Hologic Inc (HOLX) 2003 Q2 法說會逐字稿

Good afternoon, my name is Terry and I will be your conference facilitator today. At this time I would like to welcome everyone to the Cytyc Corporation Second Quarter Earning Conference Call. All lines have been place on mute to any prevent any background noise. After the speaker's remark, there will be a questions and answer period. If you would like to ask a question during this time, simply press "*" then the number "1" on your telephone keypad. If you would like to withdraw your question press "*" than the "2" on your telephone keypad. Thank you, Ms. Anne Rivers, you may begin your conference.

Thank you. Good evening everyone and welcome to Cytyc corporation's second quarter conference call. If anyone has not received a copy of the news release issued after today's close, please call FD Morgan-Walke at 212-850-5600 and one will be faxed to you immediately. The following presentation will include forward-looking statements within the meaning of the Federal Securities laws including statements about the company's expected sales performance, operating results, financial condition, and business strategy. These statements are subject to a number of risks and uncertainties including those detailed in the company's press release issued today and in its Form 10-K and other filings with the Securities and Exchange Commission. That could cause actual results and outcome to differ materially from those projected in the forward-looking statements. Please remember that these statements speak only as of today's date and that you should not place undue reliance on them. In addition, please note that this call is being recorded by Cytyc Corporation and its copy righted material. It cannot be recorded or rebroadcast without the company's expressed permission and your participation implies consent to our taping. With that I would like to turn the call over to Patrick Sullivan, Chairman, President, and Chief Executive Officer of Cytyc Corporation.

Thank you Anne and good evening ladies and gentlemen. This is Patrick Sullivan and would like to welcome you to our teleconference report on the performance of the company for the second quarter of 2003. Joining me on the call today, are Dan Levangie, President and Chief Executive Officer of Cytyc Health Corporation; Bob Bowen, Cytyc's CFO; and Chris Bleck; Cytyc's Vice President of Commercial Operations. During this evening's call, I would provide an overview of the business for the quarter and turn the call over to Bob for more detail on our finance performance. Chris will then provide an update on our core ThinPrep business and will then provide an update on our FirstCyte Breast Test product.

I am very pleased with Cytyc’s performance during the second quarter. As noted in our press release, revenues for the second quarter 2003 were 76.7m with net earnings of $18.4m or 16 cents per diluted share. These strong results were primarily driven by the 10% sequential increase in the ThinPrep Pap Test volume business. Our core business remains very strong and we are very enthusiastic about our future prospects. During the quarter, we achieved major milestones in all of our growth initiatives, including increased domestic adoption of the ThinPrep Pap test. By our estimation of 54m Pap tests in United States annually, we currently estimate our market share to be approximately 66%, an increase of 6 market share points from the first quarter.

We received FDA approval for the ThinPrep Imaging System on June 6th and shipped the first imaging system to Columbia Presbyterian in New York. We expect to place a total of 20 systems by year end. We continue to scale up manufacturing and our current manufacturing plan is 20 systems for this year and 100 systems for 2004. Today, we have received 17 letters of intent from existing ThinPrep customers. We’re very excited about the commercial opportunity to this product would represent as it has the potential to double the size of our existing business and further solidify our relationships with our customers. As you know, CMS has established a reimbursement amount at $37 for the imaging code, $9 above the existing reimbursement for the ThinPrep Pap test. We conducted a preliminary survey of insurance carriers and believe that about 100m covered lives are covered with favorable reimbursement for the ThinPrep Imaging System. We expect to market this imaging system on a recurring revenue model or price per test basis, and if you take the 120 systems that we expect to have installed in laboratories by the end of 2004, this product opportunity represents a $40-50m business force in 2005. Our international initiatives were focusing on increasing sales in Europe and are encouraged by the recent information release in the pilot study in the U.K. We believe the final report will be issued late summer or early fall and as a reminder this is 4.5-5m test represented in the United Kingdom.

