge of $30.2 million during the first quarter of fiscal 2020. The impairment charge was allocated to the Medical Aesthetics long-lived assets, of which $25.8 million was allocated to developed technology assets and written off to cost of revenues.
Cost of Service and Other Revenues
| ||Years Ended|
| ||September 25, 2021||September 26, 2020||Change|
| ||Amount||% of Service|
|Amount||% of Service|
|Cost of Service and Other Revenues||$||354.7 ||53.3 ||%||$||316.2 ||57.6 ||%||$||38.5 ||12.2 ||%|
Service and other revenues gross margin was 46.7% in fiscal 2021 compared to 42.4% in fiscal 2020. The increase in gross margin was primarily due to additional royalty revenue from Grifols related to licensing our intellectual property related to our COVID-19 assays for their sale in Spain, which has a high margin, and laboratory testing services from Biotheranostics, which has a higher gross margin than our legacy service businesses. In addition, in the current year period the Breast Health business had an increase in service contract revenue which benefited gross margin as service contract revenue has higher margins compared to revenue from spare parts, installation and training.
| ||Years Ended|
| ||September 25, 2021||September 26, 2020||Change|
| ||Amount||% of Total|
|Amount||% of Total|
|Research and development||$||276.3 ||4.9 ||%||$||222.5 ||5.9 ||%||$||53.8 ||24.2 ||%|
|Selling and marketing||561.2 ||10.0 ||%||484.6 ||12.8 ||%||76.6 ||15.8 ||%|
|General and administrative||433.2 ||7.7 ||%||355.7 ||9.4 ||%||77.5 ||21.8 ||%|
|Amortization of acquired intangible assets||42.2 ||0.7 ||%||39.7 ||1.1 ||%||2.5 ||6.3 ||%|
|Impairment of intangible assets and equipment||— ||— ||%||4.4 ||0.1 ||%||(4.4)||(100.0)||%|
|Contingent consideration—fair value adjustments||(6.7)||(0.1)||%||0.3 ||— ||%||(7.0)||**|
|Restructuring and divestiture charges||9.3 ||0.2 ||%||15.3 ||0.4 ||%||(6.0)||(39.2)||%|
|$||1,315.5 ||23.4 ||%||$||1,122.5 ||29.7 ||%||$||193.0 ||17.2 ||%|
** Percentage not meaningful
Research and Development Expenses. Research and development expenses increased 24.2% in fiscal 2021 compared to fiscal 2020 primarily due to higher R&D project spend in Diagnostics, Breast Health and Surgical, the inclusion of expenses from the Mobidiag, Acessa, Biotheranostics, Diagenode and Somatex acquisitions aggregating $14.6 million, higher salary expense from increased headcount in Diagnostics, higher project and consulting spend and increased spending to implement the European Medical Device Regulation (MDR) and In Vitro Diagnostic Regulation (IVDR) requirements. In the current year, we also recorded a $7.0 million charge related to the purchase of intellectual property in Breast Health that has no future alternative use. Partially offsetting these increases in the current year was the reduction of expense due to the disposition of the Medical Aesthetics business which contributed $7.3 million of expense in the prior year. In addition, we recorded a credit to research and development expenses of $11.0 million and $7.1 million in fiscal 2021 and 2020, respectively, from the Biomedical Advanced Research and Development Authority (BARDA) in connection with a grant to expand manufacturing capacity, obtain FDA approval of our SARS-CoV-2 assays and develop sampling pooling capability and other enhancements to our SARS-CoV-2 assays. At any point in time, we have a number of different research projects and clinical trials being conducted and the timing of these projects and related costs can vary from period to period.
Selling and Marketing Expenses. Selling and marketing expenses increased 15.8% in fiscal 2021 compared to fiscal 2020 primarily due inclusion of expenses from the Mobidiag, Acessa, Biotheranostics, Diagenode and Somatex acquisitions aggregating $36.3 million, an increase in commissions in Breast Health, Surgical and Diagnostics from higher revenues, and an increase in marketing initiatives and consulting spend. Partially offsetting these increases in the current year was the disposition of the Medical Aesthetics business which contributed $23.7 million of expense in the prior year, lower travel and trade show expenses in response to the COVID-19 pandemic, decreases in meeting expenses primarily related to cancelling our national sales meeting and not having an in-person RSNA conference as a result of the COVID-19 pandemic, and lower bonus expense.
General and Administrative Expenses. General and administrative expenses increased 21.8% in fiscal 2021 compared to fiscal 2020 primarily due to the inclusion of expenses from the Mobidiag, Acessa, Biotheranostics, Diagenode and Somatex acquisitions aggregating $16.4 million, increased acquisition transaction costs including $11.5 million for a transfer tax related to the Mobidiag acquisition, a $11.2 million non-income tax charge related to an ongoing non-income tax audit, higher expense from our deferred compensation plan, higher litigation and settlement costs, increased consulting spend for corporate initiatives and information system implementation projects, higher charitable donations, higher salary expenses due to an increase in headcount and the cessation of furloughs implemented in April 2020 due to the COVID-19 pandemic before the end of the prior year period, and lower credits in the current year of $3.5 million related to transition services provided to Cynosure. Partially offsetting these increases were lower stock-based compensation and bonuses, lower bad debt expense, the disposition of the Medical Aesthetics business, which contributed $5.5 million of expenses in the prior year, expenses incurred in the prior year to separate and dispose of that business, and a $3.3 million benefit due to reversal of a tax reserve.
