Hologic Inc (HOLX) 2003 Q4 法說會逐字稿

Good evening and welcome to the Cytyc Corporation fourth quarter earnings release conference call. At this time, all participants have been placed on a listen-only mode. Following the presentation, the floor will be open for questions. At this time, I would like to turn the floor over to your hostess, Ms. Anne Rivers. Ma'am, you may begin.

Thank you. Good evening everyone, and welcome to Cytyc Corporation's fourth quarter conference call. If you have not received the copy of the news release issued after today's close, please call The Ruth Group at 646-536-7010 and one will be faxed to you. 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 actual results and outcomes 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 is copyrighted material that cannot be re-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. Pat?

Thank you Ann. Good evening ladies and gentlemen. This is Patrick Sullivan. I would like to welcome you to our teleconference report on the performance of the company for the fourth quarter and year-ended December 31st 2003. Joining me on the call today are Daniel J. Levangie, Cytyc's Executive Vice President; Leslie Teso-Lichtman, Vice President, Controller, and acting Chief Financial Officer; Chris Bleck, our Vice President of Commercial Operations. During this evening's call, I would provide you with an overview of the business for the quarter and the year and then turn the call over to Leslie for more details on our financial performance. Dan and Chris will then provide an update on the various aspects of the ThinPrep business.

I am very pleased with our achievements during 2003. We are well positioned for another year of achievement buoyed by our strong financial and operating performance. As noted in our press release, revenues for the fourth quarter of 2003 was $78.3m with associated net earnings of $19.5m or $0.17 per diluted share. Over the year, we delivered $303m in revenue, $76.2m of operating profit, and $0.68 per diluted share. In 2004, we will continue to build on our leadership position and concentrate on our growth opportunities. We are focused on the continued conversion and international expansion for worldwide adoption of the ThinPrep Pap Test, including implementation in the United Kingdom. Since the FDA approval of the ThinPrep Imaging System in 2003, we have shipped 33 instruments and expect to place 100 instruments in 2004. At the end of 2003, we had shipped 27 of these 33 units. If you change to 127 instruments, we expect to have in place by end of 2004, this product alone represents a $40m to $50m revenue opportunity for us in 2005, and in total, we believe the imaging systems has this ability to grow from our $300m revenue level today to over $600m in revenue as a company. During 2003, the NICE Committee recommended converting the entire UK screening program to ThinPrep technology, and Dan will provide you more details on our international progress, including the UK conversion. We recently announced a co-development and co-marketing agreement with division of Abbott Laboratories for the application of a smart work technology in our ThinPrep platform for the diagnosis of recurrent bladder cancer. This is the first of a number of molecular programs we are working on to leverage the ThinPrep platform. We are conducting a three-year clinical trial for the FirstCyte Breast Test. While we remain enthusiastic about this product, we believe significant adoption will require the initial results of this clinical trial. In January 2004, we introduced 216,000 sq. ft. of our facility in Marlboro, Massachusetts, of which approximately 30,000 sq. ft. already houses our corporate training and field services facility. We plan to relocate to this space by early 2005. We are actively investigating opportunities that would leverage our core competencies, our market leader position with OB-GYNs, our technology relationships with our laboratory customers, and our international sales and marketing capabilities, and we are very enthusiastic about our prospects. As you know, we are engaged in the CFO search and having a number of candidates in the pipeline. I'd like to now turn the call over to Leslie for the financial highlights for the fourth quarter and year ended. Leslie?