Our FirstCyte Breast Test continuous to gain momentum thought the medical community and during the quarter we announced expanded reimbursement and the endorsement of American Society of Breast Surgeons. In addition, we announced collaborative research agreements with both Harvard and Northeastern University. Our balance sheet remains strong with over $153m in cash at the end of the second quarter. And, during the quarter we were active with our stock repurchase program, repurchasing $3.3m shares of Cytyc common stock with $34.5m in cash. In addition, the Board has just authorized an additional repurchase of $50m of Cytyc common stock. I would like to now turn the call over to Bob.

Thank you Pat. My remarks today will largely compare the financial results of the second quarter 2003 with the results of the second quarter 2002. I will also provide selected comparisons to the first quarter of 2003. Additionally, I will be giving guidance for the third quarter and full year 2003. We plan to provide guidance for 2004 during our third quarter conference call following the completion of our 2004 internal planning process. In compliance with the SEC's regulation FD, this guidance is being disseminated simultaneously to all parties. Further, as noted at the outset of this conference call, listeners are cautioned that the company's guidance is forward looking in nature and subject to risks and uncertainties, which could cause actual results to differ including without limitation the risks detailed in the press release we issued earlier today in our SEC filings including our 2002 10-K.

Total worldwide revenue for the second quarter of 2003 was 76.7m, an increase of 33.5m or 78% from the second quarter 2002. Domestic revenues totaled 69.2m, an increase of 30.6m or 79%. And, international revenues totaled 7.5m, an increase of 2.9m or 65%. The weaker dollar accounts for approximately $1m of the $2.9m international revenue increase. Revenue from domestic shipments of ThinPrep T2000 and T3000 instruments was approximately $1.2m and we sold 37 new instruments in the second quarter. We believe T2000 and T3000 quarterly instrument revenues will remain in the range of $1-1.5m through 2004. Revenue from domestic shipments of non-gyn products was approximately $2.4m and was 16% higher than the second quarter 2002. In each of the last two quarters non-gyn revenue has grown in the 16-22% range year-over-year. Revenue from domestic sales of ThinPrep Pap Test was approximately $63.6m, an increase of $30.4m or 92% from the second quarter 2002. Average selling prices increased 3% and shipment volume levels which were nearly 8.9m tests increased 85%. Compared to the first quarter 2003, second quarter ThinPrep Pap test revenues were up 7% with average selling prices lower by approximately 2% and shipment volume levels up nearly 10% -- nearly, 800,000 tests. Shipment volume was higher in the large and small accounts segments. Large accounts which include Quest, LabCorp and AmeriPath, equaled 50% of total ThinPrep Pap test shipments, compared to 51% in the first quarter of 2003, and 60% in the second quarter 2002. The decrease in average selling price from the first quarter 2003 was attributable to newly contracted pricing with Quest and previously contracted volume based pricing adjustments with LabCorp. Average selling prices for all other accounts as group were essentially unchanged. Based on an estimated quarterly market size of 13.5m tests, which equates to an annual market size of 54m tests, we estimate our market position in the second quarter 2003 was 66%. This compares to our market position calculated in the same fashion of 60% in the first quarter 2003. We are extremely pleased with the broad based growth in volume as well as the average selling price points. We believe we will continue to grow test volume with relatively stable pricing through 2004. The gross margin rate of 80.2% was up 6.4 points from the second quarter 2002 largely due to increased sales of the ThinPrep Pap Test, our highest margin product. Compared to the first quarter of 2003, the gross margin rate was 2.8 points lower, largely as a result of increased manufacturing costs related to the ThinPrep Imager launch and increased service costs related to building out the service organization to support the ThinPrep imager launch and instillation efforts. Changes in selling price levels from the first quarter reduced gross margin rates approximately 0.5 percentage point. We expect the ThinPrep Imager launch costs will continue for the balance of the year. Assuming we stay on our plans, we believe gross margin rates will be approximately 80% plus or minus 1 point. Operating expenses of 31.8m were 3.2m or 9% lower than the second quarter of 2002. Research and development expenses of 3.8m were 700,000 lower due to largely to lower spending levels on the ThinPrep Imaging System development. Sales and marketing expense of 21.1m was 22.4m higher due largely to higher marketing costs related in part to the ThinPrep Imager launch and higher international expenses attributable in part to a weaker U.S. dollar. G&A expense of 6.8m was 1.3m higher due largely to increased business insurance costs.