Amortization of Acquired Intangible Assets. Amortization of intangible assets results from customer relationships, trade names, distributor relationships and business licenses related to our acquisitions. These intangible assets are generally amortized over their estimated useful lives of between 2 and 30 years using a straight-line method or, if reliably determinable, based on the pattern in which the economic benefits of the assets are expected to be consumed utilizing expected undiscounted future cash flows. Amortization expense increased 6.3% in fiscal 2021 compared to fiscal 2020 primarily due to increases from recent acquisitions, partially offset by assets from older acquisitions becoming fully amortized.
Contingent Consideration Fair Value Adjustments. In connection with the acquisition of Acessa, we are obligated to make contingent earn-out payments. The payments are based on achieving incremental revenue growth over a three-year period ending annually in December. As of the acquisition date for Acessa, we recorded a contingent consideration liability for the estimated fair value of the amount we expected to pay to the former shareholders of the acquired business. This liability is not contingent on future employment, and we recorded our estimate of the fair value of the contingent consideration liability utilizing the Monte Carlo simulation based on future revenue projections of Acessa, comparable company revenue growth rates, implied volatility and applying a risk adjusted discount rate. Increases or decreases in the fair value of contingent consideration liabilities can result from the passage of time, changes in discount rates, and changes in the timing, probabilities and amount of revenue estimates. In the current year, we recorded a gain of $6.7 million to decrease the liability to its fair value. The reduction in fair value was primarily due to a decrease in forecasted revenues over the measurement period, partially offset by a lower discount rate and accretion of the liability based on the passage of time.
Impairment of Intangible Assets and Equipment. As discussed in Note 2 to the consolidated financial statements, we recorded an aggregate impairment charge of $30.2 million during the first quarter of fiscal 2020. The impairment charge was allocated to the Medical Aesthetics long-lived assets of which $4.4 million was written off to operating expenses.
Restructuring and Divestiture Charges. We have implemented various cost reduction initiatives to align our cost structure with our operations and related to integration activities. These actions have primarily resulted in the termination of employees, As a result, we recorded charges of $9.3 million in fiscal 2021 and $15.3 million in fiscal 2020, primarily related to severance benefits. For additional information, please refer to Note 6 to our consolidated financial statements.
| ||Years Ended|
| ||September 25, 2021||September 26, 2020||Change|
|Interest Expense||$||(93.6)||$||(116.5)||$||22.9 ||(19.7)||%|
Interest expense in fiscal 2021 and 2020 consists primarily of the cash interest costs and the related amortization of the debt discount and deferred issuance costs on our outstanding debt. Interest expense in fiscal 2021 decreased compared to fiscal 2020 primarily due to a decrease in LIBOR year over year, the basis for determining interest expense under our 2018 Credit Agreement, lower interest rates on our Senior Notes due to issuing our 2029 Senior Notes and paying off our 2025 Senior Notes, and the pay-off of amounts outstanding under our accounts receivable asset securitization agreement in the prior year, partially offset by issuance costs expensed from the issuance of the 2029 Senior Notes and higher interest rate swap expenses.
Debt Extinguishment Loss
| ||Years Ended|
| ||September 25, 2021||September 26, 2020||Change|
|Debt Extinguishment Loss||$||(21.6)||$||— ||$||(21.6)||(100.0)||%|
In the first quarter of fiscal 2021, we completed a private placement of $950 million aggregate principal amount of our 2029 Senior Notes, The proceeds under the 2029 Senior Notes offering, together with available cash, were used to redeem our 2025 Senior Notes in the same principal amount. In connection with this transaction, we recorded a debt extinguishment loss of $21.6 million in the first quarter of fiscal 2021.
Other Income (Expense), net
| ||Years Ended|
| ||September 25, 2021||September 26, 2020||Change|
|Other Income (Expense), net||$||(5.4)||$||9.1 ||$||(14.5)||(159.3)||%|
In fiscal 2021, this account primarily consisted of a net foreign currency exchange loss of $17.1 million, partially driven by the mark-to-market and settling of outstanding forward foreign currency exchange and option contracts, and a charge of $1.8 million for the write-off of an equity investment, partially offset by a gain of $13.4 million on the cash surrender value of life insurance contracts related to our deferred compensation plan driven by current year stock market gains.
In fiscal 2020, this account primarily consisted of net foreign currency exchange gains of $3.2 million primarily due to hedging activities, a net gain of $3.2 million to reflect an adjustment to remeasure our initial investment in SSI in connection with purchase accounting and a gain of $2.3 million on the cash surrender value of life insurance contracts related to our deferred compensation plan.
Provision (Benefit) for Income Taxes.
| ||Years Ended|
| ||September 25, 2021||September 26, 2020||Change|
|Provision (Benefit) for Income Taxes||$||491.4 ||$||(108.6)||$||600.0 ||**|
** Percentage not meaningful
Our effective tax rate for fiscal 2021 was a provision of 20.8%. The effective tax rate was lower than the U.S. statutory tax rate primarily due to the impact of the U.S. deduction for foreign derived intangible income and the geographic mix of income earned by our international subsidiaries, which are taxed at rates lower than the U.S. statutory tax rate, partially offset by state income taxes and the global intangible low-taxed income inclusion.
