Hologic Inc (HOLX) 2004 Q4 法說會逐字稿

Welcome to the Cytyc Corporation fourth quarter and year-end 2004 earnings conference call. Today's call is being recorded. At this time all participants are in a listen-only mode. Following the presentation we will conduct a question-and-answer session. (OPERATOR INSTRUCTIONS). I would like to remind everyone that this conference is being recorded and would now like to turn the conference over to Anne Rivers, Investor Relations Manager of Cytyc Corporation. Please go ahead.

Thank you. Good morning, everyone, and welcome to Cytyc Corporation's fourth quarter 2004 and year-end conference call. If you have not received a copy of the press release issued yesterday, 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 details in the Company's press release issued yesterday, in its 10-K and other filings with the 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 under 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 morning ladies and gentlemen. I would like to welcome you to our teleconference to report on the performance of the Company for the fourth quarter and full year of 2004. Joining me on the call today are Dan Levangie, Executive Vice President, Tim Adams, Chief Financial Officer, and John McDonough, our SVP of Development and Operations.

During this morning's call, I will provide an overview of the business for the quarter and the year, and then provide remarks concerning the announcement we made yesterday concerning the acquisition of Proxima Therapeutics -- a very exciting company that continues our expansion into a diversified women's health company. I will then turn the call over to Tim for more detail on our financial performance. Dan and John will then provide more of the details regarding the specifics of the acquisition of Proxima Therapeutics.

We delivered an excellent fourth-quarter and full-year performance for 2004. We are well-positioned for yet another year of achievement, based on our strong financial and operating performance for the year.

As noted in our press release, revenue for the fourth quarter of 2004 was 110.6 million with net earnings of 25.4 million, or 21 cents per diluted share, including the effect of the assumed conversion of our $250 million contingent convertible notes, which had a 1 cent dilutive impact in Q4.

Our base ThinPrep business delivered a strong quarter. In the fourth quarter, we shipped the highest volume of ThinPrep Pap Tests in the Company's history. In fact, 2004 volumes were more than 1.5 million units greater than 2003, and on a quarter-over-quarter basis, ThinPrep volumes were up in all of our customer segments. We now estimate our ThinPrep domestic market share to be approximately 70 percent.

Domestically, we shipped 36 ThinPrep Imaging Systems during the quarter and ended the year with a base of 144 revenue-generating units. We are very excited about the significant progress we're making with Laboratory Corporation of America in implementing this exciting technology.

NovaSure sales during the quarter were 24.5 million, continuing to exceed our expectations. We believe NovaSure, along with our other growth initiatives, including the ThinPrep Imaging System and our international opportunities, as well as the addition of Proxima, will put us on a strong financial growth trajectory on both the top and bottom line.

As indicated in our press release last night, we signed a definitive merger agreement with Proxima Therapeutics for a $160 million cash payment and an earnout provision. This acquisition expands our women's health and oncology franchise into breast cancer treatment. Proxima had 2004 revenues of over 16 million and is turning the corner to profitability.

Proxima Therapeutics develops site-specific cancer treatment systems for breast and brain tumors. We estimate that the market opportunity for Proxima's flagship product, MammoSite, to be in excess of $300 million on an annual basis in the United States. Proxima's business model is similar to Cytyc's, with significant technical innovation to treat patients with breast cancer with very high-margin disposables. John and Dan will provide more information concerning this great opportunity

We view this opportunity with the acquisition very similar to the Novacept acquisition we completed last March. Both Novacept and the Proxima products are in markets we did not serve with our OB/GYN sales force, but both are best-in-class products serving a significant unmet medical need with significant market opportunity. In addition, this acquisition builds upon our relationships with breast surgeons and breast centers we developed with our FirstCyte product for breast cancer risk assessment. And upon successful completion of that clinical trial, we would use the Proxima sales force to also promote the FirstCyte Breast Test to breast surgeons. Our business development focus remains squarely on high-margin, high-growth proprietary products in women's health, and we are very excited about the addition of Proxima Therapeutics to Cytyc.

I would like to now turn the call over to Tim for details on our financial performance. Tim?

Thank you, Pat, and good morning everyone. My remarks today will compare the financial results of the fourth quarter and full year 2004 with the results of the fourth quarter and full year 2003. I will also provide selective comparisons to the third quarter of 2004.

Total worldwide revenue for the fourth quarter of 2004 was 110.6 million, which exceeded the top-end of our revenue guidance for the quarter and represents a 41 percent increase from the fourth quarter of 2003.

Total revenue from the diagnostic products division was 86.1 million, which is comprised of 75.9 million from the U.S. market and 10.2 million from international markets. Revenue from the domestic diagnostic products division was comprised of 64.1 million from sales of the ThinPrep Pap Test, 6.1 million of revenue from the ThinPrep Imaging System, and 5.7 million of other revenue from sales of instruments and non-GYN tests. Revenue for the Cytyc Surgical Products division was 24.5 million for the quarter.

The 75.9 million of revenue from our domestic diagnostic products division for the fourth quarter represents an increase of 6.9 million, or 10 percent, from the fourth quarter of 2003. This increase was primarily a result from growth in the imager business. During the quarter, we shipped 36 imagers in the U.S. market, bringing total domestic shipments since the inception of the imager program to 158 units. At December 31, 2004, 144 of these units were revenue-generating, compared to 102 revenue-generating units at the end of Q3 2004.

In order to calculate the estimated annual revenue per imager, we divide the Q4 domestic imager revenue of 6.1 million by the number of revenue-generating units in the U.S. at the end of Q3 -- the 102 units. This quotient is annualized, resulting in the estimated annual revenue per imager of approximately 239,000, which is consistent with our range of 225 to 250,000 of annual revenue per imager. Although we have modified this calculation from what we described on the Q3 call, we believe this is a more straightforward calculation and fairly represents the annual revenue per imager, since the revenue-generating units tend to be back-end loaded and generate little revenue in the quarter in which they are shipped.