In the second quarter of 2002, we recorded a $6.1m charge related to the costs associated with the Digene transaction, which as you know did not close. We plan to continue to invest in our growth initiatives. The ThinPrep Imager, the FirstCyte Breast Test, international market development and molecular diagnostics in the form of personnel co-development projects, marketing programs and medical education. We believe our operating spend will be approximately $2m higher in the third and fourth quarter compared to the second. Operating margins of 29.7m or 38.8% compared to an operating loss of 3.1m in the comparable period of 2002 including the Digene transaction costs. The company recorded second quarter earnings of 18.4m or 16 cents per diluted share compared to a loss of 1.6m last year including the Digene transaction cost. For June year-to-date period, we recorded earnings of 38.1m or 33 cents per diluted share compared to net income of 16m or 13cents per diluted share in the second half -- in the first half of 2002, including -- again including the Digene transaction cost. We believe third quarter revenues will be in the range of $77-79m with fully diluted earning per share of approximately 15-16cents. For the full-year, we remain comfortable with previous guidance of revenues in the range of $300-315m and fully diluted earnings per share of 62-66 cents. We believe we will be at or near the middle of the revenue guidance and in the upper half of the earnings guidance range, 64-66 cents.

Turning to the balance sheet; key elements of working capital were in line with accounts receivable totaling $40.8m, $6.2m or 18% higher than the second quarter of 2002, while year-over-year revenues increased 78%. Day sales outstanding of 45 days compared to 70 days at the end of the second quarter 2002 and inventory turnover was slightly improved to 4.4 turns compared to 4.3. During the second quarter, our cash balance decreased by $19.7m to $153.3m. We generated 13.9m of cash from operating activities including the use of 17m for estimated federal tax payments and used 34.5m to repurchase approximately 3.3m shares of Cytyc stock. We believe our strong balance sheet continues to provide us with adequate flexibility to execute our strategy. I’d like to now turn the call to Chris Bleck.

Thanks Bob. The fundamentals of the core ThinPrep Pap Test business are very strong, and we continue to make progress against the conventional Pap smear, as we establish the ThinPrep Pap Test as the preferred method of cervical cancer screening. Physicians continue to utilize the ThinPrep Pap Test based on the wealth of clinical data, the FDA approved indications and their own clinical experience. On July 1, 2003, we announced at a quantitative survey published in a recent issue of Gynecologic Oncology reported on the improved sensitivity and specificity of ThinPrep Pap Test compared to the conventional Pap smear for the detection of cervical dysplasia. The study analyzed 24 previously published studies to assess the consistency of the two methods and to assess the accuracy of each method. Based on their findings, the authors conclude, "According to our analysis wide application of the ThinPrep technology potentially may result in cytologic diagnosis of an additional 162,000 patients with high-grade dysplasia and 3,000 with invasive cervical carcinoma who otherwise would have been missed by utilization of conventionally prepared Papanicolaou smears or false negative smears. We conclude that the ThinPrep liquid-based cervical cytology should be considered the standard of care as this technology has the potential to further reduce the incidence and increase the survival of patients with invasive cervical carcinoma as a result of early detection." In addition during the second quarter, our lab sales team continued to focus on lab standardization. As we have reported, lab standardization means that a laboratory has decided that based on clinical data and their own in house experience that full 100% conversion to the ThinPrep Pap Test is in the best interest of the laboratory, their physician clients and patients being tested. As a result, the lab will proactively announce the decision to standardize all of their cervical cytology testing on one method the ThinPrep Pap Test method. Since the beginning of the year, 172 labs have issued standardization letters. This is an additional 18 standardization letters over the prior quarter. We believe another indicator of increasing conversion is that ThinPrep instrumentation placements. In the quarter, we placed an additional 68 instruments worldwide. This brings the total worldwide installed base of ThinPrep instruments to nearly 2,600. Our lab sales team continues to focus on the subjective and we believe we will continue to drive conversion. During the second quarter in the U.S., we placed new T2000 instruments in 31 new customers, which represent approximately a 0.5m tests on an annual basis.