Thank you Pat. My remarks today will largely compare the financial results of the fourth quarter 2003 with the results of the fourth quarter 2002. I will also provide selected comparisons to the third quarter of 2003. Additionally, I'll be giving guidance for the first quarter and full-year 2004. In compliance with the SEC's regulation FD, this guidance is being disseminated simultaneously to all parties. Further, it's noted at the outset of this conference call, we further caution 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 and in our SEC filings including our 2002 Form 10-K. As Pat mentioned, total worldwide revenue for the fourth quarter 2003, was $78.3m, an increase of $11.6m or 17% from the fourth quarter 2002. Domestic revenues totaled $69.1m, an increase of $7.8m or 13% and international revenues totaled $9.2m, an increase of $3.8m or 69%. The weaker dollar accounted for approximately $1m of the $3.8m international revenue increase. Excluding the effects of varying exchange rates, international revenues were up 49%. Revenue from domestic shipments of ThinPrep T2000 and T3000 instruments was approximately $1.3m and we sold 58 new instruments in the quarter. We believe T2000 and T3000 instrument revenues will be approximately $1m per quarter through 2004. Revenue from domestic shipments of non-gene products was approximately $2.3m and was 5% higher than the fourth quarter of 2002. On a year-to-date basis non-gene revenue is up 13% from the prior year. We believe non-gene revenues will be approximately $2.5m per quarter in 2004. Revenue from domestic sales of ThinPrep Pap test, including imager ThinPrep kits, was approximately $64m, an increase of $8m or 14% from the fourth quarter of last year. Year-over-year average selling prices increased $0.09 and shipment volume levels, which we $9.1m task increased 13%. Fourth quarter ThinPrep Pap test revenues of $64m were approximately $1m higher than the third quarter ThinPrep Pap test revenues of $63m. Fourth quarter volume of $9.1m test was up just over 1% from third quarter volume levels of $8.9m tests. Average selling prices were slightly higher in Q4 compared to Q3. Large accounts including equaled 57% of total ThinPrep Pap shipments in both the third and fourth quarters of 2003. Fourth quarter revenue from all other products totaled $1.4m compared to $2.1m last year. The termination of our agreement with Digene affected June 30, 2003 accounts for primarily all of the difference in other revenue. The fourth quarter gross margin rate of 80% was approximately equal to the fourth quarter of 2002. Operating expenses of $31.4m were $6.1m or 24% higher than the same period last year. Research and Development expenses of $3.7m were $1.1m higher due to clinical activities related to the FirstCyte Breast Test and increased personnel cost. Sales and marketing expenses of $19.3m were 3% or $0.5m higher than the fourth quarter of 2002, largely as a result of customer training efforts on the Imaging System. G&A expenses of $8.3m were up 118% from the $3.8m in the fourth quarter of 2002. This increase is due in part to a significant increase in business insurance premiums in 2003. Operating margins were $31.1m or 40% of sales compared to operating margins of $28.5m or 43% of sales in the comparable period of 2002. The effective tax rate in this quarter was recorded at 39%. Fourth quarter earnings of $19.5m were 9% higher than last year's earnings of $17.9m and fully diluted earnings per share of $0.17 were up 13% from $0.15 per diluted share last year. For the December 2003 year-end period, revenues increased 28% to a record $303.1m. Earnings increased 59% to $76.2m and fully diluted earnings per share increased 74% to $0.68. 2002 year-to-date earnings included $3.8m of after-tax expenses or a $0.03 per share of cost related to terminating the Digene transaction. We believe, first quarter 2004 revenues will be in the range of $79m to $81m, with fully diluted earnings per share in the range of $0.17 to $0.18. We expect gross margin rates to be approximately 78% to 79% and operating margins of approximately 40% to 41%. Moving to the balance sheet, accounts receivable totaled $42.1m, $8m or 23% higher than the fourth quarter 2002, while year-over-year revenues were up 28%. Day Sales Outstanding of 46 days were essentially equal to the fourth quarter of 2002. Inventory levels of $17.8m increased $6.8m, due largely to imager production and inventory turnover was 4.1 turns compared to 4.4 in the fourth quarter of 2002. During the fourth quarter, our cash and cash equivalents increased by $5.2m to $177.9m after repurchasing approximately 598,000 shares of Cytyc stock for a total value of approximately $8b. Through the end of the fourth quarter, we have repurchased approximately 15.1m shares of Cytyc's stock, approximately 12% of the common shares outstanding at the start of our repurchase program, at a total repurchase cost of approximately $156m. 2004 will be the first full calendar year of image replacements, and as such our revenues will grow as shipment, installation, and customer acceptances occur. We believe 2004 incremental revenues from imagers will range between $7m to $14m. We're off to an excellent start having shipped 27 imagers in 2003, seven more units than originally planned, and we're on track for shipping an additional 100 units in 2004. As we described in the past, there was a 60- to 90-day lag time between shipping an imager and customer acceptance, which triggers revenue recognition. Cytyc places the imaging system at customer site under use plan agreements where revenue is recognized as imager ThinPrep kits are sold over the term of the agreement which is generally three to five years. We have shipped 33 units to date and have received 17 certificates of customer acceptance. We expect our core domestic ThinPrep Pap test business to continue to grow through 2004 at the rate on average of 100,000 to 200,000 tests per quarter with increasing AUP as a result of image replacements in 2004. On an annualized basis, we currently ship approximately 36m tests at an annualized revenue level of $252m. For 2004, we believe our domestic ThinPrep Pap test revenue will be in the range of $270m to $275m, and represent unit shipments of 37m to 38m tests. Outside of the United States, we expect revenues to grow 25% to 30% per year. Our international revenue in 2003 was about $32m, and we believe 2004 will be in the $38m to $40m range. We believe about 30% of the increase in revenue will be attributable to the UK conversion and the remainder from growth in other markets. We expect the balance of our revenues which include G2 and G3 instruments, , disposable, service and accessories will be in the $20m range in 2004, about the same level as 2003. We believe total revenues for 2004 will be in the range of $335m to $350m. We expect our gross margin rates to be in the range of 78% to 79% during 2004, as we continue to build our service and manufacturing organization to support the Imager plan. These margin rates reflect amortization expense related to the Imager placements, which are charged to the cost of goods sold. In addition, we believe our international business which has gross margin rates in the range of 65% to 70%, will grow faster than the domestic business in 2004. We are targeting a total year operating profit in the range of 40% to 41%, and expect the operating profit to be somewhat higher in the second half than the first half of the year as Imager placements gain revenue momentum. We estimate the effective tax rate for the year 2004 to be 39.5%, the same as for the full year 2003. We believe 2004 fully diluted earnings per share will be in the range of $0.75 to $0.79. We expect to continue to deliver strong cash flow performance net of working capital requirements, capital expenditures and funds required to support Imager placements; we expect to generate cash of approximately $40m to $50m. Our current cash balance of $178m plus incremental cash generated is likely to be used for strategic investments or to repurchase Cytyc stock. We believe the Imager presents a tremendous growth opportunity and we are also extremely encouraged by the opportunities we see outside of the United States. We believe these two growth platforms along with the domestic Thin Prep Pap test business, have the ability to deliver annual earnings growth in the range of 18% to 20% over the next three years. The Cytyc team here in New England is extremely excited about the company's 2003 performance, and we expect that our New England patriots will have an equally spectacular performance against Carolina this weekend. I'd like to now turn the call to Dan Levangie.