Due to the success of the imager since its launch in June 2003, effective in January 2005 we revised the estimated depreciable life of the imager to six years. This is consistent with industry practice and the useful life estimates of similar technologies. This change will be reflected in 2005 and is not expected to have a material impact on the financial results, based on the value of the imagers at the end of 2004.

As I mentioned earlier, the Cytyc Surgical Products division, which was created after the completion of the Novacept acquisition in March of 2004, contributed 24.5 million of worldwide revenue during the fourth quarter, an increase of 25 percent from the third quarter of 2004. Revenue during the quarter included sales of approximately 25,000 single-use devices compared to 21,000 devices sold in Q3, and sales of 167 radio frequency controllers compared to 109 controllers sold in Q3.

The overall company gross margin rate for Q4 was 78 percent, which is approximately 2 percentage points lower than the gross margin rate of 80 percent in the fourth quarter of 2003. This increase is attributed to expenses associated with the roll-out of the imager as well as increase in international sales, which generally have lower margins compared to the domestic business. This decrease also reflects the impact of NovaSure sales, which carried a lower gross margin than the ThinPrep sales during the quarter.

Total company operating expenses during the fourth quarter of 2004 were 44.5 million, or 42 percent higher than the same period last year. This increase is primarily driven by the addition of the Cytyc Surgical Products division. Additionally, incremental R&D investments and increased selling efforts were made in support of the imager, along with the continued ramp-up of international business.

G&A expenses of 10.6 million were up approximately 28 percent from the 8.3 million in the fourth quarter of 2003. The majority of the increase is attributed to the Cytyc Surgical Products division, as well as costs related to Sarbanes-Oxley compliance and legal costs related to litigation.

Our income from operations was 41.8 million, or 38 percent of revenue, compared to 31.1 million, or 40 percent of revenue in the fourth quarter 2003. The effective tax rate in the quarter was 38 percent.

Fourth quarter 2004 net income was 25.4 million, or 30 percent higher than the 19.5 million reported in the fourth quarter of 2003. The fully-diluted earnings per share for the quarter was 21 cents, up 24 percent from the 17 cents per diluted share in the fourth quarter of last year, and reflects the 1 cent dilution related to the new accounting pronouncement for contingent convertible debt which is effective for periods ending after December 15, 2004. The 21 cents is equal to the high-end of our guidance range that we discussed on the Q3 call, after giving effect to the 1 cent dilution from the convertible debt.

Total worldwide revenue for fiscal year 2004 was 393.6 million, which represents a 30 percent increase compared to 303.1 million for 2003. Total revenue from the diagnostic products division was 330 million, which is comprised of 289.5 million from the U.S. market and 40.5 million from international markets. Revenue from the domestic diagnostic products division was comprised of 252.7 million from the sale of the ThinPrep Pap Test, 17 million of revenue from the ThinPrep Imaging System, and 19.8 million of other revenue from sales of instruments and non-GYN tests.

Revenue for the Cytyc Surgical Products division was 63.6 million for the period from the date of the acquisition in March of 2004 through December 31, 2004. The full-year 2004 domestic ThinPrep Pap Test revenue of 252.7 million was approximately 3 million higher than the 249.6 million reported for 2003. As Pat mentioned, 2004 was a record year with over 36 million pap tests sold in the U.S. market. ThinPrep sales to Quest and LabCorp together represented 24 percent of consolidated revenue for 2004, as compared to 30 percent in 2003. While unit sales of total revenue to Quest and LabCorp increased year-over-year, sales to these customers decreased as a percentage of total revenues due primarily to the growth from NovaSure sales.

Pro forma net income for 2004 was 92.7 million after excluding the onetime 19.1 million Novacept in-process R&D charge, which represents a 26 percent increase over 2003 reported net income of 73.6 million. Pro forma fully-diluted earnings per share was 79 cents, up 25 percent from the 63 cents per diluted share for 2003. The 79 cent pro forma fully-diluted earnings per share for 2004 reflects the 1 cent dilution related to the new accounting pronouncement for contingent convertible debt and is in line with our guidance. The effective tax rate for 2004 was recorded at 38 percent, excluding the nondeductible R&D charge related to the Novacept transaction.

Now I would like to take a moment to discuss Q1 2005 guidance. We believe first-quarter 2005 total worldwide revenue will be in the range of 113 to 115 million. The fully-diluted earnings per share will be in the range of 21 to 22 cents, which reflects the dilutive effect for contingent convertible debt and is consistent with our guidance we gave on the Q3 call. We expect gross margin to be approximately 78 percent and operating margin to be approximately 38 percent.

And finally, moving to the balance sheet, our cash, cash equivalents and investment securities totaled 232.3 million as of December 31, 2004, or approximately 54 million higher than the balance at the beginning of the fiscal year. The increase was due to our positive results from operations, as well as tax benefits from the NovaSure transaction and proceeds from the exercise of stock options. Days sales outstanding of 50 days at the end of 2004 was slightly higher than the 46 days reported at the end of 2003. Inventory turnover was 3.9 turns at the end of 2004 as compared to 4.1 turns at the end of 2003.

Thank you. I would now like to turn the call over to John McDonough.

Thank you, Tim. As announced in the press release last night, we have entered into a definitive agreement to acquire Proxima Therapeutics in an all-cash transaction for a purchase price of $160 million, plus a two-year earnout based on incremental sales growth. The transaction is expected to close by the end of the first quarter and we plan to use existing cash balances to pay for this acquisition.

We expect incremental revenue in 2005 related to this acquisition to be in the range of 15 million to $17 million from sales in the last three quarters of the year, and for the transaction to be 1 to 2 cents dilutive to earnings, but breakeven to accretive by the fourth quarter. Revenue of 35 to $40 million is expected in 2006 and the transaction is expected to be 3 to 4 cents accretive in 2006.