I am pleased to announce that during the second quarter, we signed a two-year supply agreement with Quest Diagnostics. This relationship remains mutually beneficial and we are in constant dialogue regarding a number of initiatives. As Pat mentioned earlier, we are very excited about the recent approval by the FDA for the ThinPrep Imaging System. The ThinPrep Imaging System should allow laboratories to increase their productivity and benefit from improved sensitivity and specificity compared to manual reviewed ThinPrep slides. We have completed the sales force training, and the manufacturing of the initial units for sale.

On June 16, 2003, we announced the first shipment of the ThinPrep Imaging System to Columbia Presbyterian Medical Center in New York. As Pat said, we have 17 letters of intent and we are negotiating numerous contracts with current ThinPrep customers. We will announce future placements as shipments occur. As previously reported, we received confirmation from the American Medical Association CPT Committee that the ThinPrep Imaging system qualifies for the new code 88175. The code has been established for computer assisted screening with manual re-screening under physician review. The code allows for an increase in CMS reimbursement from approximately $28-37 per test result. We will be working with individual payers and laboratories to establish this new code and reimbursement level. We have confirmed that approximately 100m [inaudible] are currently covered by pairs that have established favorable reimbursement in the U.S. As Pat mentioned, the ThinPrep Imaging System has the potential to double our current business.

Cytyc international performed well in the second quarter with a significant increase in a number of ThinPrep Pap Tests versus the same period last year. The implementation of the Scottish Cervical Screening Program is running ahead of schedule and is a strong contributor of results. International sales were approximately 10% of total company’s sales for the second quarter and combined with the U.S., we sold nearly 10m units. At this time I’d like to turn the call over to Dan.

Thanks Chris. As we’ve discussed on previous calls, the cornerstone of our efforts and [increased] utilization of the FirstCyte Breast Test is a focus clinical referral center strategy that capitalizes on the structure and the experience of the Cytyc’s sales and marketing organization. A prime example of this strategy that I have provided to you in the past is our partnership with Northwestern University Medical Center in Chicago. We partnered with Northwestern and their breast cancer experts in their multidisciplinary breast cancer center called the Lynn Sage Cancer Center. Together with these local experts from Northwestern, our OBGYN reps had begun educating the local primary care physicians about breast cancer risk assessment. Together we are helping them identify high risk patients in their practice, and we are having those patients referred to Northwestern for evaluation by the team at the Lynn Sage] Center, utilizing a comprehensive array of test and services offered, including a FirstCyte Breast Test.

As of this time, we have established partnerships with 91 breast centers throughout the United States. Each of these centers is in a different stage of roll out with some being fully up and running and operational, while others are in the earlier stages of development. We are working with each of these centers to announce their partnership with Cytyc to their referring [clinicians] to incorporate the FirstCyte Breast Test into their risk assessment protocol, to customize risk assessment educational materials for their clinicians, and to generally prepare for increased patient referral and increased use of the FirstCyte Breast Test. A number of these centers have scheduled and conducted local medical education events and most importantly have seen additional referrals already from community-based physicians, who are regularly conducting risk assessment discussions with their patients and are recommending further evaluation for those with increased breast cancer risk. During the quarter, we trained an additional 31 centers to perform the FirstCyte Breast Test, bringing the total number of trained clinicians to 310. Further 10 additional laboratories were trained during the quarter to interpret FirstCyte specimens bringing that total to 184 laboratories.

On the reimbursement front, two significant milestones were achieved during the quarter. First, as we announced in May, the American Society of Breast Surgeons issued a physician statement that endorse the FirstCyte Breast Test as a crucial element in the evaluation of women at risk of developing breast cancer. This medical specialty is significant with respect to their role in treating breast disease, and their position statement will carry greater weight with insurers who are in the process of determining coverage for FirstCyte. Second, during the quarter, we continued to make solid progress adding Blue Cross Blue Shield of Michigan with 5m covered lives, Vytra in New York, and Care Choice in Michigan. Together these plans represent more than 5m covered lives bringing the total covered lives for the FirstCyte Breast Test to over 38m. As announced recently, we’ve entered into an exclusive license agreement with Nastech Pharmaceuticals for the intellectual property held by that company relating to the collection of Nipple Aspirate Fluid for diagnostic purposes. We believe that this licensing significantly enhances our position in the area of diagnostic approaches that may emerge from our research and development efforts based upon Nipple Aspirate Fluid. While these approaches may be years away from commercialization, this exclusive license places Cytyc in a position of strategic strength as these approaches are defined and emerge.

