Hologic Inc (HOLX) 2004 Q1 法說會逐字稿

Good afternoon, ladies and gentlemen and welcome to the Cytyc Corporation first quarter earnings conference call. At this time, all participants have been placed in a listen-only mode and the floor will be open for your questions following the presentation. It is now my pleasure to turn the floor over to your hostess, Ms. Anne Rivers. Ma'am, the floor is yours.

Thank you. Good evening, everyone and welcome to the Cytyc Corporation's first-quarter conference call. If anyone has not received a copy of the news release issued today after the 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 Securities and Exchange Commission that could cause 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. It cannot be rerecorded 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.

Good evening, ladies and gentlemen. I'd like to welcome you to our teleconference to report on the performance of the company for the first quarter ended March 31st, 2004. Joining me on the call today are Dan Levangie, EVP; Leslie Teso-Lichtman, Vice President and acting CFO; and John McDonough, our SVP of Development and Operations. During this evening's call I will provide an overview of the business for the quarter and then turn the call over to Leslie for more detail on our financial performance. Dan and John will then provide an update on various aspects of our ThinPrep business and NovaSure business. We're off to an excellent start for 2004. We are well-positioned for another year of significant achievement based upon our strong financial and operating performance in the first quarter. As noted in the press release, revenues for the first quarter of 2004 were $80.7 million, with associated pro forma net earnings of $20.6 million or 18 cents per diluted share, excluding the one-time charge of $19.1 million for inprocess R & D associated with the Novacept acquisition.

In 2004, we will continue to build on our leadership position and concentrate on our growth initiatives. We continue the conversion and international expansion for worldwide adoption of the ThinPrep Pap Test. We are ahead of our original ThinPrep Imaging System expectations, since the first -- since the FDA approved the ThinPrep Imaging System in June of 2003 we have shipped 51 instruments and expect to place more than 125 instruments in 2004. This is a 25-unit increase from our expectations back in January. And as a result, we are increasing our production capacity to meet this increased demand. As previously announced, we completed the acquisition of Novacept on March 24th and are very pleased with the integration of Novacept into the Cytyc organization. As you will hear throughout the call today, we will introduce a new operating division of Cytyc called Cytyc Surgical Products or CSP, consisting primarily of the Novacept acquisition. With only about a month of operating the two companies together, we are more convinced than ever about the significant benefit of the acquisition for both organizations.

This acquisition really builds on our reputation and leadership position in providing innovative devices for women's health. In addition, the combined sales resource will increase our competitive position for the ThinPrep System as well as expand the opportunity for increased NovaSure sales. The acquisition also allows us to further leverage not only our domestic sales and marketing organizations, but our international presence as well. And finally, as you'll hear throughout the call today, we believe this acquisition, along with our other growth initiatives of the ThinPrep Imaging System and international expansion will put us on strong financial growth trajectory for both the top and bottom line for the foreseeable future. We continue to evaluate a number of opportunities to continue to leverage the strength and significant capabilities for our sales and marketing presence in the OB/GYN offices and are excited about some of the prospects. We remain focused on our goal of achieving $1 billion in revenue by 2008 and becoming the premier women's health company delivering innovative products to physicians and their patients. I'd like to now turn the call over to Leslie for more detail of the financial performance for the first quarter. Leslie.

Thank you, Pat. My remarks today will compare the financial results of the first quarter of 2004 with the results of the first quarter 2003. I will also provide selected comparisons for the fourth quarter of 2003. My comments will be focused primarily on our diagnostic product segment, which includes the ThinPrep System and FirstCyte Breast Test and then John McDonough will discuss our surgical products segment, namely the NovaSure System. Additionally, we will be giving guidance for the second quarter and full year 2004. In compliance with the SEC's regulation FC, 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 2003 Form 10-K.

Total worldwide revenue for the first quarter of 2004 was $80.7 million, an increase of 11% from the first quarter of 2003. Total revenue from our diagnostic product segment for the first quarter 2004 was $79.3 million, an increase of $6.7 million, or 9%, from the first quarter 2003. Domestic revenues totaled $69.6 million, an increase of $4.3 million, or approximately 7%, and international revenues totaled $9.7 million, an increase of $2.4 million, or 33%. Exchange rate variation from the first-quarter 2004 compared to the first quarter of 2003 accounted for approximately $900,000 of the $2.4 million international revenue increase. Excluding the effects of varying exchange rates, international revenues were up 21%. Revenue from domestic shipments of ThinPrep 2000 and 3000 instruments was approximately $600,000 and we sold 39 new instruments in the first quarter. Revenue from domestic shipments of Non-Gyn products was approximately $2.5 million and was 5% higher than the first quarter of 2003.