Our effective tax rate for fiscal 2020 was a benefit of 10.8%. The effective tax rate differed from the U.S. statutory tax rate primarily due to a $313.4 million discrete net tax benefit related to the sale of the Medical Aesthetics business, the impact of the U.S. deduction for foreign derived intangible income, federal and state tax credits, and the geographic mix of income earned by our international subsidiaries, which are taxed at rates lower than the U.S. statutory tax rate, partially offset by state income taxes, reserves for uncertain tax positions net of releases resulting from statute of limitations expirations and favorable audit settlements, the global intangible low-taxed income inclusion, and unbenefited foreign losses.
Segment Results of Operations
We operate in four segments: Diagnostics, Breast Health, GYN Surgical, and Skeletal Health. Until December 30, 2019, our product portfolio included aesthetic and medical treatments systems sold by our former Medical Aesthetic business. We completed the disposition of the Medical Aesthetics segment on December 30, 2019 (the first day of the second quarter of fiscal 2020). The accounting policies of the segments are the same as those described in the footnotes to the accompanying consolidated financial statements contained in Item 15 of this Annual Report. We measure segment performance based on total revenues and operating income (loss). Revenues from product sales of each of these segments are described in further detail above. The discussion that follows is a summary analysis of total revenues and the primary changes in operating income or loss by segment.
| ||Years Ended|
| ||September 25, 2021||September 26, 2020||Change|
|Total Revenues||$||3,695.0 ||$||2,102.1 ||$||1,592.9 ||75.8 ||%|
|Operating Income||$||2,140.1 ||$||929.7 ||$||1,210.4 ||130.2 ||%|
|Operating Income as a % of Segment Revenue||57.9 ||%||44.2 ||%|
Diagnostics revenues increased in fiscal 2021 compared to fiscal 2020 primarily due to the increase in product revenues from the recovery of our core product lines, current year acquisitions and sales of our SARS-CoV-2 assays discussed above, an increase in royalty revenue from Grifols related to licensing our intellectual property to our COVID-19 assays for their sale in Spain, and the inclusion of laboratory testing service revenue from Biotheranostics.
Operating income for this business segment increased in fiscal 2021 compared to fiscal 2020 primarily due to an increase in gross profit from higher revenues partially offset by an increase in operating expenses. Gross margin was 73.2% in the current year compared to 65.2% in the prior year. The increase in gross margin was primarily due to increased sales of our SARS-CoV-2 assays, higher overall production of our Aptima assays and ThinPrep Pap Test reducing fixed overhead on a unit basis and increased royalty revenue from Grifols, partially offset by an increase in freight costs to ship product internationally, an increase in inventory reserves, higher field service costs, an increase in amortization of placed Panther instruments as the installed base has increased significantly year over year, and higher intangible asset amortization expense from the Mobidiag, Diagenode and Biotheranostics acquisitions in the current year.
Operating expenses increased in fiscal 2021 compared to fiscal 2020 primarily due to higher compensation and benefits driven by salary, commissions and our deferred compensation plan, an increase in headcount in the operations, service and sales departments, an increase in R&D project spend, higher acquisition transaction expenses, which included $11.5 million for a transfer tax related to the Mobidiag acquisition, higher bad debt expense, an increase in marketing initiatives, a lower BARDA credit of $3.9 million in the current year, and additional expenses from the Mobidiag, Biotheranostics and Diagenode acquisitions. These increases were partially offset by lower bonus expense.
| ||Years Ended|
| ||September 25, 2021||September 26, 2020||Change|
|Total Revenues||$||1,352.2 ||$||1,151.9 ||$||200.3 ||17.4 ||%|
|Operating Income||$||284.2 ||$||192.8 ||$||91.4 ||47.4 ||%|
|Operating Income as a % of Segment Revenue||21.0 ||%||16.7 ||%|
Breast Health revenues increased in fiscal 2021 compared to fiscal 2020 primarily due to an increase of $143.0 million in product revenue as discussed above and an increase of $57.3 million in service and other revenue. The increase in service revenue is primarily due to an increase in service contract revenue as the Breast Health business continued to convert a high percentage of our installed base of digital mammography systems to service contracts upon expiration of the warranty period, the addition of service contracts from the NXC Imaging acquisition and an increase in spare parts revenue.
Operating income for this business segment increased in fiscal 2021 compared to fiscal 2020 primarily due to an increase in gross profit from higher revenues with higher gross margin, partially offset by an increase in operating expenses. Gross margin was 56.4% in the current year compared to 52.8% in the prior year. The increase in gross profit was primarily due to the increase in product revenue and service revenue discussed above and lower costs related to the step-up in fair value of inventory of $2.3 million for the Somatex acquisition in the current year compared to $6.8 million for the SSI and Health Beacons acquisitions in the prior year. In addition, gross profit in the prior year was impacted by the COVID-19 pandemic, which resulted in decreased sales volume across the majority of our product lines, period costs for temporary facility shut-downs and reduced manufacturing utilization and higher inventory reserves.