Over the past quarter, we had a strong performance by the FirstCyte team in implementing our clinical referral center strategy and working with these centers to establish risk assessment as a standard of practice in the primary care study. In the current quarter, we continue to add new centers to our list of CRCs and we'll further expand our educational efforts for primary care OBGYN physicians. We'll focus on patient identification and referral to centers for comprehensive breast cancer risk assessment and the FirstCyte Breast Test through the efforts of our OBGYN sales team together with experts from breast centers. Overall the clinical referral center strategy is being executed by the CYTYC sales and marketing team, and FirstCyte Breast Test will be established as a standard for assessment of breast cancer risk in the United States. I would like to now turn the call back to Pat.

Thanks Dan. Operator, I would now like to open the call up for questions.

And I would like to remind everyone if you would like to ask a question, press "*" then the number "1" on your telephone keypad. We will pause for just a moment to compile the Q&A roster. Your first question comes from Wade King of Wells Fargo.

Hi guys, good evening. Thanks for the detail. A couple of question, if I could, please. First, Bob, do you think that you could be a little bit more specific on the plan for the rise in operating expenses especially that component associated with the Imager launch. For example, we have 28m in OPEX in the quarter and it was about 3m above that, would you consider a $30-32m level on OPEX per quarter for the second half to be a reasonable assumption?

Well, I think what I said, Wade, was we would be couple of million higher than the second quarter in the third and fourth quarter.

[Oh sorry] a couple of million higher than your performance in the second quarter. So that would be of the order of may be $33-34m?

Right.

Per quarter?

Right.

Okay and -- very good. Secondly, you alluded to contract negotiations with specific labs regarding the imager. Could you talk a little about what the dynamics of those negotiations are? What the customers are seeking in terms of their financial part of the deal? What they are most focused on? And can you also talk about how significant for them is your enhanced sensitivity claim associated with your approval?

I think it's -- this is Chris Bleck speaking. There is -- it goes back to the three fundamentals -- their improved sensitivity, specificity, and as labs go down the road of standardization, they really look at increasing the quality of the results. As we mentioned, the imager does qualify for potential increase in reimbursements, so we look to share in that reimbursement with the lab and per the approval from the FDA, I am approximately doubling a 100% increase in productivity, so as the labs operationalize or incorporate the technology they have the potential for significant cost savings within their lab. So it’s really the nature of the discussion. Every lab has a different primary point that’s important to them, and we try to highlight that in the negotiation process.

In terms of your revenue per disposable, in other words your revenue per slide processed and imaged, however; is there a significant variation in your contracted arrangement with each particular lab?

I would say not today Wade. I mean we have just got 17 in which I think is from my perspective a great performance by the sales and marketing team. But, you know, the pricing is very similar across those contracts.

Okay thank you and last question will get back in line. This is for Dan. Dan you mentioned that you are now into 91 of the breast centers in the U.S. You referenced in the first quarter call that there are 100 high-volume centers that care for most of the patients with breast cancer of this country. When you said 91, are you talking about you are now at 91 out the 100 because in the first quarter I believe you said you were in the 50 out of the 100?

Yes we have partnerships with 91, I don't know if I said that there were 100 that is the majority of the breast cancer work. What I said, I believe, is that we were targeting 100 centers for this year. So we are well ahead of where we need to be in terms of achieving partnerships with the 100 targets that we have set for the sales team and now we are really turning our focus on generating revenue through each of those centers.

And Dan, what's the current number on the sales force targeting obviously ductal lavage to the breast cancer surgeons?

Yes. Can you clarify for me? I think I am not sure what you are asking?

The question is what is the size now of your sales growth selling ductal lavage to breast cancer surgeons?

20.

So that’s unchanged. Is that correct?

That’s correct.

Okay. Thank you for very much.

The next question comes from Tom Gunderson of Piper Jaffray.