Revenue from domestic sales of ThinPrep Pap Tests, including imager thin prep kits was approximately $65.1 million, an increase of $5.7 million, or almost 10%, from the first quarter of last year. First quarter 2004 average selling prices decreased 2.5% compared to the first quarter of 2003, primarily due to higher pricing to one of our large laboratory customers in the first quarter of 2003 while we were finalizing a new contract, which was signed in May of 2003. Shipment volume levels, which were 9.1 million tests, increased 12%. First quarter ThinPrep Pap Test revenues of $65.1 million were approximately $1.1 million higher than fourth quarter 2003 ThinPrep Pap Test revenues of $64 million. First-quarter volume of 9.1 million tests was up approximately one half of one per cent from fourth quarter volume levels. Average selling prices were higher in Q1 compared to Q4. Large laboratory accounts were 58% of total ThinPrep Pap Test shipments in the first quarter of 2004, up 1% from the fourth quarter of 2003.

The first quarter gross margin rate of 81% was better than we anticipated, in spite of costs related to the ramp up of the imaging system and increased international business as a percentage of sales, which carry lower-average selling prices compared to the United States. Imager use plan agreements in the quarter averaged longer contractual terms of four years compared to three, which spread amortization costs over longer periods and more instruments placed as reagent rentals instead of outright purchases contributed to improve gross margins. Operating expenses, excluding the one-time charge of $19.1 million to write off in process R & D related to the Novacept acquisition were $31.9 million, $4 million or 14% higher than the same period last year. Research and development expenses of $4.3 million were $1.4 million higher, due to continued development of the imaging system, costs associated with clinical trials for the FirstCyte Breast Test and expenses for collaborative research agreements initiated in 2003 with Harvard and Northeastern University.

Sales and marketing expenses of $20.2 million were 7% or $1.3 million higher than the first quarter of 2003; largely as a result of international expansion, following the UK NICE Committee recommendation in the fall of 2003, and increased selling and customer training efforts to support the release of the imaging system. G & A expenses of $7.4 million were up 23% from $6.1 million in the first quarter of 2003. This increase is due to legal costs related to litigation and higher business insurance premiums. Excluding the one-time charge of $19.1 million, operating margins were $33.6 million, or 42% of sales compared to operating margins of $32.3 million, or 45% of sales in the comparable period of 2003. The effective tax rate in the quarter was recorded at 39%, exclusive of the effects of the nondeductible $19.1 million in process R & D charge. Excluding the nonrecurring charges related to the acquisition, first quarter earnings were $20.6 million or 4% higher than last year's earnings of $19.8 million and fully diluted earnings per share was 18 cents, up 6% from 17 cents per diluted share last year.

We believe second quarter 2004 total worldwide revenues from both business segments will be in the range of $97 to $100 million with fully diluted earnings per share in the range of 17 to 18 cents. We expect gross margin rates to be approximately 78 to 79% and operating margins to be approximately 34% to 36%.

Moving now to the balance sheet. Accounts receivable totaled $56.6 million, $14.5 million higher than the fourth quarter 2003. Approximately $6.6 million of the increase related to the Novacept purchase. Excluding the $6.6 million accounts receivable increased 19%. Days sales outstanding of 53 days were up from 46 days in the fourth quarter 2003 due to a higher percentage of sales in the first quarter coming in the last two months. Inventory levels of $23.2 million increased $5.4 million due largely to approximately $4 million of inventory acquired from Novacept and the balance from imager production. Inventory turnover was 3.7 turns compared to 4.1 in the fourth quarter of 2003. During the first quarter, our cash, cash equivalents and investment securities increased by $42.7 million to $220.6 million. This reflects the proceeds from our private placement of $250 million convertible notes, which we used approximately $238.2 million to pay Novacept's shareholders as part of the acquisition during the first quarter. The balance of the aggregate purchase price of $325.6 million was paid out in April.

We also repurchased 135,000 shares of Cytyc stock for a total value of approximately $1.7 million. We have temporarily suspended our repurchase program. After completion of payment for the Novacept transaction during April, our cash balance approximates $130 million. This amount, plus incremental cash generated -- generated is likely to be used for strategic investments, to repay debt, or to repurchase Cytyc stock. We expect to generate cash of approximately $40 to $50 million dollars during 2004 consistent with our previous guidance. For 2004, we believe our domestic diagnostic product segment revenue will be in the range of $290 to $300 million. We expect revenue from our ThinPrep Pap Test business, including imager kits, to be in the range of $270 to $280 million, representing unit shipments of 36 to 37 million tests. We expect our ThinPrep Pap Test business to continue to grow through 2004 at the rate on average of 50 to 100 thousand tests per quarter and that AUPs will continue to improve as imagers are placed.