Thanks Leslie. The Thin Prep Pap test business performed very well, with record dollar in unit sales. We continue to make progress, converting from the conventional Pap smear, and establishing the Thin Prep Pap test as the preferred method of cervical cancer screening. Physicians continue to utilize the Thin Prep Pap test based on a relative clinical data, the FDA approved indications and their own clinical experience. During the fourth quarter our lab sales team continued to focus on lab standardization, utilizing the ThinPrep Pap test. During the quarter we placed an additional 92 instruments worldwide. This brings the total worldwide installed base of ThinPrep instruments to nearly 2,800. Our lab sales team will continue to focus on this objective, which we believe will continue to drive conversion. During the fourth quarter we placed 58 new ThinPrep instruments in the United States, with 29 of these in new US customers, which represent approximately 200,000 tests on annual basis. In our international business, we continue to focus on success in the UK. In Scotland, where we have an exclusive five-year agreement with the government, conversion to the ThinPrep Pap test is approaching 80%. We believe full conversion of this country screening program will be complete by mid year 2004. In England and Wales, the conversion process has begun with the government appropriation of 1.2m pounds for the period until March 2004 and another 6m pounds to fund conversion for the period of April 2004 to March of 2005. The primary care trucks are getting organized to make technology decisions, and we are involved in discussion with all regions. We expect the training schools to begin their conversion during this quarter. In Germany, the second largest cervical cancer screening program in the world with 15m Pap test performed annually. The government has established the cervical cancer working group that will advice the German government regarding incorporating new technology into their tax funded screening program. We currently are enjoying success in a private base segment on the German market and are working with government officials to allow coverage and use of the ThinPrep Pap test in its larger public segment of the market. Initial market reaction to the ThinPrep Imaging system is strong throughout Europe. We currently have one customer up and running and will install three additional systems this quarter. We expect international revenues to grow to approximately $38m to $40m in 2004. Earlier this month, we announced with Abbott Laboratories a collaboration and co-promotion agreement to the development and marketing of the ThinPrep UroCyte Slide Preparation System. Initial efforts were focused on modifying Cytyc's proprietary ThinPrep sample preparation technology to be used in combination with UroVysion, a DNA probe-based test for the detection of bladder cancer recurrence. Wyeth has received FDA approval to include the ThinPrep UroCyte product in its product label and both companies will promote this new system. Abbott is a leader in the development and commercialization of diagnostic technologies, and this arrangement is an excellent fit for Cytyc. I'd like to now turn the call over Chris Bleck.

Thanks Dan. As Pat mentioned earlier, we are very excited about the early success of the ThinPrep Imaging System since FDA approval in June of 2003. The ThinPrep Imaging System will allow laboratories to benefit from improved sensitivity and specificity compared to manually reviewed ThinPrep slides and increase their productivity. Through December 31, 2003, we have placed 27 ThinPrep Imaging Systems on a worldwide basis, and so far this month we have shipped six for a total of 33 system placements to date. This exceeded our goal of 20 placements by year-end and is indicative of very strong customer demand and acceptance. Although it's early in the product introduction, we imaged slightly more than 1% of total slides during the quarter, which had a favorable impact on our average unit price. We have signed 47 letters of intent and are currently negotiating with numerous customers -- negotiating numerous contracts with current ThinPrep customers and potentially new customers. We are very encouraged with our early success with receiving purchase orders from 37 customers representing 43 imaging systems. As previously reported, we received confirmation from the American Medical Association CPT Committee that the ThinPrep Imaging System qualified for a new CPT code 88175. The code has been established for a computer-assisted screening with manual re-screening under physician review. The code allows for an increase in CMS reimbursement from approximately $28 to $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 130m lives are currently covered by payers that have established favorable reimbursement in the US. Earlier this month, we announced that AmeriPath Incorporated entered into a purchase agreement to place ThinPrep Imaging System in AmeriPath's anatomical pathology laboratories. Under the terms of the agreement, ThinPrep Imaging Systems will be installed initially in two AmeriPath evaluation centers, one in Florida and one in Colorado. In addition, the new agreement extends the AmeriPath contract with Cytyc for the ThinPrep Pap Test through the end of 2006. AmeriPath has offered the ThinPrep Pap Test since 1998 as an improved technology for cervical cancer screening. AmeriPath and its affiliate currently process more than 1m Pap tests annually. We believe that the ThinPrep Imaging System provides a clinical performance and enhanced productivity that will significantly contribute to AmeriPath's quality and growth objective. As Pat mentioned earlier, we believe that ThinPrep Imaging System has the potential to double our current business and further solidify our customer relationships. I would like now to turn the call back to Pat Sullivan.