Proxima Therapeutics is a private company located in Alpharetta, Georgia that designs and develops innovative site-specific cancer treatment systems for breast and brain tumors. Proxima's revenue in 2004 was approximately $16 million, with over 75 percent of the revenue coming from Company's MammoSite product line, which is used for the treatment of breast cancer.

Both of Proxima's primary products -- MammoSite for breast cancer, and GliaSite, which is used for the treatment of malignant brain tumors -- allows physicians after removal of a cancerous mass to deliver optimally-dosed radiation directly to tissue that is at the highest risk of cancer recurrence while minimizing damage to healthy tissue.

Although we believe GliaSite is a very promising product that plays an important role in the treatment of brain tumors, this product does not fit within our core focus on women's health. As a result, over the next several months we plan to seek a strategic partner who has the capabilities to expand the usage of GliaSite. Until a strategic partnership is in place, we expect to manage the business (indiscernible) break on an earnings basis.

As we have stated in the past, our objective is to build a diversified women's health franchise. This acquisition will allow us to expand our women's health and oncology franchise into the breast cancer treatment market. Similar to our ThinPrep, imager and NovaSure products, we believe MammoSite represents a best-in-class product that offers significant clinical and technological advantages over the current standards of care. This acquisition will also increase our participation in the medical device marketplace with another high-margin, high-growth product with significant market potential.

For further background on the breast cancer market and the MammoSite opportunity, I will now turn the call over to Dan Levangie.

Thanks John. Breast cancer is one of the most common types of cancer among women. Over 200,000 new cases of invasive breast cancer and 65,000 cases of ductal carcinoma in situ, or DCIS, are expected to be reported in 2005.

The standard of care for treating breast cancer has shifted in the last two decades from mastectomy to lumpectomy, a less disfiguring breast-conserving therapy which involves surgical excision of the tumor, plus a margin of normal tissue. After a breast surgeon performs a lumpectomy, the patient is typically referred to a radiation oncologist for radiation therapy.

Currently, the most common method for delivering radiation is whole-breast radiation, which is delivered once a day, typically over 30 to 35 days. Another method for delivering radiation is brachytherapy, which is simply the administration of radiation from inside the body. The traditional method, interstitial brachytherapy, requires several needles or catheters to be implanted in breast tissue to allow a radioactive source to be temporarily placed inside the lumen of each of these needles. Method of administration has a reduced treatment time -- 5 days -- but it requires 15 to 25 needles be placed in the breast to ensure adequate coverage of the tumor bed. Due to its complexity and time requirements, this approach has not been broadly adopted by the medical community.

The MammoSite Radiation Therapy System is a device that facilitates and simplifies brachytherapy in the breast. The MammoSite device consists of a multi-lumen silicon catheter connected to an inflatable balloon assembly that is available in spherical or elliptical shapes. After tumor removal surgery, an uninflated MammoSite balloon is placed into the tumor recession cavity. Placement can be performed by either a breast surgeon or radiation oncologist in the office or in the surgical center, either in conjunction with the lumpectomy or following that surgery.

Once in place in the breast, the balloon is filled with a saline and contrast solution to create a symmetric sphere that allows for accurate calculation of the amount of radiation required for treatment. Radiation is delivered temporarily by temporarily placing a radioactive seed into the catheter using commercially-available remote afterloaders. Patients using MammoSite receive radiation during two 15-minute treatments per day over five days. After patients complete their radiation therapy, the MammoSite balloon is deflated and easily removed in the physician's office.

The efficacy of partial-breast radiation has been studied by a number of investigators and has been found to be comparable to whole-breast radiation. Data presented in December of last year at the San Antonio Breast Cancer Conference demonstrated that not a single patient that participated in the MammoSite FDA clinical trial has experienced a breast cancer recurrence over a three-year follow-up period -- zero local recurrences in three years.

In addition to its effectiveness, there are several compelling advantages over the MammoSite product over whole-breast radiation and conventional breast brachytherapy. MammoSite significantly reduces the complexity and the invasiveness of conventional breast brachytherapy while retaining the reduced treatment time and other advantages of local radiation delivery.

Training requirements for physicians are minor, and for patients the procedure is far less invasive than conventional brachytherapy. As compared to whole-breast radiation, treatment times are reduced from 30 to 35 days, down to five days -- significantly increasing patient convenience and compliance, along with improved physician productivity.

Furthermore, due to the targeted delivery of radiation associated with the MammoSite product, the volume of normal healthy tissue, including the heart, lung and skin, receiving unnecessary radiation is dramatically reduced.

To date, over 7,000 breast cancer patients have been treated with MammoSite. Of the estimated 260,000 new cases of breast cancer and DCIS in the United States each year, approximately 120,000 breast cancer patients are currently eligible for the MammoSite procedure, representing more than a $300 million annual market opportunity in the United States alone.

Reimbursement for MammoSite compares favorably to whole-breast radiation. Breast surgeons, who are the key decision makers in the treatment process, receive no reimbursement for whole-breast radiation, but now receive an office reimbursement of approximately $4,900 for placement of the MammoSite catheter. Both in-office and facility reimbursement were not established by Medicare for the MammoSite product until January of this year, though reimbursement was in placed under existing CPT codes for the delivery of radiation treatment.

While the new code has not been fully adopted by private payors yet, insurance plans appear to be positive, with the nation's largest carrier, Aetna, having issued a policy of medical necessity for the MammoSite device. We feel the establishment of the specific reimbursement from MammoSite will help drive accelerated adoption over the next several years.

As John stated earlier, our objective is to build a diversified women's health franchise, and the acquisition of Proxima Therapeutics and the MammoSite product will allow us to expand our presence in women's health. Proxima has built a 30 percent breast cancer sales force, calling on breast surgeons and radiation oncologists. Our intention is to preserve and expand this group through approximately 50 sales professionals over the next 12 to 18 months, to allow us to fully capitalize on this opportunity.

The combination of increased use of breast tissue-conserving surgery with the move to more targeted and localized radiation therapy, and the newly established reimbursement coverage and payment for MammoSite, makes this a very compelling commercial opportunity that will improve the lives of women diagnosed with breast cancer.