Outside the United States, we expect revenues to grow 25 to 30% in 2004. Our international revenue in 2003 was about $32 million and we believe 2004 will be in the $40 to $45 million 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 believe total worldwide revenues for 2004 from our diagnostic product segment will be in the range of $330 to $345 million. We expect our gross margin rates, for both of our operating segments combined, 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 plans. We are targeting a total year operating profit rate in the range of 38 to 39% for both of our operating segments combined 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 2004 will approach 38% due to savings anticipated from tax planning initiatives we began in 2003. I'd like to now turn the call over to Dan Levangie.

Thanks, Leslie. Today I will report on the progress that we made during the quarter in the four major commercial segments of our business. The core US ThinPrep Pap Test business, our international business, the ThinPrep Imaging System, and our newly acquired Endometrial Ablation business based upon the NovaSure system. During the first quarter our lab sales team continued to focus on lab standardization utilizing the ThinPrep Pap Test. During the quarter we shipped an additional 76 ThinPrep instruments worldwide, 39 new instruments in the United States and 37 in international markets. During the first quarter, of the 39 instruments placed in the United States, 14 of these were in new customer laboratories. This brings the total worldwide install base of ThinPrep instruments to nearly 2,900. Our lab sales team will continue to focus on this objective which we believe will continue to drive conversion. Our penetration level at the two largest commercial labs has been reported to be in the 80% range; and recently they both reported that the conversion rate had flattened. As a result of that flattening, our growth will come from the all-other segment of labs.

We continue to see growth going forward from this all-other segment, amounting to 50,000 to 100,000 tests per quarter, rather than the previous guidance given in the range of 100,000 to 200,000 tests per quarter for the all-other segment and the two large lab companies combined. For the full year we believe total ThinPrep Pap Tests to be in the range of 36 to 37 million tests compared to earlier guidance of 37 to 38 million tests. This change is being offset by accelerated adoption of the ThinPrep Imaging System, which is driving a higher average unit price, leaving total revenue consistent with earlier guidance. 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, the conventionally prepared pap smear is now an historical footnote. Full conversion to ThinPrep Pap Test was accomplished last quarter, and now all women participating in the Scottish screening program are provided an improved quality of care with the ThinPrep Pap Test. In England and Wales the conversion process is underway.

The tender process has been completed with the National Health Service and contracted pricing is now available to all 12 cytology training schools in the UK. It is our expectation that 11 of the 12 training schools in the UK will be providing ThinPrep Pap Test training. We expect that the training schools will begin to acquire hardware during the upcoming quarter, and that 100% conversion of the schools will be complete by the end of Q3 this year. At that point, training with other laboratories will begin. The schedule is delayed by approximately one quarter compared to earlier projections, but we believe we are very well positioned as the UK moves towards full conversion. In Germany, the government has established a cervical cancer working group that will advise the German government regarding incorporating new technology into their tax funded screening program. In March we submitted a dossier for their review and have been informed that liquid based cytology will be an important consideration in the recommendation to the German government.

In France, a 7 million test market, we're in a similar position as we are in Germany. There's a full review of reimbursement by the government underway and we believe we are well-positioned to see reimbursement established at an appropriate level for the ThinPrep Pap Test by the end of this year to become effective in 2005. Market reaction to the ThinPrep Imaging System is strong throughout the European market, with a total of five systems shipped to customers in international markets by the end of the quarter. We expect the international revenues to grow to approximately $40 to $45 million during 2004. We are very excited about the success we had and the milestones we achieved during the quarter with the ThinPrep Imaging System. The ThinPrep Imaging System provides labs the opportunity of improved sensitivity and specificity compared to manually reviewed ThinPrep slides, a significant increase in cytotechnologist productivity, and increased reimbursement for automated screening. During the quarter we generated orders for 34 additional systems, shipped 24 additional systems, and received letters of acceptance representing an additional 21 systems. This brings our total orders for the system, since approval last June, to 74; total shipped units to 51; and total signed letters of acceptance covering 35 of those systems

We are ahead of schedule in achieving our objective of 100 systems shipped during 2004 and are thus revising our guidance to 125 to 130 systems shipped during calendar year 2004. When we combine this with systems shipped during 2003, we believe we will have between 150 and 160 ThinPrep Imaging systems in the field by the end of 2004. We also made great strides during the quarter on the reimbursement front. As previously reported, a new code has been established for computer assisted screening with manual rescreening under physician review. That code allows for an increase in CMS reimbursement, with a national limitation amount, or NLA, of approximately $9 per slide imaged; raising reimbursements for the laboratory from approximately $28 to $37 per test result. During the quarter, we confirmed that this level of increased reimbursement is in effect in plans representing an additional 23 million covered lives, bringing the total covered lives to approximately 155 million.