Hi, good evening. I guess I will follow up a little up with the sales line specifically on U.S. and 10% sequential increase. There wasn't anything that I heard on either the LabCorp or the Quest calls that would lead us to believe that they had 10% increases, could you elaborate a little bit more with what's going with maybe some of the smaller labs, maybe more on the western side, and as part of that were there any incentives going on in the quarter that were unusual?

I will answer the last question first Tom. There we no incentives going on in the quarter that were unusual.

Okay.

Tom, this is Bob. There are no incentives or pricing Q2 versus Q1, and all other segment was flat. The -- interestingly, I am not going to talk about Quest or LabCorp individually, but our large lab segment as we defined it here is Quest, LabCorp, and AmeriPath combined grew up in the high-single digits in the second quarter versus the first relative to test shipped and the all other accounts segment grew in the low-double digits. So we did have stronger growth in the all other accounts segments, but we also had growth in the large accounts segments, so we – I guess we didn’t -- may be we just didn’t see what Quest and LabCorp did. At least, may be it was not our segment that they were referring to in their call, I would also say that I think you asked about the growth by region, I don’t recall it specifically by region, but I do know that the west coast did grow quite nicely in the quarter I just don’t recall the numbers of the top of my head.

And remind me again, I felt like Pat could audition for the FedEx commercial guy with his fast talking, there was a lot of data going through, the percentage that [alleged], sorry LabCorp, Quest, and AmeriPath out of the total was 50 --

50%.

50% grew in high-single digits; the other 50% grew in low-double digits.

Yes.

Is there a feeling out there I mean this is -- I get the sense of acceleration, is there a feeling out there that’s what going on? Are we finally at the so-called tipping point? Are we -- is there anything else going on other than just people finally seeing the light that they can’t be in the minority?

I think the [inaudible]. This is Chris Bleck. There are two initiatives. One is to continue to go after non-user customers. In this quarter, we brought on 31 new customers, a little bit smaller in total volume, but we are going to continue to focus on them, as well as labs that are not at 100% levels of ThinPrep. So again I think we have two initiatives for new customers and current customers to get to the 100% standardization letter. And obviously there is more potential in the mid-west and southwest and west because of that, you know, high current conversion rates in the northeast and down the east coast.

Okay and then last question on a different topic and that's on the imager. As I understood it earlier in the quarter, the plan would be to do 5 or 6 what I would call [data] sites to get a feel for what was going on and you are going to do 20 by the end of the year. Is that still the plan that we would expect the next may be 4 or 5 sites to be placed soon and then the remainder of the 20 after some evaluation period?

That's correct.

Okay. Thank you.

Your next question comes from Jessica Santalipel (ph.) of Thomas Weisel.

Hi good evening. First question, could you clarify for me the definition of the large lab segment? I believe last quarter you defined it as six private sector labs, plus the Army, Navy, and Air Force?

Yes that's correct.

Is that definition changing sequentially?

There wasn't a - I guess the data that I had readily available for me this quarter was Quest, LabCorp, and AmeriPath and so that's how I defined. I don't think the other accounts are so large that they move the needle substantially.

Okay and as far as the new Quest contract, we understand that volume thresholds are now trigged differently. Is this the case and how will that effect results and pricing going forward?

We are not prepared. At this time, we have mutually agreeable contract that's confidential information on pricing and contracting.

Okay. Alright. Thanks very much.

Thank you.

Your next question comes from Jason Wittes of Morgan Stanley.

Hi folks. Couple of questions mainly on spending. Spending in the second half was about $2m higher than we anticipated, could you kind of break that out as to that imager replacement revenues, money spent on placing imagers or just part of that first side as well?

It’s a little bit of both, Jason, we are focusing you know heavily on the imager. We think that’s our biggest near-term revenue opportunity, and so there is a lot of activity around the imager launch. There is also some spending in the FirstCyte Breast Test area, particularly related to the serial lavage trial that was kicked off in the second quarter, as those patients are [accrual] into that trial.

How long is that trial scheduled to last, the serial lavage trial?

The enrollment of the patient [cover] will take place over a period about a year and those patients will be followed forward in total a period of three years.

Are you -- related to the spending, are you guys able to sort of give an indication, I think, you had said in the past somewhere around $15m a year's spend on upwards spent on FirstCyte, is that a fair assessment or is it -- is that the ballpark or is that a little higher now at this point?