Operating expenses increased in fiscal 2021 compared to fiscal 2020 due to due to higher compensation and benefits driven by higher commissions from increased sales and our deferred compensation plan, a $7.0 million charge related to the purchase of intellectual property, an increase in R&D project spend, an increase in consulting spend, an increase in marketing initiatives and the prior year included a benefit from the reversal of acquisition related accruals and a holdback. These increases were partially offset by lower bonus expense, lower stock compensation expense, a decrease in trade show expenses and lower bad debt expense.
| ||Years Ended|
| ||September 25, 2021||September 26, 2020||Change|
|Total Revenues||$||488.1 ||$||376.1 ||$||112.0 ||29.8 ||%|
|Operating Income||$||58.9 ||$||42.0 ||$||16.9 ||40.2 ||%|
|Operating Income as a % of Segment Revenue||12.1 ||%||11.2 ||%|
GYN Surgical revenues increased in fiscal 2021 compared to fiscal 2020 due to the increase in product revenues discussed above.
Operating income for this business segment increased in fiscal 2021 compared to fiscal 2020 primarily due to an increase in gross profit from higher revenues with higher gross margin, partially offset by an increase in operating expenses. Gross margin was 61.0% in the current year, compared to 59.1% in the prior year. The increase in gross margin was primarily due to the increased sales volume in the current year as the GYN Surgical business recovered to pre-COVID levels and the impact of the COVID-19 pandemic on the prior year, which resulted in decreased sales volume, period costs for temporary facility shut-downs and reduced manufacturing utilization. The increase in gross margin was partially offset by an unfavorable product mix of lower margin products, including our Fluent Fluid Management system and Acessa ProVu systems, higher intangible asset amortization expense from the Acessa acquisition, and an increase in inventory reserves.
Operating expenses increased in fiscal 2021 compared to fiscal 2020 primarily due to the inclusion of Acessa expenses of $15.0 million, higher compensation and benefits driven by our deferred compensation plan and commissions from the increase in sales, increased spending on research and development projects, higher travel, marketing initiative spend and consulting, and an increase in bad debt expense partially offset by a gain of $6.7 million related to the fair value adjustments for contingent consideration related to the Acessa acquisition.
| ||Years Ended|
| ||September 25, 2021||September 26, 2020||Change|
|Total Revenues||$||96.9 ||$||81.0 ||$||15.9 ||19.6 ||%|
|Operating Loss||$||(2.9)||$||(2.4)||$||(0.5)||20.8 ||%|
|Operating Loss as a % of Segment Revenue||(3.0)||%||(3.0)||%|
Skeletal Health revenues increased in fiscal 2021 compared to fiscal 2020 primarily due to the increase in product revenues discussed above.
Operating loss increased in fiscal 2021 compared to fiscal 2020 primarily due to an increase in operating expenses, partially offset by an increase in gross profit from higher revenues. Gross margin decreased to 31.4% in the current year compared to 33.2% in the prior year primarily due to higher service costs, partially offset by higher sales volume of our products and higher inventory reserves in the prior year.
Operating expenses increased in fiscal 2021 compared to fiscal 2020 primarily due to higher compensation and benefits and an increase in trade show expenses.
Fiscal Year Ended September 26, 2020 Compared to Fiscal Year Ended September 28, 2019
Discussions of year-to-year comparisons between fiscal 2020 and 2019 that are not included in this Form 10-K can be found in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Part II, Item 7 of the Company’s Annual Report on Form 10-K for the fiscal year ended September 26, 2020.
LIQUIDITY AND CAPITAL RESOURCES
At September 25, 2021, we had working capital of $1,841.9 million, and our cash and cash equivalents totaled $1,170.3 million. Our cash and cash equivalents balance increased by $469.3 million during fiscal 2021 principally due to cash generated from operating activities partially offset by cash used in financing and investing activities related to acquisitions of businesses, repurchases of common stock, net repayments of debt and capital expenditures.
In fiscal 2021, our operating activities provided us with $2,330.4 million of cash, primarily due to net income of $1,869.7 million, non-cash charges for depreciation and amortization aggregating $406.9 million, stock-based compensation expense of
$65.0 million and a debt extinguishment loss of $21.6 million. These adjustments to net income were partially offset by a decrease in net deferred tax liabilities of $70.1 million primarily due to the amortization of intangible assets. Cash provided by operations included a net cash inflow of $13.0 million from changes in our operating assets and liabilities. Changes in our operating assets and liabilities were driven primarily by a decrease in accounts receivable of $110.9 million primarily due to payments received from customers that had large balances from COVID-19 assay sales in our Diagnostics division and lower revenues in fourth quarter of fiscal 2021 compared to the fourth quarter of fiscal 2020, an increase in accounts payable of $20.4 million primarily due to the timing of these payments, and an increase in deferred revenue of $14.0 million primarily due to an increase in service contracts as the Breast Health business continues to convert a high percentage of its installed base of digital mammography systems to service contracts upon expiration of the warranty period, and a decrease in prepaid income taxes of $13.0 million. These cash inflows were partially offset by an increase in inventory of $84.1 million primarily due to the increase in raw materials and inventory to continue to support SARS-CoV-2 assay demand and production and an increase in prepaid expenses and other assets of $56.3 million due to an increase in technology implementation capitalized costs and licenses and the timing of value added tax receivables.