In addition to confirming this reimbursement with insurers we have now begun to see evidence of payment levels -- payment levels to lab customers. I will provide two real life examples to illustrate what we're seeing with respect to payment for automated screening of ThinPrep Pap Test slides using our imaging system. The first example comes from a customer -- a customer in the southeast region that went live with the ThinPrep Imaging System in November of 2003. Recently this lab reported to us that they had processed claims for approximately 7,000 cases, and their average allowed payment was $40.94 per imaged slide. This compares to their reimbursement for manually reviewed slides of $30.58, or an incremental reimbursement paid to them of $10.36 per slide. The second example comes from a lab customer in the mid-Atlantic region that also went live with the ThinPrep Imaging System in November of 2003. They reported to us recently that they had received payment using the automated screening code from a total of 19 insurance plans and that their average allowable payment was $44.62 per slide imaged.

Again, more than $10 of additional reimbursement compared to manual screening of ThinPrep slides. These labs illustrate the trend that we're seeing across the United States. That insurers are recognizing the automated imaging code and are paying at a level consistent with the medicare established national limitation amount. In addition of these milestones, during the quarter we executed an evaluation agreement with one of the two largest lab companies in the United States that will result in their evaluation of the ThinPrep Imaging System. The first phase of that evaluation has begun, and while details of this agreement are confidential, we will update you as we move through the evaluation process. We expect this evaluation process to continue through the remainder of this year.

In summary, we believe we have introduced a major advancement to cervical cancer screening with the ThinPrep Imaging System, that will significantly improve quality and reduce the overall system costs. We are confident that we will achieve our revised shipment goal of 125 to 130 systems by year-end 2004, and predict revenues from sales of imager slides to be in the range of $14 to $18 million for 2004.

The final business segment that I will comment on is our recent acquisition of Novacept and the NovaSure procedure. The integration of Novacept is well underway, and the former Novacept employees have been organized into a new division of Cytyc Corporation, named Cytyc Surgical Products. The NovaSure System is an endometrial ablation procedure performed on women who suffer from excessive menstrual bleeding. This disorder affects approximately 20% or as many as 7 million women in the United States between the ages of 35 and 55. The NovaSure System is rapidly gaining acceptance in the medical community as a replacement for older approaches including hormone therapy, dilation and curettage, first generation endometrial ablation devices and hysterectomy. The NovaSure sales organization has been integrated with Cytyc's commercial operations with Dave Ramsey, Novacept's Vice President of Sales and Marketing now reporting to me as Vice President of Sales for Cytyc's Surgical Products division, or CSP.

The CSP sales organization is responsible for the sale of the NovaSure product, and will be responsible for the sale of other surgical products in the future. The CSP sales force is complemented by Cytyc's professional medical representatives, or PMR sales force, that call on the OB/GYN office to promote the use of the ThinPrep Pap Test. PMRs are now promoting the use of NovaSure by profiling each of their OB/GYN physicians regarding their awareness of endometrial ablation products, qualifying the potential and interest, educating them about the features and benefits of the NovaSure System and, when appropriate, arranging a meeting and discussion with the NovaSure sales representative. A national sales integration meeting was held during the first week of April to train and educate Cytyc's PMR sales force on NovaSure and the CSP sales force on ThinPrep. Additionally go to market plans were established for each of the sales territories across the United States. We feel that this event was a success and have already had a steady stream of reports of competitive wins, since the sales meeting.

The combination of the Cytyc office-based sales representatives and the Cytyc Surgical sales representatives will be a powerful driver of conversion to NovaSure from competitive technologies and from older management approaches. At next week's annual clinical meeting in the American College of Obstetricians and Gynecologists in Philadelphia, four papers will be presented describing the clinical benefits of the NovaSure system compared to competitive technologies. In addition a medical education symposium will take place on Sunday evening with a distinguished panel of experts discussing ablation and the role of the NovaSure procedure in treating this disorder. We expect the attendance to be very high for this key event. We are off to a very strong start with NovaSure and expanded presence in the field with our combined sales organizations gives us the reach to accelerate our core ThinPrep business and to create a new standard of care with the best in class NovaSure System. I will now turn the call over to John McDonough.

Thank you, Dan. The acquisition of Novacept was completed on March 24th, and as a result five business days of Novacept activity is included in Cytyc's first-quarter results. Novacept contributed $1.4 million of sales during this five-day period, representing the sale of over 1,000 single-use devices and approximately 20 controllers. On March 22nd, we closed a $250 million contingent convertible bond offering that yielded $242.6 million in net cash proceeds to the company. The notes will bear interest at 2.25% per annum, payable semiannually and the conversion price is $29.67 per share. The proceeds from this bond offering, coupled with approximately $83 million of Cytyc cash, were used to pay the acquisition costs of $325.6 million. We previously reported that we expect sales of the NovaSure System for the remainder of calendar year 2004 to be in the range of $45 to $50 million. Based on the initial success of our integration activities, we are increasing our revenue expectations for the remainder of the year and, as such, expect revenues for the last three quarters of 2004 to be in the range of $50 to $55 million.