I would now like to turn the call back to John McDonough, who will review the financial terms of the transaction and present updated Cytyc guidance due to this acquisition.

Thanks Dan. I have already given you a brief overview of the transaction structure. We will make a $160 million up-front payment at the time we close this transaction, which is expected to occur in late March. The two earn-out payments are calculated off 2004 base revenue and are based on the growth in revenues from Proxima's breast cancer products in 2005 and 2006, and do not adjust for revenues generated from the GliaSite product.

The first payment will be 2.5 times the incremental 2005 breast cancer sales and will be paid in 2006. The second payment will be 0.5 times the incremental 2006 breast cancer sales and will be paid in 2007.

We anticipate there will be approximately $1 million of cash and no debt on Proxima's balance sheet at the time we close this transaction. Proxima recorded a net loss of $3.8 million in 2004 on $16.4 million in revenue, but the company was profitable by the end of the year. Despite the lack of MammoSite reimbursement, Proxima recorded $12.6 million in MammoSite sales in 2004, up nearly 50 percent from 2003.

We expect that we will record 15 to $17 million of revenue from the sale of Proxima products during the second through fourth quarters of this calendar year, excluding sales from GliaSite. This assumes that the transaction is closed by March 31. This represents the sale of approximately 6,000 to 6,500 single-use devices in the United States at an average sales price of 2,500 to $2,600 per unit. We do not expect any significant international MammoSite revenue in 2005, although we view international as an excellent opportunity and an area for future growth.

For 2006, sales of MammoSite are expected to be in the range of 35 to $40 million.

Gross margins for the MammoSite product are expected to be consistent with margins in our Cytyc Surgical Products division, which are over 80 percent for single-use disposables. We intend to grow the existing MammoSite sales force from 30 people today to 40 people by the end of 2005. As a result, MammoSite SG&A expenses are expected to be 65 to 70 percent of revenue in 2005, while R&D expenses are expected to be 21 to 23 percent of revenue. We expect that as the business grows and our integration is completed, SG&A and R&D costs will drop, and that operating margins will be in the 30 to 33 percent range by 2006. We expect to take a onetime charge related to this acquisition of approximately $500,000.

From an earnings standpoint, excluding the onetime charges, we expect this transaction to be 1 to 2 cents dilutive to Cytyc's earnings per share in 2005, but breakeven to accretive to earnings by the fourth quarter of this year. As we look out to 2006, we anticipate that this transaction will be at least 3 to 4 cents accretive to earnings per share.

On an overall basis, we have previously reported that we expect total Cytyc 2005 revenues to be in the 485 to $505 million range, and earnings per share to be between 95 cents and $1.01 per share, after the effect of the new accounting for the convertible securities.

Reflecting the Proxima acquisition and contribution from the MammoSite product, we expect total Cytyc revenue for 2005 to be in the 500 to $522 million range, and for earnings per share to be between 93 cents and $1 per share.

We are excited about combining forces with Proxima and leveraging our respective core capabilities. Proxima brings a market-leading product, along with a significant sales force calling on breast surgeons and radiation oncologists, which we can leverage and expand to drive market adoption of the MammoSite product. Cytyc brings a strong market presence and reputation in the women's health market, with almost 200 sales reps calling on OB-GYNs everyday, along with an operational infrastructure that can support the growth in the MammoSite business.

In summary, our goal is to be the leading women's health company in the world. ThinPrep, the imaging system, and NovaSure represent best-in-class products, addressing large market opportunities in cervical cancer and endometrial ablation. MammoSite provides us with our fourth best-in-class product and has significant growth opportunities over the coming years. We feel we are adding another high-growth building block to our current women's health platform and that we are well on our way towards attaining our goal of $1 billion in revenue by 2008.

I would like to now turn the call back to Pat Sullivan.

Thank you, John. Operator, I would like to now open the call up for questions.

(OPERATOR INSTRUCTIONS). Tom Gunderson, Piper Jaffray.

The GliaSite part of this looks like it was, what, maybe $4 million in sales last year? Was that up, number one? And number two on GliaSite, when you say looking at strategic partners -- I think some investors might be thinking you paid a pretty hefty price for this. But would it include the possible sale of the GliaSite business that could lower your overall price for MammoSite?

There are really two answers to that, Tom. This is John McDonough. The first one would be GliaSite revenue in 2004 was up a bit from 2003. So there was some growth there. And secondly, to the extent that the GliaSite business is sold, that would be reduced -- you could consider that a reduction from the purchase price.

And then, Dan, you mentioned a $4,900 payment to in-office for delivery of radiation for this. Can you break that out, the way it would look for a doctor? What are his costs in that and what would he, on average, he or she net?

The device itself is roughly $2,400 and his total reimbursement, of course, is 4,900. So the remainder would be used to cover whatever costs are associated with a nurse assisting him and whatever instrumentation would be required. So it's fairly minimal costs. It's a relatively profitable endeavor. We think overall, a physician would earn about $2200 of profit with that procedure.

And anesthesia -- does it require an anesthetic? Tell me a little bit about the iridium. Are you guys supplying or is MammoSite supplying the iridium, or does that come from another source?

The anesthesia required is local anesthesia to place the device. It can be done using general anesthesia, but certainly can be done also with local. In terms of the radiation, that is provided when the patient attends the radiation oncology department at the facility. The facility would provide the radiation source.

Okay. I'm sorry, but I'm a little -- we're all try to gather this real quickly. I'm a little confused. How do you do that in office with a rad on?

I'm sorry. The placement of the MammoSite device is what I'm referring to taking place in the physician's office. It's simply the placing of the catheter and the balloon, making sure it's placed appropriately in the cavity. Once that take place, then the patient attends the radiation oncology department twice a day for five days.

And the balloon stays in for that five days?

The balloon stays in. She would then return to her breast surgeon for removal of the balloon after the therapy is completed.