Thank you Chris. Operator, we would now like to open the call up for questions, please.

The floor is now open for questions. If you do have a question, you may press the numbers one followed by four on your touchtone telephone at this time. If at any point your question has been answered, you may remove yourself from the queue by pressing the pound key. Please hold while we poll for questions. Thank you, your first question is coming from Jason Wittes with Morgan Stanley.

Hi, thanks a lot. A couple of questions. First off on the cash flow disclosure that you gave. How should we be thinking about your Imager placements, and how that impacts CAPEX? Are those all going to be -- is every Imager place going to directly impact capital expenditures?

I'll take that Leslie. Yes, Jason, essentially we will use the cash that we generate from the business to fund not only the capital expenditures that are associated with the business, but also the placement of the imaging system.

So in other words, it sounds like it's somewhere around $200,000 to $300,000 per instrument?

You are right.

Okay, so $180,000 or so, but that goes directly to CAPEX or does that get allocated to other places on the cash flow statement?

That will be used to put the imaging system in the field, to pay for that $200,000 per instrument.

Okay. So, what is -- I guess, a more direct question will be, what is your CAPEX expectation for 2004?

I would say, for both the imaging systems, the capital expenditures we would expect to spend somewhere between $15m and $18m in each one of those categories. $15m to $18m for imaging systems and $15m to $18m for other capital allocations. But the net is the $40m to $50m in net cash flow after those allocations of those two items.

Okay, and one question about your revenue breakout. It sounds like you are lumping in Imager sales with ThinPrep sales, is that correct?

That is correct. The way we shift the ThinPrep PapTest kits to customers, they basically would be priced. If it's a $7.50 incremental to the ThinPrep pricing, it would be at probably $15 sales price to the customer.

Okay, but you did also -- I guess, you said it is about 1% of sales came from the Imager?

Yes.

Okay. The other question is on . On your deal with Abbott. It sounds like you are not inputting any revenues this year for that opportunity.

We are not putting anything in our guidance at this point. We expect to have that product on the market in the first half of this year.

In the first half of this year, but it sounds like you are pretty conservative on those numbers. I guess, why the conservatism?

We'd like to get the product into the market and then judge the market as option before we bake into our financial projections.

Okay. Last question before I'll hop back into the queue. In terms of pricing for 2004, what is your expectation for ThinPrep alone, excluding the imaging system?

Our expectation is -- perhaps it will remain flat.

Flat. And I guess much of that is prefaced on that fact that it is, I think at least for the most of large labs you have contracts through the end of the year?

That's correct.

Okay. Thank you.

Thank you. Your next question is coming from Wade King with Wells Fargo.

Hi, guys can you hear me.

We can hear you Wade.

Thank you for the detail on the performance. One clarification, question is 1% of revenue, I thought you said that 1% of specimens processed were now imaged, is that correct?

That's correct. For clarification, 1% of the slides imaged were imaging slides.

Alright. Okay. Also can I just be sure we heard the numbers correctly, 47 letters of intent today on imagers, 37 purchase orders, 33 shipments and 17 certificates of acceptance, is that right?

That's correct.

One additional was 43 instruments systems in total from those 37 purchase orders.

So, obviously couple of multiple immature customers?

Yes.

Okay. Very good. On the -- if you subtract the domestic instruments placed, you placed 34 instruments internationally in the quarter, is that right?

That's correct.

And if you do the math, it sounds like the ASP actually on the instruments placed is pretty generous, is that right? Either that, or could break out the instrument versus disposable international evident?

Our ASP on the T2 is about $20,000.

Internationally?

Yes.

Okay. Very good. So, are you willing to break out the international disposable component of the revenue?

We haven't done that Wade.

Okay. Very good on the business. Could you describe whether, where we are in the process of trying to reduce the time, the 60 to 90 day lag time before the company starts collecting revenue on the images placed. What is possible here in terms of reduction or training time etc.?

You've already seen us -- we've been truthful, we've been hard on that Wade, obviously, but we've already seen reduction in the amount time. I think we are averaging now about 45 days from shipment to customer acceptance. And the goal is to get it down under 30.

With that some customers as quickly as two weeks.

Okay, and other things that we've understood it's obviously just some throughput considerations as to . Are there other areas whereby you might work to reduce 69 days that would be helpful?

With the same thing going on during that period of time, Wade, are implementing the new stain, training their operators to use the review scopes, and training the preparation people to cover some slides appropriately. It's lab workflow that we need to work through with the customer, and I think we're taking the appropriate steps to reduce certain - we're pretty convinced we can get it down to under 30 days. We've already had, as Pat mentioned, a number of occasions where the customer signed the acceptance in a period of two weeks.

Okay, very good. Could you just lay out, I know this is a long-term process, as of advancement in the various legal claims that both Cytyc and TRIPET has in the imaging field looking ahead, you know, can you provide any timeline on resolution of this and putting the associated risk behind the investor lines?

Really can't Wade, the case was just transferred to Massachusetts, and we're in an initial stage of that case. And as you know, patent cases are hard to predict, how long they're going to take.

Okay. Is there one area of the various claims that you consider to be most important and that we might get resolution on earlier than later or do you just not want to comment further on it?