Approximately 90% of the revenue is expected to come from the sale of single-use devices with the remaining 10% expected from the sale of controllers. Approximately 3% of 2004 revenue is expected to come from international sales. Excluding the one-time acquisition costs mentioned previously, while we initially expected the acquisition to be breakeven in 2004, we now expect the acquisition to be accretive by one to two cents, but may be one cent dilutive to second quarter earnings. The acquisition is expected to be accretive by the third quarter of 2004. When you combine our expectations for the NovaSure product, with our expectations for our diagnostics product segment that Leslie mentioned previously, we expect total Cytyc revenue for 2004 to be in the range of $380 to $400 million, and for earnings per share to be in the range of 76 to 80 cents, excluding the one-time charges mentioned earlier. This earnings per share range is up from our previous guidance of 75 to 79 cents. We are pleased with the early progress of integration activities since the closing of the transaction on March 24th.

Management reporting relationships have been finalized and we confirmed the role and reporting relationships for all Novacept employees immediately after the transaction closed. Novacept's Palo Alto operation has been established as a division within Cytyc named Cytyc Surgical Products. The role of this group is to continue all research & development activities related to the NovaSure product, to evaluate new product opportunities related to NovaSure, surgical products generally or other opportunities related to our women's health focus, and to manage operations related to the NovaSure product, including medical education, manufacturing, and other support activities. In conclusion, we are off to a very positive start with the integration of Novacept and feel that our plans are right on track. As Cytyc and Novacept continue to become one, we believe we are well on our way to becoming the leading women's health-care company capable of achieving our goal of more than $1 billion in sales by 2008. I would like to now turn the call back to Pat Sullivan.

Thanks, John. Operator we'd now like to open the call up to questions that the participants might have.

Thank you. The floor is now open for questions. [Caller Instructions] Please hold while we poll for questions. Thank you. Our first question is coming from Wade King of Wells Fargo Securities.

Hi, guys, can you hear me.

Got you.

Sorry, Leslie, I shouldn't have said guys.

No problem, Wade.

Listen, congratulations on a strong performance. A couple questions, if I may. Very pleased to see the imager placement guidance going up. Is that inclusive of any expectations with the big labs, Pat?.

We do not have any expectations for placement of imager systems with either of the large labs this year.

Okay. And has the time from going into contract versus, uh, you know, achieving a letter of acceptance compressed at all since the last time you spoke on this issue?

Yes, it has. It's -- Wade, it's averaging about 45 days right now.

So it's cut in half, basically, is that right, from 90 to 45 days.

Yep, that's correct.

Very good. And can you just give a little more color on the process for the large lab evaluation of the imaging system? I assume -- is this a staged process, can you talk a little bit about the throughput dynamics that they're evaluating, are they testing, uh, you know, anything as it relates to, you know, dealing with the payers, etc.?

Currently, they're--we're in the first phase of that evaluation and you're right it is a staged evaluation. Phase one involves, uh, their use of the system with a limited number of cytotechnologists to determine their compatibility with the system, their sensitivity and specificity and their throughput. Following the successful completion of that phase, phase two would involve, uh, actual implementation of systems in -- in a series of their facilities, uh, to conduct a more real-life evaluation of the product in their hands.

Okay. Very good. Turning-- Leslie, maybe you could comment a bit on the gross margin. Obviously it was way ahead of our expectations in the first quarter, yet you have guided in a similar manner to the second quarter that you did for the first about 250 basis points down from your performance in the first quarter. You know, what specifically, aside from the costs associated with the imager and the like going into COGS, what specifically is there that is going to cause such a significant reduction in the gross margin that we, you know, had planned for Q1, didn't happen, and then now you are guiding for the second quarter.

Wade, that number was an overall worldwide number, so that takes into account the Novacept product coming into the mix.

Okay. So the difference now is that Novacept's on board and you're taking into account the impact on margin of the NovaSure product. However, are we to assume that there is still a factor associated with imager placements and the costs of ramping the imager? Because clearly we didn't see that, you know, in the latest quarter.

We still do have those costs, Wade, but I think what's offsetting that is that the terms of the contracts are coming in longer and so we're able to spread out the amortization over a longer period, which has offset some of those costs.

Okay. Very good. And just one question -- additional question and I'll get back in line. You went through a number of changes on the balance sheet, uh, quickly DSOs, but still obviously 53 days, that's certainly an admirable performance. The accounts receivables, um, you know, you said $6.6 million of the $14.5 million increase was Novacept, is that correct?

That's correct, Wade.

And the rest, can you break that out?

That was basically the core business.

That was the core business?

Right.

Okay. Is there any -- is there anything on a macro basis happening there that we -- that you could point us to?