Last question on Proxima, and then I will get back in queue, and that is side effects. You didn't mention it; I couldn't find anything in the literature last night. But it would seem, and you sort of hinted at it -- but, you've got local radiation rather than whole-chest radiation, that you would have lower side effects. Is there anything that's been documented on that?

In terms of the side effects profile, it's actually improved compared to whole-breast radiation from a cosmetic standpoint. The cosmetic effects of MammoSite are much reduced in comparison to whole-breast radiation. And as I mentioned in our discussion earlier, the radiation effects on other structures nearby the breast really are not impacted. Those structures are not impacted with the MammoSite device in the way they are with whole-breast radiation. So it's really localized therapy that treats the tumor bed itself, and is really becoming a preferred way to go in terms of treatment of these patients.

Wade King, Wells Fargo Securities.

Thanks for all the detail. Congratulations. I will direct some questions towards some other sides of the business. First off, could you update us on your expectations for imager placements in 2005? Has that changed, and can you give us a figure, please, or a range?

This is Tim. The number has not changed from what we communicated back in Q3, and new shipments -- approximately 120 to 130 in calendar '05.

Very good. That figure continues to take into account your agreement signed last year with LabCorp -- is that correct?

Yes. Correct.

Very good. Could you provide us any detail please on how the agreement with LabCorp is progressing? And I know while you have indicated that over the life of the agreement with LabCorp, as in several years, you would expect that to represent up to 75 potential imagers in LabCorp facilities -- is that a good number for us to key on, on an ongoing basis? Could you give us any metrics as relates to your expectations, in terms of how many of those you would expect to place by the end of '05 for example, and '06?

This is Dan. I would say -- I don't want to give a lot of specifics about the number of imagers or facilities within LabCorp. I will say that we are definitely on track with where we expected to be in terms of the roll-out. I think both Cytyc and LabCorp are very satisfied with the way we see the roll-out going, as well as with the level of reimbursement that we're seeing. So all systems are go. I think your estimate of 75 is a fairly good estimate in terms of total systems that would be placed at the conclusion of our roll-out. But I'd rather not give any more detail on that, given the confidential nature of our agreement with LabCorp.

Those of us that have followed the Company for years remember well the investor uncertainty period over the timeline of you going into agreements with Quest Diagnostics. Can you make any comments on the springtime calendar associated with the renewal renegotiations, the Quest agreement? Is there any activity there? Is there anything you can comment on as relates to the relationship with Quest whatsoever?

There's really not, other than the fact that our contract extends through May of this year. And we would be expecting to have discussions with Quest about the renewal of an agreement as we speak. I will say that as we look at our ThinPrep volume during the fourth quarter, it was up in all segments, including large labs. So we're very confident that the product continues to be very strong in all of our customer segments.

And given you have an agreement with LabCorp and are placing images there, if you separated out Quest within the large labs segment, and given Quest does no imaging to date, and just pure ThinPrep volume, was that up in the quarter?

All segments were up, Wade.

Last question. Could you comment on your international business, please, in '05? Obviously, the Novacept business is on a tear and other parts of the business are growing well; the international piece was a little below our expectations. Could you talk about prospects for reimbursement in several of the major European markets, and what is going on? I mean, obviously, we're all familiar with what's going on in the UK in terms of you growth opportunities, but especially in Germany and some of the other markets, where we would hope to see a similar windfall in terms of creation of opportunity for you. What is going to impact the international business profoundly and maybe boost your growth rate a bit the next year or two?

Our international revenues for the year were at the low-end of the guidance range that we had provided. So I wouldn't say they were low; they were at the low-end of the range. That is partially due to the fact that while we have agreements in place with about half of the strategic health authorities in the UK that represent about 50 percent of the market, the conversion process itself is behind schedule. So we still feel good about the position that we're in. We think we're going to win the lion's share of the market in the UK. But, in fact, the actual conversion is just delayed versus our expectation. And that, I think, explains why we finished at the low-end of our guidance range. In terms of growth next year -- Tim, have we provided guidance on international?

Yes, Dan. The guidance for '05 for international is 52 to 58 million, and that is unchanged from where we were a quarter ago.

Is there any further detail you can provide on why you are a little bit behind schedule in terms of conversion, please, either market-by-market or otherwise?

In terms of the UK, Wade, it's not us that are behind, it's the government making the conversion process. And it's a fairly complicated system. But essentially, it's well behind the schedule that had been laid out by the National Health Service at the time of the announcement in October.

In terms of other markets that are -- where we're seeing reimbursement come along fairly nicely are both in Spain and in Italy, where reimbursement decisions are regionally based. And in both of those countries we continue to make progress and see our revenues grow. We have talked in the past about our distributor in China. We had a nice growth rate in China during the year 2004. We continue to be optimistic about our prospects there.

How about in Germany and France?

Germany and France, as we've said in the past, are centralized decisions. Germany will likely be a decision based upon a clinical trial that would be required in that country. And we're in discussions with authorities there about such a trial. And in France, we were expecting a decision at the first of this year. And we suspect it will take a bit longer for the government to come down with new reimbursement levels for laboratory services, so our expectation is second half of this year.

David Lewis, Thomas Weisel Partners.

I have one quick question on the imager, and then a couple on Proxima. Just real quick on the imager -- the 6.1 million in the quarter here I guess is lower than the pull-through we're assuming. And I know you're talking about these things being pushed out. Maybe I missed it -- is the 2005 guidance for the imager remain unchanged?

This is Tim. That's correct. That revenue guidance is 48 to 50 million and it ties back to the 120 to 130 shipments for next year.

So even this deceleration we saw on a sequential basis doesn't concern you? You still believe that the back-end processing your seeing in January and February makes you comfortable in your estimates for '05?

That is correct.

Great. Shifting over here to the Proxima, I guess first for Dan or John. Proxima used to be very excited about this Varian relationship. And maybe -- I don't if the Varian relationship is still going to be on on a go-forward basis. Maybe talk about how important that channel will be to the Company, and whether that channel is still going to be accessed?