In fiscal 2021, our investing activities used cash of $1,329.6 million primarily related to net cash paid for our fiscal 2021 acquisitions of Biotheranostics, Diagenode, Somatex, and Mobidiag of $1,164.7 million and net capital expenditures of $156.2 million, which primarily consisted of purchases of manufacturing equipment primarily to expand the capacity of our molecular diagnostics manufacturing facilities and the placement of equipment under customer usage agreements.
In fiscal 2021, our financing activities used cash of $529.8 million, primarily related to $970.8 million for the repayment of our 2025 Senior Notes, $409.8 million for repurchases of our common stock, $250.0 million for the repayment of amounts borrowed under our revolving credit line, $75.0 million for scheduled principal payments under our 2018 Credit Agreement, $71.5 million for the net repayment of amounts borrowed under our accounts receivable securitization agreement and payments of $47.5 million for employee-related taxes withheld for the net share settlement of vested restricted stock units. Partially offsetting these uses of cash were net proceeds of $936.3 million under our 2029 Senior Notes, $320.0 million of proceeds under the accounts receivable securitization agreement that we restarted in the third quarter of 2021 to partially fund the Mobidiag acquisition, and $51.3 million from our equity plans, primarily from the exercise of stock options.
We had total recorded debt outstanding of $3.0 billion at September 25, 2021, which was comprised of our term loan under our then existing Credit Agreement of $1.38 billion (principal of $1.39 billion), 2029 Senior Notes of $934.5 million (principal of $950.0 million), and 2028 Senior Notes of $395.4 million (principal of $400.0 million), Securitization Program of $248.5 million, and $64.5 million in debt acquired in the Mobidiag acquisition.
2021 Credit Agreement (Subsequent Event)
On September 27, 2021, we refinanced our existing term loan and revolving credit facility with Bank of America, N.A. in its capacity as Administrative Agent, Swing Line Lender and L/C Issuer, and certain other lenders from time to time party thereto (the "2018 Credit Agreement") by entering into Refinancing Amendment No. 2 dated as of September 27, 2021, to the Amended and Restated Credit and Guaranty Agreement, dated as of October 3, 2017, as amended(the "2021 Credit Agreement"). Substantially all of the proceeds under the 2021 Credit Agreement of $1.5 billion were used to repay the amounts outstanding under the term loan under the 2018 Credit Agreement. Borrowings under the 2021 Credit Agreement are secured by first-priority liens on, and a first priority security interest in (in each case subject to certain liens permitted under the 2021 Credit Agreement), substantially all of our U.S. assets and the assets of the Subsidiary Guarantors. These liens are subject to release during the term of the facilities if we are able to achieve certain corporate or corporate family ratings and other conditions are met. The credit facilities (the "2021 Credit Facilities") under the 2021 Credit Agreement consist of:
•A $1.5 billion secured term loan ("2021 Term Loan") with a stated maturity date of September 25, 2026; and
•A secured revolving credit facility (the "2021 Revolver") under which the Borrowers may borrow up to $2.0 billion, subject to certain sublimits, with a stated maturity date of September 25, 2026.
As of the date of this Annual Report, there have been no borrowings under the 2021 Revolver.
Borrowings under the 2021 Credit Agreement, other than Swing Line Loans (as defined in the 2021 Credit Agreement), bear interest, at our option, at the Base Rate (as defined in the 2021 Credit Agreement), at the Eurocurrency Rate (as defined in the 2021 Credit Agreement), at the Alternative Currency Daily Rate (as defined in the 2021 Credit Agreement), or at the LIBOR Daily Floating Rate (as defined in the 2021 Credit Agreement), in each case plus the Applicable Rate (as defined in the 2021 Credit Agreement).
The Applicable Rate in regards to the Base Rate, the Eurocurrency Rate, the Alternative Currency Daily Rate, the Alternative Currency Term Rate and the LIBOR Daily Floating Rate is subject to change depending on the Total Net Leverage Ratio (as defined in the 2021 Credit Agreement). The borrowings of the Term Loan under the 2021 Credit Facilities initially bear interest at an annual rate equal to the Eurocurrency Rate for a one month interest period plus an Applicable Rate equal to 1.00%.
We are also required to pay a quarterly commitment fee calculated on a daily basis equal to the Applicable Rate as of such day multiplied by the undrawn committed amount available under the Revolver (taking into account any outstanding amounts under the LS Sublimit). This commitment fee is initially 0.15% per annum for the Revolver.
We are required to make scheduled principal payments under the 2021 Term Loan in increasing amounts ranging from $3.750 million per three-month period commencing with the three-month period ending on December 29, 2022 to $18.750 million per three-month period commencing with the three month period ending on December 26, 2025. The remaining scheduled balance of $1.335 billion (or such lesser aggregate principal amount of Term Loans then outstanding) on the 2021 Term Loan and any amounts outstanding under the 2021 Revolver are due at maturity. In addition, subject to the terms and conditions set forth in the 2021 Credit Agreement, we may be required to make certain mandatory prepayments from the net proceeds of specified types of asset sales (subject to certain reinvestment rights), debt issuances and insurance recoveries (subject to certain reinvestment rights). Certain of the mandatory prepayments are subject to reduction or elimination of certain financial covenants are met. These mandatory prepayments are required to be applied first to the 2021 Term Loan, second to any outstanding amount under any Swing Line Loans (as defined in the 2021 Credit Agreement), third to the 2021 Revolver, fourth to prepay any outstanding reimbursement obligations with respect to Letters of Credit (as defined in the 2021 Credit Agreement) and fifth to cash collateralize any Letters of Credit. Subject to certain limitations, we may voluntarily prepay any of the 2021 Credit Facilities without premium or penalty.