No. There were really no issues in terms of collectability or anything of that nature that concerns us.

Okay. Very good. And as it relates to the inventories, a $5.4 million increase of which I believe you said $4 million was Novacept and the balance was-- the balance of the difference was primarily imagers, is that right.

That's correct.

Okay. And you expect that to remain reasonably consistent in the quarters ahead.

Well, we obviously won't have the large one-time increase from the Novacept acquisition.

Right. I'm sorry. I was referring to the imagers, the impact of the imagers.

Yeah. Although we are taking up our -- our imager -- you know, guidance and build plan, so that may go up -- go up a bit going forward.

Right. Okay. Very good. Thanks very much.

Thank you. Our next question is coming from Tom Gunderson of Piper Jaffray.

Hi, good afternoon, everybody.

Hi, Tom.

Imagers. Phase one and phase two that you just went through, Dan, is there a time frame we can put on either or both of those?

Our estimate is we would be complete with phase one, uh, during this quarter, and then phase two would initiate sometime in Q3.

Okay.

Our expectation, Tom, is that this evaluation will take for the remainder of this year.

All in.

Yeah, both phases.

Okay. So there's phase three of, you know, assuming phase two works of -- of putting the imagers throughout the system.

We would hope so.

Okay. The second is, I believe -- and I'm sorry, I'm doing this from memory and you know where I get in trouble with that, but AmeriPath was one of the ones that had signed up, can you tell us how many imagers they've been shipped?

Actually, we are in an evaluation with AmeriPath in two of their facilities, one in Florida, the other in Colorado, and those evaluations are still ongoing.

Okay. And then, Dan, as long as I've got you going here, the two examples were good ones and, um, you know, us number-crunchers love that. Can you give us a little of the soft on it as well? Did they give you in the Southeast region, for example, any increases in productivity that we could measure or market-share gains in that -- in their neighborhood?

Well, I can -- not those two labs in particular, but I can tell you we've just completed a survey of 20 of our lab customers that are live with the imaging system. And in almost all of the cases that -- of the survey, their comments were very, very positive about the productivity gains in some cases doubling productivity but in -- in virtually all cases, a significant increase in productivity in the customers that have this -- the system live. So there are many other attributes that they commented on, the sensitivity increases they are seeing. Um, so the combination of sensitivity and productivity, there -- we've got some very happy customers out there.

Okay. On the imager contracts, three years going to four years allowing longer amortization, what's the benefit to the customer for going to four years, they get a little bit better pricing?

Yeah. Their pricing is -- is fixed throughout the contract but it allows for a little bit lower pricing on the per-click charge.

Okay. I'll end there, thank you guys.

Thank you. Our next question is coming from Glenn Reicin of Morgan Stanley.

Glenn Reicin, Morgan Stanley, hi everyone.

Hi, Glenn.

A couple questions. Do we have enough experience now with the image that we can test some assumptions on average usage? We've been assuming roughly, you know, sort of 12,000 to 13,000, uh, disposables per installed, um, machine per quarter, I want to know if that works, what you're seeing, and also in terms of pricing what you're seeing.

Yeah. I think that's a pretty good ballpark for utilization and the pricing we're seeing is consistent with the ThinPrep Pap Test price.

So essentially a double up --

So what you're saying $7, around there.

Yeah.

And then to break it out, I think you said about 65 million were disposable sales in the quarter domestically.

Yes.

Can you break out the two ThinPrep versus imager?

That's all-inclusive.

I understand that. Can you break out those two pieces?

No. We don't normally break it out. We're looking at it as one -- one segment of the business.

Right.

Okay. That's fair. And then, a couple other things that I -- that didn't make sense here. You said you placed 39 instruments but you only generated $600,000 in revenues, I would have thought you'd generate, you know, three times that given that placement.

You know, what -- what's happening there is we're -- instead of outright purchases, we're seeing more instruments placed as reagent rentals.

Okay. So what is a realized price now on-- sort of a net realized price on a placement.

We placed the instrument -- first of all, the reason for the change over the last year or so, Glenn, has been, uh, many of these placements of ThinPrep -- ThinPrep systems today are in smaller-volume laboratories.

Right.

So the capital purchase can be a problem for those labs. So what we do is add an upcharge to the test price and amortize the cost of the capital for them. So our -- our test price is -- on the order of 30 to 35% higher than our typical test price.

So what you're going to see are the ASPs trend up on disposables, but the average realized price per instrument that you're seeing is going to be very low.

Right.

Okay. So can you just give me the -- sort of the placements of the 2000s and 3000s in the quarter, domestically?

Virtually all of the -- the placements were 2000s.

2000s.

I don't have specific numbers. If you have another question I can answer you in a minute.

Um, no, I think --oh also, on the international front, can you break down the instrument sales versus the disposable sales.

It usually runs 85% as disposables.