I'm not at liberty to comment on legal matters at this point.

Okay, very good. Just one minor question. And it has to do with the other income line was three hundred some thousand, and third quarter that 800,000, that cross about 550,000 of interest, and then there's a second component which flipped positively this quarter. Could you give any guidance Leslie on where this is going to go and how it might be, a model going forward?

Yes, that's all related to realized and unrealized foreign exchange.

Okay, so once again this is some currency contracts which went positive in the latest quarter?

Right.

And would you suggest keeping that flat going forward or would you suggest a couple of 100,000 incremental gain?

Well, it's difficult to predict, but I would say just keep it flat going forward.

Okay, very good. And are you going to provide a breakout on, as it relates to the inventory? I know you said the inventory bump

sequentially was mostly associated with imager space. Is it possible you could break out the imager versus other within that force or no?

I don't have those numbers with me. Les with you?

Could you repeat that one more time, Wade?

I was just asking if you had it available, whether you could break out the inventory by Imager associated increment versus other or maybe more specifically the increase sequentially quarter-over-quarter as to what component came from Imaging?

I believe it was around $3m of incremental Imager inventory.

So inventory on disposables then went down slightly, presumably. And Leslie, are you expecting snow in Houston this week or no?

We would like to see that.

Thank you very much.

Thanks, Wade.

Thank you. Your next question is coming from David Lewis with Thomas Weisel Partners.

Good afternoon. Probably just first a housekeeping question. It was mentioned in the third quarter conference call that growth from large labs was flat sequentially from Q2 to Q3 and small labs was up 2.3%. Do you have those numbers in the fourth quarter?

Going from the third to the fourth quarter, they were pretty much flat in both the segments.

Okay, so looking at the gross margin, gross margin was down below our estimates. Is that the result of just spending tight at the Imager, it looks like pricing was up. Could you give us pricing exiting out the Imager effect in the fourth quarter?

Actually the fourth quarter had one of our high-end percentages of International revenue. It was 12% in the quarter and International AUPs are lower than domestic. So, that was -- it was just a mix of international versus US.

Okay, and then -- but exiting out the imager effect in the fourth quarter, was pricing kind of flattish?

Yes.

Okay, great. And then Leslie you mentioned sequential growth rate on domestic consumables from 100,000 to 200,000 per quarter now, down from 100,000 to 300,000, maybe Dan could comment on the result of that. It is simply just market penetration, is it competition, I imagine it has nothing to do with intervals?

I can't imagine it has anything to do with intervals. No, I just think it is -- we believe that the one 200 test per quarter is a reasonable growth estimate at this point in time.

Okay. domestic penetration now, obviously, Northeast being relatively saturated and the Midwest being somewhat saturated. Is the West Coast now sort of the bastion future growth or is it used to giving was 50% - 55% West Coast penetration, I imagine that's picking up. Any comment if it was the West Coast or areas within the country where the will come from new region penetration or simply existing utilization increases on existing markets?

Yes. This is Chris Antony, it is still the primarily the West and Southwest that really has the growth left in it, the Northeast is approaching 90%, through the Mid-Atlantic. The Midwest is pretty well converted, but there is still growth opportunities and so truly the Southwest and West, as well as not only current customers with the ThinPrep Imaging System, but it's other customers that are either with our competition or less than having converted from conventional. So the ThinPrep Imaging System is really going to expand the opportunity for growth.

And was Chris, what Cytyc forecasted is kind of long-term growth forecast, did you think about the West Coast or not?

No. We're looking it as an opportunity location by location, as we reported earlier in the third quarter we had full conversion of a Cytyc Denver facility and we're in discussions with each of the local, but now we haven't forecasted it going forward.

Okay. And then two quick ones. Pat, I may have misunderstood you, but I think you talked about traditional ThinPrep consumable cut on the weighted average $7 price point. I thought, what you would say was the images that could go up to 15, which implies just $7 reagent for the imager, I thought that was closer 4 to 5. So may be I misunderstood you there.

No, you didn't misunderstand me. Probably we've been seeing on the pricing on the imaging system is between $7 to $8 in our contracts and I think that's where the price point is going to double up.

Which implies the hospitals will be making 2 bucks or the fact that the hospital is getting better pricing of $9 on imaging reimbursement.

Yes, in fact we've seen some EOBs that have come in that we've got in from some of our initial customers that are higher than the $37 CMS rate. And the two components of where the laboratory - the Imaging System effects our economics are on the - of course the reimbursement, which in CMS's case is $9 incremental, but there is also a labor savings of about $4.5 to $5. So the total economic value of the Imaging System is about $15 or so to the lab at CMS rates and the price point is going to be probably half of that. And we do have some EOBs that are significantly higher than that $37 range.

Okay, and than last question before I turn back in the queue. There has been some changes Pat on the business development front, just going forward, do you view the company, if they were to make strategic acquisitions or alliances for those deals doing more within healthcare field or more in molecular diagnostics plant?

I would say that - I would expect, the way we think about opportunities is to leverage the significant capabilities that we have in our OB/GYN relationships are 100 plus sales people that we have falling on those OB/GYNs in the relationships we've built over the last seven or eight years, as well as leveraging a platform, the ThinPrep platform as indicated by the announcement, and also were in international distribution capabilities.