The 2021 Credit Agreement contains affirmative and negative covenants customarily applicable to senior secured credit facilities, including covenants restricting our ability subject to negotiated exceptions, to incur additional indebtedness and grant additional liens on our assets, engage in mergers or acquisitions or dispose of assets, enter into sale-leaseback transactions, pay dividends or make other distributions, voluntarily prepay other indebtedness, enter into transactions with affiliated persons, make investments, and change the nature of our business. In additions, the 2021 Credit Agreement requires the Borrowers to maintain certain financial ratios. The 2021 Credit Agreement also contains customary representations and warranties and events of default, including payments defaults, breach of representations and warranties, covenant defaults, cross defaults and an event of default upon a change of control of the company.
2028 Senior Notes
As of September 25, 2021, the total aggregate principal balance of the 2028 Senior Notes was $400.0 million. The 2028 Senior Notes are general senior unsecured obligations of the Company and are guaranteed on a senior unsecured basis by certain of the Company's domestic subsidiaries. The 2028 Senior Notes were issued pursuant to an indenture, dated as of January 19, 2018, among the Company, the guarantors and Wells Fargo Bank, National Association, as trustee. The 2028 Senior Notes mature on February 1, 2028 and bear interest at the rate of 4.625% per year, payable semi-annually on February 1 and August 1 of each year, commencing on August 1, 2018. We may redeem the 2028 Senior Notes at any time prior to February 1, 2023 at a price equal to 100% of the aggregate principal amount so redeemed, plus accrued and unpaid interest, if any, to the redemption date and a make-whole premium set forth in the Indenture. We also have the option to redeem the 2028 Senior Notes on or after: February 1, 2023 through February 1, 2024 at 102.312% of par; February 1, 2024 through February 1, 2025 at 101.541% of par; February 1, 2025 through February 1, 2026 at 100.770% of par; and February 1, 2026 and thereafter at 100% of par. In addition, if there is a change of control coupled with a decline in ratings, as provided in the indenture, we will be required to make an offer to purchase each holder’s 2028 Senior Notes at a price equal to 101% of their principal amount, plus accrued and unpaid interest, if any, to the repurchase date.
2029 Senior Notes
On September 28, 2020, we completed a private placement of our 2029 Senior Notes. The total aggregate principal balance of the 2029 Senior Notes is $950.0 million. The 2029 Senior Notes are general senior unsecured obligations of the Company and are guaranteed on a senior unsecured basis by certain of the Company's domestic subsidiaries. The 2029 Senior Notes were issued pursuant to an indenture, dated as of September 28, 2020, among the Company, the guarantors and Wells Fargo Bank, National Association, as trustee. The 2029 Senior Notes mature on February 15, 2029 and bear interest at the rate of 3.250% per year, payable semi-annually on February 15 and August 15 of each year, commencing on February 15, 2021. We may redeem the 2029 Senior Notes at any time prior to September 28, 2023 at a price equal to 100% of the aggregate principal amount so redeemed, plus accrued and unpaid interest, if any, to the redemption date and a make-whole premium set forth in the Indenture. We may also redeem up to 40% of the aggregate principal amount of the 2029 Senior Notes with the net cash proceeds of certain equity offerings at any time and from time to time before September 28, 2023, at a redemption price equal to 103.250% of the aggregate principal amount so redeemed, plus accrued and unpaid interest, if any, to the redemption date. We also have the option to redeem the 2029 Senior Notes on or after: September 28, 2023 through September 27, 2024 at 101.625% of par; September 28, 2024 through September 27, 2025 at 100.813% of par; and September 28, 2025 and thereafter at 100% of par. In addition, if there is a change of control coupled with a decline in ratings, as provided in the indenture, we will be required to make an offer to purchase each holder’s 2029 Senior Notes at a price equal to 101% of their principal amount, plus accrued and unpaid interest, if any, to the repurchase date.
Accounts Receivable Securitization Program
In response to the market uncertainties created by the COVID-19 pandemic, on March 26, 2020, we paid off the total amount outstanding of $250.0 million previously borrowed under our then existing accounts receivable securitization program. On April 13, 2020, we amended the Credit and Security agreement with the lenders, temporarily suspending the ability to borrow and the need to comply with covenants for up to a year. On June 11, 2021, we amended and restated the Credit and Security agreement to restart the Securitization Program (the "Securitization Program") and increase the maximum borrowing amount to $320.0 million. Under the terms of the Securitization Program, we and certain of our wholly-owned subsidiaries sell our customer receivables to a bankruptcy remote special purpose entity, which is wholly-owned by us. The amount that the special purpose entity may borrow at a given point in time is determined based on the amount of qualifying receivables that are present in the special purpose entity at such point in time. The assets of the special purpose entity secure the amounts borrowed and cannot be used to pay our other debts or liabilities. The Securitization Program provides for annual renewals.