Are disposable?

Yep.

And the base we're using there is $9.7 million again.

That's correct.

I'll get back in line thank you.

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

Hi, good afternoon.

Hi.

A couple things if I could. I think first of all Leslie, you went kind of fast for me on the revenue breakout, and I'm trying to do the math, was the -- the other line about $2 million, is that right?

The other line?

Yeah, in other words I got ThinPrep and the equipment was $600 K and Non-Gyn was $2.5.

Oh, right, the all-other line is about $1.5.

$1.5. Okay. And then, again, kind of looking at the '04 guidance on -- on ThinPrep consumables, if now we're looking at 50 to 100k sequentially. I know it's sort of a typical question, but if you had to kind of ballpark it, is it -- do you sort of -- the law of large number sort of having a hard time getting conversions because we're just getting further along in terms of overall penetration, or are you factoring in, um, some competitive losses on a net basis as well going forward?

First of all, I think, um, we're assume that the two large labs are pretty much where they're going to be. And so that leaves the all-other segment, the smaller labs, and, you know, there's -- there's only so much left, frankly. So we're taking a conservative approach here and think we can continue to grow in that segment, but it's not to the level that we would have, you know, predicted a year ago.

Okay. If you could help me with the math a little bit. I think last quarter we were -- in terms of number of slides that were imaged I seem to recall it was about 1% or so. Do you know what that number was this quarter, in -- I am trying to back into the -- the overall ThinPrep guidance for '04, what would you expect the -- the percentage of slides to be imaged for calendar year '04 to be?

This quarter was just -- we think just under 3%.

Slides imaged.

And then for the year, again I could do the math, I'm sorry, I am being lazy, but within the $275 million let's say guidance for ThinPrep, do you know what that would represent in terms of percentage imaged?

Our revenue guidance for imagers was $14 to $18 million.

$18.

Okay. And then just a couple more things, kind of housekeeping. Um, the -- all right. So I guess -- I guess the only thing I'm kind of still missing is, um, for the '04 guidance, outside the U.S. I think the number Leslie was $45 million, is that right.

$40 to $45.

And how much of that was the UK?

About 30% of growth we think will come from the UK.

Okay, 30% of the growth. All right. And, lastly, can you give us any sense about -- you mentioned ACOG in the abstracts and I know it's probably kind of sensitive, but any sense at all what -- what we could see there in terms of sort of a safety versus efficacy bent on the abstracts, or any kind of head-to-head data with competing products?

There is a -- one head-to-head comparison of all competing products based upon the summary of safety and effectiveness filed with the FDA. And it's a rather thorough comparison of the -- all the technologies. I think that's one of the key papers that will be presented. Another is related to post-procedure discomfort and pain, it's very favorable. Uh, the other is related to clinical performance, generally.

Thank you. Our next question is coming from Ryan Rauch from SunTrust Robinson Humphrey.

Good afternoon. Just a couple questions. Do you want to give -- I mean I missed part of the call. Did you give '05 guidance and if not, do you want to take a shot at it or do we have to wait? I mean what quarterly call should we expect '05 guidance.

Ryan, consistent with our previous track record we usually do that in the fall.

Okay. But is it fair to say that your prior guidance from -- for Novacept since you just increased it for '04 we should have a positive bias as we build our model in '05 from a top line and accretive standpoint?

Yes, I would have a positive bias.

Okay. And then what -- where do you stand with the Abbott bladder cancer test, I mean just as far as the rollout? Maybe any other initiatives there? Can you just give us a brief update.

Yeah, the UroCyte, urine collection kit, which is a part of the collaboration, is completed and was released on April 1st, uh, so it's available to labs. We are taking a controlled-market launch approach with Abbott. They -- 20 laboratories in the United States make up about 85% of their business. So currently we have targeted those 20 labs for the urine-collection kit part of this product. The remainder of the product, which is the UroCyte filter and slide, uh, still have some development work underway, we would expect to have the complete system in place by the end of this year but the collection kit itself is released.

And then finally Leslie can you give us just by product line you're '04 guidance again? I know what Novacept was but just for ThinPrep, disposables, instruments, Non-GYN, etc., can you just briefly walk us through those line items?

Sure, well, basically all the all-other segment instruments, and Non-Gyn and the other segment is about $20 million.

And what was your ThinPrep guidance again? I missed that, I apologize.

ThinPrep guidance for domestic was $270 to $280.

And that includes imager?

That does.

Okay. Have a nice afternoon, thanks a lot.

Thanks.

Thank you, our next question is a follow-up from Wade King of Wells Fargo Securities.

Hi, it's Ed Shanken following up for Wade. A couple quick questions. One would be, if you were to expense the stock options to 2004, what do you anticipate that expense could be and then if -- you know, a law went into effect, is why I am asking that so that we could model this going forward.