So, we are looking across the pretty broad horizon of opportunities, and I would say this is - we are pretty excited about some of the opportunities out there.

Great, thank you very much.

Thank you. Your next question is coming from Bill Bonello with Wachovia Securities.

Yes. Just had two quick questions. One, the growth in sales and marketing expense was significantly lower than the growth in revenue, which doesn't seem to be the pattern in previous quarters, just curious if you can explain why that has never separate, second question?

Yes, could you repeat that question? I am sorry, this is Daniel Levangie. I didn't quite understand.

Sure. Your sales and marketing as percentage of revenue was lower than what we expected and the total expense only grew about 2 plus percent, you know much lower than what sales grew, and in previous quarters, it seems like growth in sales and marketing expense has been at more in line with your growth in revenue. So, I am just wondering, you know why that number?

I think it is reflective of what we believe our sales and marketing spending to be at this point and leverage we have at the topline with that sales expense.

Okay.

So, I mean if you really start with single leverage in the business.

Okay. And then just I wanted to revisit the pricing question, maybe this is a rounding thing, but if I take the $64m of US revenue and I divide it by the 9.1m units, it's about $7.03. So, flat, and then if it revenue from that. When you are talking about product pricing being flat, it sounds more like, maybe flat year-over-year as opposed to flat sequentially?

I think it's, I would expect it to be pretty flat sequentially.

But, is that what you saw it as this quarter, I may it look to us like it maybe was down this quarter compared to last quarter?

It was actually, slightly up this quarter.

It was up slightly up this quarter.

Okay, we will do the math off line then.

The ThinPrep baseline AGP is slightly up this quarter, Q4 to Q3.

Yes.

Okay. We will on the math then with you off line. We are done.

Okay, anybody? Operator, other questions? Did the last caller get back in queue? Operator?

Your next question is coming from Ryan Rauch with SunTrust Robinson.

Hi guys. Just a couple of quick questions. One, Leslie, where do you stand, I mean how many shares are left on your current repurchase and with your sort of increasing capital expenditure need, you are still going to be repurchasing stock quarterly?

We have about $44m left in the Board approved plan which was originally $200m, and the plan is good through November of 2007, and I would say for 2004, you could expect us to still be out there at similar levels to this year, if the stock, you know, to defend the stock on weakness, if that were the case.

Okay, and then Pat, with respect to the Imager, you have been focused on sort of the mid to small labs. Are you starting any initial discussions with the larger laboratory players, and if so, can you at least sort of describe those discussions, at least anecdotally, I mean are you moving forward? Is there any progress? Do you think you might have something with a larger lab in the first half of 04?

This is Chris to answer that. Actually, it was 37 customer purchase orders, and 43 we have six customers that have multiple instruments that are in the test lines, greater that 100,000 annually. So, we are very pleased about not just the medium to small labs going forward. The AmeriPath deal is indicative of a large lab, that's greater than 1m PapTests annually. We are pleased about that contract, and we are in discussions with the other players to go forward, either through evaluations or full market conversions. So, we've got a lot of things, you know, in negotiations with the entire segmentation lists that we go through. So, again as AmeriPath moves forward, I think other labs are going to look in competitive situations to get involved with the program.

Okay, and then what does your international sales force look like? Can you just refresh our memory?

Yes, we have about 100 people in total in Europe, Ryan, and about half of those would be defined as sales people.

Okay, and then finally with respect to the Abbott deal, what sort of affair, I mean longer term, how should we look at that as far as that opportunity, maybe as far as revenues out into '05? And then is it fair to assume you might be seeking other potential ways to work with Abbott and others, whether it be breast, ovarian, or other molecular diagnostic indications?

I'll answer the second question first. The answer is yes. I view this bladder recurrence application of the ThinPrep technology to be first of many applications that we are looking at in the non-gynecologic sample preparation including sputum, bladder, and other non-GYN body sites. To the first question, the potential size for recurrence of bladder cancer, the total market for bladder cancer is just under about $7m to $8m tests. And if you take a $15 to $20 price point, it represents a pretty significant opportunity for us. The first indication is for the recurrence of bladder cancer, and they are going for a spring indication that they expect to have by the beginning of next year.

Okay, thanks a lot. Have a wonderful afternoon.

Thanks.

Thank you. Your next question is coming from Bruce Cranna with Leerink Swann.

Good afternoon. Pat, quick question on the ThinPrep Imaging placements, there seem to be a little bit ahead of I think your prior expectations which is good news and I think the numbers we are talking about, it sounds like $7-14m potential incremental revenues in '04 and I guess the question is seeing how, you've kind of seen the early ramp look a little bit better than you thought, is the best way to think of that range is really kind of the upper end being more realistic in your opinion?

We are not changing our guidance or prospects for the imaging system at this point in time for this year, but having said that I would say that, when I think back to the August, September timeframe when our goal was to get six units by the end of the third quarter. We did that, I said we wanted to get 20 by the end of the year, we placed 27. I'm extremely pleased with what I'm hearing from the field about the performance of the product and customers acceptance and excitement about having this new and exciting technology in their laboratories. We are feeling very good about the 100 that we've got in for this year and I guess given us another quarter and we will come back in if we need to make adjustments going forward we will do that.