Loans outstanding under the Securitization Program bear interest at LIBOR plus an applicable margin for defined tranches. As of September 25, 2021, there was $248.5 million outstanding under this program. The weighted average interest rate under the Securitization Program was 0.8% as of September 25, 2021.
Fiscal 2022 Acquisition
On October 14, 2021, we announced that we entered into an agreement to acquire Bolder Surgical, Inc., or Bolder, a privately held, U.S.-based company that provides advanced energy vessel sealing surgical devices, for approximately $160.0 million, subject to working capital and other customary closing adjustments. The closing is subject to certain regulatory approvals, but we expect the acquisition to close before the end of calendar 2021. The acquisition will add laparoscopic vessel sealing, dividing and dissecting devices to the GYN Surgical portfolio and also will enable Hologic to expand the use of Bolder’s devices to OB/GYN specialists.
Contingent Consideration Earn-Out Payments
In connection with certain of our acquisitions, we have incurred the obligation to make contingent earnout payments tied to performance criteria, principally revenue growth of the acquired business over a specified period. In addition, contractual provisions relating to these contingent earn-out obligations may result in the risk of litigation relating to the calculation of the amount due or our operation of the acquired business. Such litigation could be expensive and divert management attention and resources. Our obligation to make contingent payments may also result in significant operating expenses.
Our contingent consideration arrangements are recorded as either additional purchase price or compensation expense if continuing employment is required to receive such payments. Pursuant to ASC 805, Business Combinations, contingent consideration that is deemed to be part of the purchase price is recorded as a liability based on the estimated fair value of the consideration we expect to pay to the former shareholders of the acquired business as of the acquisition date. This liability is re-measured each reporting period with the change in fair value recorded through a separate line item within our Consolidated Statements of Operations. Increases or decreases in the fair value of contingent consideration liabilities can result from changes in discount rates, changes in the timing, probabilities and amount of revenue estimates, and accretion of the liability for the passage of time.
Currently, our primary contingent consideration liability is from our acquisition of Acessa Health. We have an obligation to the former Acessa Health shareholders to make contingent payments based on a multiple of annual incremental revenue growth over a three year period ending annually in December. There is no maximum earnout. Pursuant to ASC 805, the contingent consideration was deemed to be part of the purchase price and we recorded our estimate of the fair value of the contingent consideration liability utilizing the Monte Carlo simulation based on future revenue projections of the business, comparable company revenue growth rates, implied volatility and applying a risk adjusted discount rate. At September 25, 2021 this liability was recorded at $75.1 million and no contingent earnout payments have been earned or made.
Stock Repurchase Program
On December 9, 2020, the Board of Directors authorized a new five-year share repurchase plan, to repurchase up to $1.0 billion of our outstanding common stock. The prior plan was terminated in connection with this new authorization. As of September 25, 2021, $691.6 million remained available under this authorization. Subsequent to September 25, 2021, we repurchased 2.3 million shares of our common stock for $167.0 million.
Future Liquidity Considerations
We expect to continue to review and evaluate potential strategic transactions (both acquisitions and dispositions) and alliances that we believe will complement or enhance our business and stockholder value. Subject to the Risk Factors set forth in Part I, Item 1A of this Annual Report and the general disclaimers set forth in our Special Note Regarding Forward-Looking Statements at the outset of this Annual Report, we believe that our cash and cash equivalents, cash flows from operations, the cash available under our 2021 Revolver and our Securitization Program will provide us with sufficient funds in order to fund our expected normal operations and debt payments over the next twelve months. Our longer-term liquidity is contingent upon future operating performance. We may also require additional capital in the future to fund capital expenditures, repayment of debt, acquisitions including contingent consideration payments, strategic transactions or other investments. As described above, we have significant indebtedness outstanding under our 2021 Credit Agreement, 2028 Senior Notes, 2029 Senior Notes and Securitization Program. These capital requirements could be substantial. Our operating performance may also be affected by matters discussed under the above-referenced Risk Factors set forth elsewhere in this report. These risks, trends and uncertainties may also adversely affect our long-term liquidity.
We are currently involved in certain legal proceedings and claims. In connection with these legal proceedings and claims, management periodically reviews estimates of potential costs to be incurred by us in connection with the adjudication or settlement, if any, of these proceedings. These estimates are based on an analysis of potential litigation outcomes and settlement strategies. In accordance with ASC 450, Contingencies, loss contingencies are accrued if, in the opinion of management, an adverse outcome is probable and such outcome can be reasonably estimated. It is possible that future results for any particular quarter or annual period may be materially affected by changes in our assumptions or the effectiveness of our strategies relating to these proceedings.
Guarantees and Other Off-Balance Sheet Arrangements
We do not have guarantees or other off-balance sheet financing arrangements, including variable interest entities, of a magnitude that we believe could have a material impact on our financial condition or liquidity.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with U.S. generally accepted accounting principles. The preparation of these consolidated financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an on-going basis, we evaluate our estimates, including those related to revenue recognition for multiple element arrangements, allowance for doubtful accounts, reserves for excess and obsolete inventories, valuations, purchase price allocations and contingent consideration related to business combinations, expected future cash flows including growth rates, discount rates, terminal values and other assumptions used to evaluate the recoverability of long-lived assets and goodwill, estimated fair values of intangible assets and goodwill, amortization methods and periods, warranty reserves, certain accrued expenses, restructuring and other related charges, stock-based compensation, contingent liabilities, tax reserves and recoverability of our net deferred tax assets and related valuation allowances. We base our estimates on historical experience and various other assumptions that are believed to be reasonable under the circumstances. Actual results could differ from these estimates if past experience or other assumptions do not turn out to be substantially accurate. Any differences may have a material impact on our financial condition and results of operations.