We haven't done that exercise for 2004 yet. We did obviously disclose that in our 2003 Form 10-K so you could see the impact it would have had at that point in time. But that's all the information we have on that right now.

Okay. And going forward, where should we model the share account, it went up a little bit this quarter, and you mentioned you're not repurchasing shares. You know, given expenses or options going to the money. How should we model that going forward?

I think if you use the 113 million and maybe bring that up slightly for option exercises, which are extremely difficult to predict, you'll be in the ballpark.

What would you anticipate for the share count, you know, at the end of the fourth quarter, Leslie?

Uh, it's probably up maybe a million.

From -- from the end of 2003?

Well, it'll be about 114.5 million.

114.5 million for the end of the year.

That's our current assumption.

Okay. Good. And the amortization of imagers, you mentioned is lengthening because of the contract, um, previously, you know, we were anticipating four years, do you just change it for every contract, so it's a little bit different for every imager or do you have a standard that you used for your accounting for all imagers, how do you -- do you go about that? And then will you be updating that, you know, going forward, just tell us a little bit about that.

The range of the contracts is anywhere from three to five years, we've just been seeing a majority of them coming in at four. So it's basically whatever is negotiated with the customer.

So each piece of inventory might have a different amount of years that you amortize it?

That's correct.

Okay.

It's Wade. One additional question. Is there any update at all on the legal rangling between you folks and Tripath over patents in the imaging domain?

No update on that at all, Wade.

Could you repeat what you said previously as it relates to any timeline associated with this dispute coming to trial?

We would expect an '05 trial date.

An '05 trial date?

Correct.

Okay. Very good. Thanks very much.

Thank you. Our next question is a follow-up from Glenn Reicin of Morgan Stanley.

Hi folks, two other questions on ASPs. The first is with the -- with the changes in FX, are you getting effectively more on a price-per-test overseas today than you are domestically?

No, not more.

Not more.

More than we had been historically, but not more than the US.

So can you give us an idea of what the change is now or what the differences are?

I can tell you in the UK the contractor pricing with the National Health Service, um, is -- is -- is 80% of the U.S. pricing.

Was that established before -- before we've seen the big changes?

It was established last month.

Okay. And then in the United States, can you give us again a little bit of, you know, sort of advice as to where the AUPs are going on ThinPrep for the next couple quarters in the -- again, just in the U.S.?

Yeah, we -- we see the AUP increasing as we place more imagers out with our customers.

What about without the imaging system, just the plain ThinPrep.

I would say pretty much stable.

Stable.

Yep.

Okay. Thank you very much.

Thank you. Our next question is coming from Jayson Bedford from Adams and Harkness.

Hi, guys, good afternoon. Just one quick question for you. I know you added 20 controllers at least in the last week of March, what's the current installed base of NovaSure instruments out there and then, secondly, what's -- what's your anticipation for utilization per device per quarter? Thanks.

Uh, there are about an installed base of 250 to 300 controllers, um, and we expect that to -- between now and the end of the year virtually double in terms of all the --

Okay. And just the utilization per instrument.

In terms of utilization per instrument, um, not a number that's tracked specifically that way, but generally speaking we're looking at roughly one to two hundred disposables per instrument over the course of a year.

Okay. Great. Thanks.

Thank you. Our next question is coming from Bill Bonello from Wachovia.

A couple questions. I thought you mentioned when you were talking about DSO that revenue that may have been a little bit back-end loaded in the quarter, more in the last two months. I am wondering what -- why that was and then I have a totally different follow-up question.

I think we saw January, uh, being a little lighter than we would have expected but very consistent with what we heard reported out of our large-lab customers; that the weather, particularly in the northeast, was -- caused there sessioning to go down and I think we may have seen some effect of that in January.

I just wanted to clarify something you said earlier just so I make sure I understand this. When you place an instrument through a reagent rental agreement, that revenue is actually showing up in the -- in the ThinPrep Pap Test revenue as opposed to the instrument revenue.

That's correct.

That's correct.

Okay. Thanks.

Thank you. At this time, there appears to be no further questions. I'd like to turn the call back over to management for any closing remarks.

Great. Thank you operator. We are really off to a great start for 2004. In addition to the acquisition of Novacept, we achieved significant milestones in each segment of our expanding women's health franchise during the first quarter. We began to market the NovaSure System for endometrial ablation, our marketing plan for the ThinPrep Imaging System is ahead of schedule, and we initiated patient enrollment for our pivotal C trial for the FirstCyte Breast Test. We also continued to increase conversion to the ThinPrep Pap Test in the U.S. and international markets. I believe we are well positioned to become the worldwide market leader in providing innovative products for women's health. Thank you very much.

Thank you and thank you callers. This does conclude today's conference. You may disconnect your lines at this time and have a wonderful day.