Okay that's fair and can you comment at all about. You know, what you think is the sweet spot with the Imager in terms of typical lab size or is there a sweet spot where the economics really make the most sense in terms of volume?

We are getting broad level of interest across a broad spectrum or segmentation of the laboratory industry from some of the smaller labs who are looking to expand their product offering and their number of tests or bring additional tests on board with the same existing headcount. As Chris mentioned the AmeriPath initially and interest at the larger lad levels. So, I see this as a product that has a wider appeal to the broader market segment.

Okay. What about a low end. I mean, so you think there is a level of annual Test volume, I'm trying to figure out what the cut point is in terms of --?

Probably around 20,000. But if they can, if they believe they can grow that business pretty quickly people can get into business just through Imaging.

And, I guess in some of the conversations we've had with folks in the lab, it sounds like obviously there is a throughput advantage or an incremental throughput advantage for the lab folks and obviously there is potential for labors savings. So, have you seen any instances where a lab as a given Pap Volume is there actually or is thinking about, you know, if we go with the Imager, you could actually have a situation where you might need to pull through more equipment in terms of 2000 or 3000 to kind of -- just to make out, even if you know what I mean?

We are seeing interest in many of the laboratory customers to bring in the 3000, even the workflow and put together really sort of ideal laboratory situations where you have the combination of all of our products.

Optimizing the work flow through the lab and ultimately ending up in the productivity improvements in the Imaging system.

We are seeing some pretty good productivity. One of the labs, I don't want to give out the name just for phone calls, but a lab that was running above three-week turnaround times on the Pap smears after the Imaging system is gone in, they had 97% of their Pap smears were given results back within the first week - within a week of receiving the Pap smear. So, they really have dramatically increased their turnaround time, and we are getting another anecdotal stories from other labs and we look to document those going forward.

When you think of the incremental line in '04, is it fair for me to ask kind of what that split might be between the two processors?

T2 and T3.

Yes.

I don't think we are thinking about it as - I think there might be some incremental pull through on T3 We believe that T2 and T3 still represent about $1m in revenue per quarter.

Okay, and last question quickly because Leslie was kind of - she is moving fast and I'm looking at my '04 numbers and the guidance that is, the US, the domestic ThinPrep was 270. Was that the guidance plan?

Yes, 270 to 275.

And that was with TIS or not.

No, that was with the incremental Imager revenue, which was another 7 to 14.

Okay, so, that's sort of $38m Pap times 7 bucks or something more or less.

Yes, approximately.

Okay, and then I had 38 .

Yes, 38 to 40 OUS.

And 20 was the other and then what I'm missing is the Imager was 14, okay I'm there, I made it. Alright, thank you.

Okay.

Thank you. Your next question is coming from Mark Regan with .

Hello.

Hi, Mark.

Couple of quick question please. First of all you talked about the contract is, your contract on the Imager is a three to five year contract?

That's correct.

Could kind of explain what the, how you setup the minimum and stuff on that and what kind of for the uses if any. Is it firm or volume goes through the Imager or is it half the volume through the Imager or how does that work? What are they committed to?

I think we are seeing virtually all of these contracts with 100% of the customers volume going through the Imager, and the committed contracts that are .

And are they locked in if the price is high-end, or does it escalate or deescalate overtime?

Pretty much locked in.

Most ( Indiscernible) contracts out there or not.

No.

No.

So, these are pretty much firm as it is. Second question is cost of goods, you mentioned that international raised cost of goods somewhat, but it seems like that would only be about a $0.5m of extra cost of what you described. Is the other $1.5m of incremental cost of goods coming from the Imager if I've done this right?

I think what we said was the international being a higher percentage of overall sales in the quarter, 12%, it's usually less than that. That would have a negative impact on the margin.

But, if I do look at the sales your last quarter and the cost of goods you had last quarter, and that you were up little less $2m, then if I gave you 60%, I don't get 2m -?

The other piece is the Imager ramp up.

Can you give an idea of big the Imager ramp up was in the cost of goods?

We didn't break that out.

Would you like that be over $1m?

I think, we rather not break that out at this point in time.

Okay, fair enough. Are you clear now that the seasonality issue in the third quarter, was seasonality - there is no seasonality now, what do you come out on the seasonality issue from last quarter?

My view hasn't changed since the third quarter of conference call with all of the noise on ACOX screen intervals, with Pap in and somehow I didn't think any one of those three had any impact on us in the third quarter of last year.

And I think our fourth quarter came back very strong.

Okay, so, it was 150,000 you grew for this quarter?

Pats..

Between 100 to 200.

For this last quarter?

Q4 and for Q3.

Okay. And just, I might go back to one question, which sure you had known -- curious about which is the Imager guidance? You've already got you said 27 units placed and it may as many as many as 43 in the pipeline and if I understand what you said earlier correctly, they get $7.5 a unit, which on 50,000 units per lab is $350,000 a year for imager, is that a fair assumption?

You are doing good so far in your math.