I think we continue to be excited about the relationship in which the specific high-dose afterloaders are provided by Varian, and we are replacing those in facilities. So I don't think there's any lack of enthusiasm about that relationship at all.

Tim, you mentioned gross margins around 80 percent. Historically we thought Proxima was more like 85 percent. Is there any reason why that 85 percent number for Proxima gross margins would be inaccurate?

This is John McDonough. What we said was we expect the gross margins to be over 80 percent. 85 percent is definitely within range of where we think we can get to with the MammoSite product.

Great. Lastly, just looking at customer count penetration. I think, looking at our old notes here, they used to have something in the neighborhood of 80 percent of their revenue coming from their top-20 customers, or their top-50 accounts being over half of revenue. I don't know. John, if you would talk a little bit about how important the top customers are, and have those mixes changed in your opinion? And will they change going forward with the increasing breadth from Cytyc?

I think some of that information is probably old. The breadth in revenue that we've seen from the existing accounts is spread very evenly -- no heavy concentration. We think there are opportunities, and our market research supported significant opportunities to expand usage with new customers, and also to drive increased penetration from physicians who are already using the product. And we really believe that the new reimbursement in place is going to be one of the major drivers, along with new data coming out, the three-year data that came out recently, etcetera.

So, there's really upside on all fronts, we think. And for sure over time, 80 percent of the revenues over some period of time will be coming from existing customers who are doing more, as opposed to closing new physicians. And (technical difficulty) the split is probably going to be more like 1/3 new customers and 2/3 existing customers.

But no one center job is driving more than 5 percent of sales for the Company?

No.

Glenn Reicin, Morgan Stanley.

A couple of questions on the quarter and then one on the acquisition. I noticed that margins have bounced around a lot from quarter to quarter. Third-quarter margins were much better than expected; fourth-quarter, actually a lot worse than expected. Can you talk about some of the variables that have led to the volatility? And please be as specific as possible.

This is Tim. We reported 78 percent in the most recent quarter. We saw a couple of things there. Continued growth in the imager business, which does have a lower margin than the core business. And over in the Novacept side of the business, there was a two-week plant shutdown that occurred during the quarter. And so effectively some of the under-absorbed overhead was taken in as a period charge during the quarter, and there was some scrap inventory that was written off in the quarter as well.

Anything on the SG&A front that was unusual as well?

I don't think so.

Can you just break down the domestic and international NovaSure numbers?

Glenn, we haven't broken that down in the past. For this year it's still relatively pretty immaterial over on the international side. It's a pretty small number.

Did you give us a total international number for the entire corporation?

We gave you -- for '05?

For '04.

For '04. Yes. 40.5 million was the total international revenue for '04.

I can back into the quarter. Finally, one for you, Pat. There's always nervousness around the acquisitions. You had one very poor acquisition and you've had one acquisition that was a home run. Can you maybe compare and contrast those different acquisitions, explain what went wrong, what went right, and maybe relate that to Proxima? Because last time we talked, you did mention that you were looking more for bolt-on acquisitions rather than new platforms. This seems more of a new platform than a bolt-on, just my initial impression.

I think as we looked at growing a diversified women's health care company, this one fits very nicely. I would say both in the case of Novacept and in the case of Proxima, both companies had significant revenues on a quarter-over-quarter basis. Both were turning the corner to profitability, or actually have turned the corner to profitability. And I look at this one very similar to the Novacept acquisition, probably characterize it just a year behind -- about a year behind in terms of the commercialization of the product.

The product acquisition was a lot different. It was a product that was -- continues to have a lot of promise. But I think at the stage we acquired the company, it wasn't a -- reimbursement was a significant issue and remains a significant issue, and we're going to have to -- we're doing the clinical work to get the data that we're going to need to make that commercial -- a commercial product.

But, I think in the case of both Novacept and Proxima, they are real revenues, profitable companies, sales forces -- in the case of Proxima, a 30 range; in the case of Novacept, 60. And I think both products have very significant growth opportunities that we can take and commercialize with our existing sales and marketing organization.

Let me push you on that. You've obviously proven your talents in terms of providing reimbursement expertise to these new companies, and I can see how you would push with the insurers to help get greater acceptance for Proxima. But can you talk a little bit about the point of sale here and the different interactions between your existing sales force and Proxima going forward?

The existing sales force is calling on the OB-GYNs, both in the office and in the surgery center. In the case of Proxima, it is a new sales force -- about 30 -- that are targeted on breast surgeons and the -- breast and the oncologists. But it is focused on women's health, and I think it's a (indiscernible) just like Novacept; it's a segment that we did not have distribution in. And I think we have proven with the acquisition of Novacept the ability to integrate a sales and marketing channel into our organization, and really drive the market and the sales -- the top line and bottom line.

So you don't envision any cross-selling between -- or direct to consumer cross-selling with your OB-GYN sales force, and now the new oncologist sales force, or breast sales force?

This is Dan. I think down the road, as we have a broader base of trained physicians that are using the MammoSite device, that consumer effort -- either consumer education, or advocacy, or advertising would be something we would look at. And I think our office-based sales force could play very heavily in the educational component -- patient education component of that.

Last question. You did provide guidance for '06 for the acquisition. Are you venturing to give us the guidance for the entire corporation in a wide range, perhaps, for '06?

This is Tim. Not at this time.

Bruce Cranna, Leerink Swann.

A couple of things. If I could start, first, Pat or Dan, just on the ThinPrep side. Can you give us a volume number in the U.S. for the quarter? I seem to recall we pried one out of you last quarter. And what I'm trying to get to is if I take the imager number and assume kind of the $7-ish per slide figure, triangulating to maybe 10 to 11 percent of ThinPrep slides being imaged in the quarter. Is that more or less right?

We have consistently said over the past several quarters that the volume out of the U.S. is about 9 million per quarter. This quarter it was little bit higher, 9.4. And your 10 percent estimate is pretty close. That is approximately where we are.