It’s in $15-20m range.

Okay. And, I guess the question is at what point you should reassess the whole program? When do you feel you get enough data to know whether it's worth to keep investing?

Well I think, we are certainly encouraged by the results that we are seeing and the strategy that we’ve engaged in is being well received and the teams doing a good job, so we've given no consideration at this time.

So, you don’t have like -- sort of like may be your [inaudible] -- you take look recollect and say

What, I think, we look at all programs on a regular basis as we go through a financial planning process and we will continue to do that with all programs at the company.

Okay. One last question regarding this and that is, I guess, that if I subtracted all the revenue lines that you broke out, I get about $2m left over unaccounted for.

Yes, that’s correct.

Is that FirstCyte or is that other revenues?

No, there is other revenue in there. There is the Digene co-promotion revenue, which is about a $0.5m. There is the FirstCyte revenue and there is accessory service and freight that's recovered from most of our customers.

Okay, can I push a little and just ask what -- what the FirstCyte revenue was -- in the $1m range, could I assume?

You could push some -- I don’t think we are going to break that out?

Okay, fair enough. Thank you very much.

Your next question comes from Bruce Cranna of Leerink Swann.

Hi, good afternoon everyone. Just a quick couple of follow-ups here, I think, I got the year-over-year ASP and volume change for U.S. ThinPrep, but could you run by the sequential change on both those metrics for me again please?

Yeah, the ThinPrep Pap Test revenues were up 7%, Q2 versus Q1.

Okay.

Average selling prices were lower by 2% that was all due to Quest and LabCorp and shipment volume levels were up 10% about 800,000 tests.

Okay so on the -- again back on the large lab commentary so, we saw high single-digit growth, but I guess, what we are saying is ASP is down a little bit but the volume growth is making up for that, obviously.

Yes.

And flat for others, is it fair to say that I am kind of curious if you are seeing a little better pricing on the smaller lab, I know, on the smaller lab side there was some discussion on that last quarter. Is that still fair to be thinking with that way that --.

We [inaudible] we have for years seen, you know, have had price negotiations with all of our customers and we don't see that what's been occurring in the second quarter as any difference than what's been occurring in the past.

Okay and one other quick point on the placements again, on the T2000, T3000 placements, I think, I picked up the number 37 new instruments, was that just U.S.?

That's correct, that's domestic.

And then the ex-U.S. number was -- if you gave it.

60 in total.

It was 68 in total.

Yes, 31 ex-U.S.

Okay and last question, if were kind of 66% share penetration today, yeah I know, historically, we always kind of thought sequentially at that moment for two-three points a quarter, is that still a reasonable way to kind of look at things going forward or should we [rein] that in?

As I think about it, I think, LabCorp even mentioned on their conference call that they expected over the next 18 months to have liquid base, which will include both ThinPrep and a competitive product to be in the 85% range. So, I think that the one of the large lab's view and I wouldn’t disagree with them.

Okay. So, that's still reasonable and ideal account carry forward?

Yeah.

Great and thank you.

Your next question comes from Ed Shenkan of Wells Fargo Securities.

Good afternoon gentlemen. I wanted to ask you little bit more about the imagers that you have placed may be you can tell us about the experience on reimbursement, you know, to-date is it specific by geography, you know, what you might have noticed?

Yeah, it's too early today. The first system is coming up; the second location is getting some of the early accessories, and there have not been a lot of submissions to insurance carriers for payment. We made our surveys into the carriers through the labs and they confirmed us reimbursement. So we don't have -- we have expectations that it will occur and we are getting all positive signals, but we do not have enough experience yet --

Okay.

-- to answer that question.

And with the FirstCyte ductal lavage test, do you think it will be appropriate to consider, you know, adding more reps and at what point you know, will you consider that you know, if you have 20 reps currently in and your penetrations getting better as Dan, pointed out? If you can just talk a little bit more about your thoughts of when you would add reps and what would be -- what you would be looking for?

I think we are staffed adequately today with our sales group to begin to generate usage through these 91 centers and focus that theme back on. You know each one will have approximately 5 at each centers to manage and to generate revenue through. I think we’ll stay intact with that size of investment. If we see upside potential, I think we’d go after that with an additional investment in sales and marketing, but at this point of time I think 20 is appropriate.