Okay. So, why if $350,000 per unit and you've already shipped over 40 units, I know there is some time lag involved, well, I mean you haven't had shipped over 40 but your contracts are over 40? It seemed that you are seven to 14 you already have that level of revenue pretty much in the bag with which you said you have already contracted and shipped. I understand there is a 60 day lag, but even with the lag, so should online and running I'd imagine by April or May with full lags, right?

Right.

Okay. So, is there a risk in this, if they don't actually run at full 50,000 volumes, is there a risk that you don't get $7?

There is -- you did the math correctly. And I'd agree with the numbers that you came out at the end of your calculation.

Okay. So, this is just a cautious ramp up on --

We've got 27 at the end of the year; they are at various stages of implementation where we've got 17 letters of acceptances. So, those customers we are now starting to ship them on a regular basis and build them on a regular basis and generate revenue. I think we'd like to get another quarter behind us before we start to moving the guidance.

Okay. And last question is on the associate for the large lab, you indicated that there is $15 benefit in the overall system to go into the Imager?

That's correct.

Between productivity and reimbursement?

That's correct.

If you look at both those number from a large lab point of view, is that benefit likely to be higher or lower?

It depends upon their individual economics, I'd say. You have to look at their mix of reimbursement and then their individual laboratories, LIBOR savings, what their specific profile looks like.

Okay. If you were to -- and so right now you said the pricing for the average lab to split the $15 with you get $7.5 and they get $7.5, that's how you contract going to be running right now?

That's right.

Is Lab Quest have to be on -- or is LabCorp or Quest have to be on the high end of that $7.5 or lower end of the $7.5 range?

We'd like to -- I'd rather not comment on pricing to the large labs until we have something to talk about.

Okay. But, if they were on the lower end that means it would be a greater profitability to them to be to go with Imager and than it would be for a smaller lab, if they were able to exert a larger savings from you?

You are correct.

Okay. numbers right. Ukay, great, thanks.

Thank you. Your next question is coming from Jason Wittes with Morgan Stanley.

Hi, Thank you. Most of my questions have been answered, however, a quick follow up and that is you seem to be increase my confident of the $7 to $8 reimbursement rate for the imaging system. Is that based on some feedback you're now getting from the labs that have been submitting their reimbursement forms or can you just give us a little more color on that?

Yes, it's $9 incremental Jason, just to make sure whether everybody is on that.

$9, but you seem to be 750 in terms of what labs are willing to pay?

Yes, and the reimbursement we are seeing is coming in at many of the carriers where we have initiated the initial reed, is that it's at very attractive levels. In some cases, almost twice that of the existing Medicare rate.

Last quarter you actually gave a profit loss estimate, do you have one this quarter?

I think, you're talking about $130m this quarter.

Okay. Thank you very much.

Operator, I have time for one more question.

Thank you. Your last question is coming from Wade King with Wells Fargo.

Hi, it's Ed Shenkan with the follow-up for Wade. On the throughput of the imagers are you finding 50,000, 75,000 was the range that you talked about previously. Are you finding the expected to be more at the high end or at low end where the labs where they use the imager?

Are you talking about the capacity of the instrument itself or the number of test that they were expect to run through?

How many they'll run through it?

We would expect that they would run 50,000 or more 1000s through an imaging system. And if you're starting out to get there customers start out of 25,000, we would expect them and they would expect to grow to a volume for 50,000.

And along the lines of Dr. Levangine, have you begun enrolling for the study that you talked about and if you have been, tell us when you would expect and as you can give any details around that?

Yes, we haven't started enrolling yet, we are in the process of clearing IRBs and we would expect to start enrollment in this current quarter.

Okay. And lastly, the changes to the guidelines recently, because you talked about any response that you're seeing from positions about two of those new guidelines recently?

Yes, I would say we are uniformly across the country as reported to occupy our sales people not seeing any impact.

But this will continue to do scream once in a year and I think there has been a couple of studies out testing patient preferences and women are saying they are going to be strained much of the year. So, it's our view as it was in the third quarter is the same in the fourth and the first quarter that we don't believe that's going to have an impact.

And the size of your sales force in the US, just give us a reminder what you expect to be staffing it up in the upcoming year with the additional imagers?

We've already increased our sales force on our imaging system. We moved some of the people from first side over to the imaging system late last year. And but the sales force size would basically remain the same in total.

Okay. Thank you very much.

Great.

Sir, there are no questions that we have in the Q&A session for today. Do you have any closing comments?

I do operator. In 2003, we displayed healthy probe and strong operating performance and we continue to build on our leadership position in cervical cancer screening. In 2004, we are well positioned for another year of significant achievements as we focus on our growth initiatives including continued conversion to the ThinPrep Pap test placing 100 imaging systems with our customers and significant growth in the international markets. We are enthusiastic about starting the clinical trial to define the clinical outcomes of the FirstCyte Breast Test, and launching the ThinPrep UroCyte Slide Prep System for the recurrence of bladder cancer with Abbott. We are also enthusiastic about business development opportunities we're seeing to capitalize on our significant strength and capabilities. Thank you for joining us on the conference call. Good bye.

Thank you for your participation. This does conclude this evening's teleconference. You may disconnect your lines at this time and have a good day.