Any change to the number of covered lives in the U.S. for image slides?

No. It's about the same as it had been last quarter.

I guess on Proxima, I would like to kick around the market opportunity a little bit. I think, Dan, you had mentioned 300 million or so being the way you look at the opportunity in the U.S., which I guess means 120,000 women, more or less, or somewhere around 40 or 50 percent of cases. And I'm trying to reconcile that with what we have heard some docs say, which is it's somewhat of a smaller number -- I guess specifically, those women with tumors less than 2 centimeters. I'm trying to figure out if it is sort of 120,000 or so patients, in your estimation, market opportunity. Is that sort of cut point, if you will, on tumor size wrong that I'm talking about, 2 centimeters, or does Proxima have some data pending regarding effectiveness in larger tumors that is high-risk women?

This is John McDonough. I will try to take that one for you. As Dan mentioned in his script, there are about 260,000 new cases of breast cancer each year. So what I'll try to do is I'll take you from the 260 down to the 120 using general numbers based on our own market research.

Of the 260,000 new cases, about 210,000 are really pursuing breast-conserving surgery as opposed to mastectomy. And from that 210,000, in terms of tumor size, the tumor size -- you've got different guidelines out there -- 2 cm, 3 cm or less. In our estimation, you could subtract about 50,000 of the 210,000 to reduce the number for tumor size, in terms of market availability.

Then, you would want to reduce the market again by about another 2 to 5,000 for pathology, which would be negative lymph node status. Then you would want to reduce about another 15,000 for age. Again, you've got conflicting guidelines which would say eligibility is for either women over 45 or women over 50. But if you reduce about 15,000, you're in the right range.

And then breast size is the other market-reducing issue, although that is debatable, too. But we reduce the market size by about 20,000 to cover that particular issue. So we think conservatively, if you kind of do the math on that one, you get to a market size of 120,000. If you multiply that by the ASP, you get over a $300 million market. And again, we think those numbers are pretty conservative.

That's helpful. Does Proxima have any data pending, or do you foresee further studies to kind of put a finer point on this?

There's a study just beginning -- NCI study, actually out of the NSABP -- that will enroll patients with tumor size that's unrestricted basically -- larger than 3 cm. So that data will be forthcoming over the next several years.

And then, I guess some of the folks we spoke to mentioned that Proxima had already gone down the DTC road, and that -- actually it had some patients show up asking for the device and actually having supplied the device in their practices. So do you know, I guess, is that the case? Did Proxima really -- had they sort of pushed too hard on the DTC approach? And do you see yourself pushing harder or continuing that?

I could tell you that Proxima has not engaged in proactive direct-to-consumer activity at all. What they have done is what I think every company does -- the press will pick up stories about their device, and women will read newspapers and ask their physician. So, I think it's a passive kind of consumer interaction that's taking place. I don't think that they've been out ahead of themselves at all. And I think we have got a track record of really trying to gauge when the appropriate time is to engage in consumer advertising, and we will follow the same guidelines with the MammoSite device.

Dan, did you mention the CPT code for brachy was about 4900? Is that the number we are using?

Yes.

And the code specific to RTS is what, or the reimbursement on that code, the pending code?

The new code that I described covers the placement of the MammoSite balloon by the breast surgeon in the office, and the CMS rate of reimbursement is 4900.

One bookkeeping thing. Did you or did anyone break out NovaSure U.S., o-U.S.? I know it's teeny o-U.S., but I'm just curious.

We gave you the revenue number for the quarter in total. We didn't break out the U.S. or the international piece.

I know you didn't. But you won't?

It's pretty small in international markets.

Ryan Rauch, SunTrust Robinson Humphrey.

Just a handful of quick questions. First, Tim, what was the FX impact in the quarter?

On the revenue?

Yes.

It is approximately 7 to 800,000.

Can you just walk through are there any synergies from your FirstCyte efforts? Granted, you've reined those in tremendously over the last couple of years. But can you give us, Dan, some insight where you stand with the FirstCyte clinical trial, as well as how many breast surgeons are active or breast centers that you're currently in? Maybe just walk us through if there's any synergies on that side.

Yes, Ryan. At this point we have really pulled back from the commercialization effort with FirstCyte, and have invested those resources in other parts of the business while we continue to invest in the SEDE trial, the FirstCyte Breast Test trial.

In terms of our knowledge of the marketplace, we did spend nearly two years pursuing the commercialization opportunity with FirstCyte. So, the breast surgeon world is fairly well known to us, and we continue to have contacts in that area -- certainly nowhere near the level that exists today with Proxima and their sales force. So, I think it's going to be not a brand-new world for us, but one in which we can capitalize on what we have known and done in the past, and what Proxima brings to the table today.

In terms of users of FirstCyte, we still have a core group of FirstCyte users out there. I would estimate they number in the less-than-100 range, but there's still clinical use of the product that takes place.

What were ASP's -- and I'm sorry if I missed it -- both on the controller side and the disposable side for Novacept?

We did not throw those numbers out. They tend to be pretty consistent with what we've seen historically -- approximately 16,000 on the controller side and $840, approximately, on the disposable side.

Just two quick ones. Pat, what does your domestic sales force look like now for OB-GYN and for the laboratories?

We've got about 40 individuals calling on the laboratory segment, directly selling ThinPrep Pap Test and Imaging Systems. And then on the OB-GYN side, we've got about 100 PMR's -- what we call PMR's -- calling on the OB-GYNs in their offices, that promote both the ThinPrep product as well as the NovaSure product to the OB-GYN physicians. And then, specifically on NovaSure, we have got 80 reps today, going to 100 by the end of the quarter.

Finally, you at the beginning -- you typically give the number of ThinPrep instruments, the percentage of ThinPrep sales to large labs, etcetera. Can you give us some of those data points, or you're just not going to give that level of detail going forward?