The following is a discussion of what we believe to be the more significant critical accounting policies and estimates used in the preparation of our consolidated financial statements.
Our inventories include material, labor and overhead, and are stated at the lower of cost (first-in, first-out) or market. As a developer and manufacturer of high technology medical equipment and diagnostic test kits, we may be exposed to a number of economic and industry factors that could result in portions of our inventory becoming either obsolete or in excess of anticipated usage. Our policy is to establish inventory reserves when conditions exist that suggest that our inventory may be in excess of anticipated demand or is obsolete based upon our assumptions about future demand for our products and market conditions. Although considerable effort is made to ensure the accuracy of our forecasts of future product demand, any significant unanticipated changes in demand or expected usage could have a significant negative impact on the value of our inventory and our operating results.
We record tangible and intangible assets acquired and liabilities assumed in business combinations under the purchase method of accounting. Amounts paid for each acquisition are allocated to the assets acquired and liabilities assumed based on their fair values at the dates of acquisition. Contingent consideration, which is not deemed to be linked to continuing employment, is recorded at fair value as measured on the date of acquisition using an appropriate valuation model, such as the Monte Carlo simulation model. The value recorded is based on estimates of future financial projections under various potential scenarios, in which the model runs many simulations based on comparable companies' growth rates and their implied volatility. These cash flow projections are discounted with a risk adjusted rate. Each quarter until such contingent amounts are earned, the fair value of the liability is remeasured at each reporting period and adjusted as a component of operating expenses based on changes to the underlying assumptions. The estimates used to determine the fair value of the contingent consideration liability are subject to significant judgment, specifically projected revenues, and given the inherent uncertainties in making these estimates, actual results are likely to differ from the amounts originally recorded and could be materially different.
The fair value of identifiable intangible assets is based on detailed valuations that use information and assumptions provided by management, which consider management’s best estimate of inputs and assumptions that a market participant would use. We allocate any excess purchase price over the fair value of the net tangible and intangible assets acquired and liabilities assumed to goodwill.
We generally use the income approach in which cash flow projections on an after-tax basis are discounted using a risk adjusted rate to determine the estimated fair value of certain identifiable intangible assets including developed technology, in-process research and development projects, customer relationships, and trade names. The significant assumptions used to estimate the fair value of intangible assets include discount rates and certain assumptions that form the basis of the forecasted results specifically revenue growth rates. These significant assumptions are forward looking and could be affected by future economic and market conditions.
With respect to property, plant and equipment, we estimate the fair value of these assets using a combination of the cost and market approaches, depending on the component. Generally, we apply the cost or income approach as the primary methods in estimating the fair value of land and buildings as the market approach is less reliable based on potential significant differences between the property being valued and the potentially comparable sales of similar properties.
We test goodwill at the reporting unit level for impairment on an annual basis and between annual tests if events and circumstances indicate it is more likely than not that the fair value of a reporting unit is less than its carrying value. Events that could indicate impairment and trigger an interim impairment assessment include, but are not limited to current economic and market conditions, including a decline in market capitalization, a significant adverse change in legal factors, business climate, operational performance of the business or key personnel, and an adverse action or assessment by a regulator. Our annual impairment test date is the first day of our fiscal fourth quarter.
In performing the test, we either use the qualitative assessment permitted by ASC 350, Intangibles—Goodwill and Other, or the single step quantitative approach prescribed under ASC 350 including amendments under ASU 2017-04. Under the qualitative approach we consider a number of factors, including the amount by which the previous quantitative test's fair value exceeded the carrying value of the reporting units, the forecasts in our then-current strategic plan compared to the forecasts in the previous quantitative test, an evaluation of discount rates, long-term growth rates including the terminal year rate, if tax rates would have significantly changed, an evaluation of current economic factors for both the worldwide economy and specifically the medical device industry, and any significant changes in customer and supplier relationships. We weigh these factors to determine if it is more likely than not that the fair value of the reporting unit exceeds its carrying value. If after
performing a qualitative assessment, indicators are present, or we identify factors that cause us to believe it is appropriate to perform a more precise calculation of fair value, we would move beyond the qualitative assessment and perform a quantitative impairment test.
Under the quantitative impairment test, we perform a comparison of the reporting unit’s carrying value to its fair value. We consider a number of factors to determine the fair value of a reporting unit, including an independent valuation to conduct this test. The valuation is based upon expected future discounted operating cash flows of the reporting unit as well as analysis of recent sales and ratio comparisons of similar companies. We base the discount rate on the weighted average cost of capital, or WACC, of market participants. If the carrying value of a reporting unit exceeds its estimated fair value, we apply the single step approach under ASU 2017-04. As a result of this simplified approach the goodwill impairment is cal