Okay and in the current quarter or last quarter there was a label change for the Digene HPV test, so you could talk about what, you know, -- how that changes anything for you guys, you know, besides from your promotion deal with doctors and how they are using the two tests in tandem?

From my perspective it doesn’t change our opportunity at all. The ThinPrep Pap test has been demonstrated in multiple clinical trials for the significant improvement and testified [inaudible], the two products are completely complimentary in physician's offices, so I don’t really see they impacting us.

Okay. Was there any impact at all from the TriPath label change with the account penetration or anything that you noticed there?

No nuthin different from what we seen in the past.

Okay. Good thank you gentleman.

Once again I would like to remind everyone if you would like to ask a question, please press "*" then the number "1" on your telephone keypad. We will pause for just a moment to compile the Q&A roster. Once again we are pausing to compile the Q&A roster. Your next question comes from Amrit Nagpal (ph.) of Wontord Capital (ph.).

Hi can you hear me. Just three quick questions, could you just repeat the third quarter guidance I missed it when you went thorough it?

77-79m in revenue and 15-16 cents in earnings per share diluted.

Okay. And given some of the spending was a little bit higher than some of [south side] analysts have been looking for. Was there any incremental spend associated with re-detailing you existing ThinPrep accounts give TriPath's expanded label, was there an extra effort made by your sales force on that front?

No I would say that efforts were the same as is been for a long, long time.

Okay. And then the final question was the 10% volume increase can we assume that reflects end-user demand or was there in your estimation any inventory billed given your recently renewed contract with Quest?

All indications we have is that represents end-user demand.

Thanks very much.

We have a follow-up question from Tom Gunderson of Piper Jaffray.

Hi, quick question for Q3 modeling, the Digene co-marketing dollars go away on revenues, do I take away that same amount half of gross margin assuming no cost to goods?

Yes.

Thank you.

Our next question comes from Ron Opel of Morris & Cabot (ph.).

Yes the 2% price change in ThinPrep products domestically quarter over quarter do you see that as a one-time event and would you explain, if in fact, that's the way you see it, would you explain your rationale?

I see it largely as a one-time event; however, I would note that the Quest contract was renewed effective May 1. So we had 2 months of pricing based on a new contract and one month based on the old basis, so there will be a one month adjustment which is not going to be a material number. But other than that I think that those contracts are negotiated; they have pricing incorporated in them, there are volume based incentives, and I would expect the quarterly pricing with the exception of that one month adjustment to be pretty much constant for the balance of the year.

What is the status of your contract with LabCorp?

It's valid through '04. It expires at the end of 2004.

And are there price ranges in these contracts or are there are actually fixed prices and volumes?

Prefer not to go into any more details on our contracts with large customers, Ron.

Thank you.

We have a follow up question from Wade H. King of Wells Fargo Securities.

As a follow up in England, you are expecting, you know, the NICE committee to come back to you and -- is your expectation to rollout in England in '04 or sooner? How's that changed in? Are there have been any additional questions that you have gotten other than what we have seen on the NICE committee website, you know, that you could comment on?

No, we saw are very favorable. We haven't had to respond to any additional questions at this point and following their guidance through the NHS, we will do our rollout, may have some impact early or, you know, at the end of this year, minimal -- and the primary impact will be in 2004.

Okay, thank you.

Thank you. I would like to now turn the call back over to Mr. Pat Sullivan for closing remark.

Thank you operator. We are very focused on continuing the U.S. conversion of the ThinPrep Pap Test, increasing market share of 6 percentage points Q2 over Q1. Very excited about the commercial opportunity where we stand with the ThinPrep Imaging System given the potential increased reimbursement for our laboratory partners, increasing the adoption of the FirstCyte Breast Test for breast cancer risk assessment, capitalizing on the international opportunity with the NICE Committee report being a near term opportunity we think will happen in late summer or early fall, and to continuing to evaluate business development opportunities to leverage both the ThinPrep technology and our distribution channel. Thank you for your participation.

Thank you this concludes today's Cytyc Corporation second quarter earnings conference call. You may now disconnect.