This is Tim. The preference is just not to get into that grain of detail as we go forward. What we're trying to do is now speak to the business the way we have laid out the guidance for 2005. So we just talk about the core business broadly speaking, the imager, NovaSure, and the international business, and not get into that grain of detail on the instrument side.

Jayson Bedford with Adams, Harkness & Hill.

Most of my questions have been asked. I just have a couple of quickies. First, just looking at the imagers, you mentioned 102 revenue-generating units in the quarter. Is that an average number which equates to the 88 that you reported in the third quarter? (multiple speakers) how we look at that?

This is Tim. The 102 is at the end of the third quarter. The 88 that you're referring to from last conference call took the 77 at the end of Q2 and added in an approximate 11 to get you to the 88 of imagers that came online in the third quarter. And we think it more accurately reflects the computation, just to go back to the end of the previous quarter to take the unit count, and that gets divided into the revenue that was -- the 6.1 million that was generated in the fourth quarter.

And then, what is the 144 then? I thought that was the revenue-generating units at the end of the quarter.

144 is at the end of the fourth quarter; the 102 was at the end of the third quarter.

So what we would do on a going-forward basis is take the revenue generated in Q1 '05 and use the 144 that were installed at the end of the year that were revenue-generating units to get to the revenue per unit for Q1 of this year.

Were there any imagers returned during the quarter?

No.

My final question. Is Quest currently trialing the imager?

Quest is not currently trialing the imager.

Bruce Jackson, Wachovia Securities.

Did you say that approximately 10 percent of the ThinPrep units were performed on the imager in Q4?

That's right. Correct.

And then, you gave us the percentage of sales for LabCorp and Quest. Do you have the total large lab percentage for the quarter? And then, who is included in that definition?

I don't have the large lab number at my fingertips.

I'll just ask another question then. Do you happen to have the year-over-year change in the average selling price for ThinPrep?

It is basically flat year-over-year.

Vivian Wohl (ph), Federated Kaufman Fund.

A couple of follow-up questions on Proxima. One is if you could give us a sense of the Medicare/non-Medicare mix that they're running at, and what the quarterly progression looked like last year in total sales for the company.

The percentage of patients that are eligible for Medicare that would be appropriate for the device is fairly high. You know, an estimate on the 40 percent range, I think, wouldn't be too far off.

So they are getting private reimbursement?

The code is just newly in place in January. There have been positive coverage decisions that have been made and published. In terms of seeing real reimbursement, I think it's early on for us.

Can you walk through for us what the economics are like for the radiation oncology center that is actually performing the treatments?

There's two components there, Vivian. One is the facility itself and the other is the radiation oncologist. In the case of whole-breast radiation therapy, the facility average reimbursement is $7400. The radiation oncologists to deliver the radiation averages about 1,850.

For conventional brachytherapy, the facility radiation delivery fee or reimbursement is about $12,000. And for the facility for the administration of radiation it's about the same, about $12,000. In the case of conventional brachytherapy, the radiation oncologist is reimbursed roughly 3,000. And in the case of MammoSite, the reimbursement to the radiation oncologist is about the same -- 3,000.

Can you give us an idea of the number of afterloaders that are out there and whether you need to place new afterloaders to grow this business? Or are there are enough already out there?

Our estimates are there are at least 600. We're not seeing the number of afterloaders to be an impediment to the use of the product.

(OPERATOR INSTRUCTIONS). Tom Gunderson.

Just a quick follow-up. I want to make sure on Novacept on the gross margin answer you gave to Glenn -- on an ongoing basis, is it fair to assume that Novacept has corporate or maybe a little better gross margins?

Yes. I think that's fair.

Last question. Pat, or I'm not sure who. Last year, Q4 sales for Novacept had a big surge and then there was a slowdown in January and February. Are we getting the same thing this year, or has that seasonality flattened out a little bit?

We're not seeing a slowdown.

I think primarily Q4 previously there was a sales incentive program that Novacept had in place that provided an incentive -- increased incentive to the sales force. So, I think that was the reason Q4 was up, and that was basically shifted from Q4 to Q1.

And that didn't happen this year.

No.

Operator, if there's anymore -- we'll take one more question.

Glenn Reicin.

A couple of more very detailed questions here. Sorry to be so painful. Can you break down the instrument sales with the non-GYN sales count specifically? I guess what I'm after is there was a surge in that number, and I'm wondering if there was any connection between that and getting the Vysis bladder test approved by Abbott?

There was no surge because of the Vysis product approved by Abbott. (indiscernible) I don't have the non-GYN.

In terms of instrument placements, Q4 was a little bit better than Q3 in terms of total number of instrument placed, but --

Do you have revenues?

Yes. I'm just trying to pull that number out for you, Glenn. I don't have the detail for Q3.

Do you mean Q4?

I'm sorry; I thought you were looking at quarter-over-quarter.

No. I just need the fourth quarter number. (indiscernible) the third quarter numbers.

Glenn, I'm going to have to dig out the detail for you. It's 5 7 in total.

Should we talk later, or do you have it?

Let me give you a little detail. Non-GYN tests -- approximately 3 million accessories, and others approximately 1 million; instruments about 1.2.

And that is worldwide or domestic?

That is domestic.

Before, you gave me a number of 40.4 million for domestic -- for international sales. I think that was only a diagnostic number. Did you disclose what total corporate international sales were?

It was 40.5, and that is from the diagnostic division solely. We didn't disclose the NovaSure piece, and that's a pretty small number.

Operator, I will conclude the conference call.

In closing, I'm extremely pleased with our exceptionally strong performance in 2004. As we have discussed on today's call, our organization demonstrated excellent execution of our key growth initiatives in both the diagnostic and surgical divisions of our business. And I believe we are well-positioned to become the worldwide leader in providing innovative products for women's health. We are particularly excited about the Proxima acquisition and look forward to welcoming the Proxima employees into the Cytyc team as we continue to focus on becoming the premier women's health company, delivering innovative products to improve women's lives.

Thank you for your participation on today's call.

This does conclude today's conference.