Hologic Inc (HOLX) 2005 Q1 法說會逐字稿

Good afternoon, ladies and gentlemen. Thank you for standing by. Welcome to the CYTYC Corporation first-quarter 2005 earnings conference call. Today's call is being recorded. At this time for opening remarks and introductions, I would like to turn the conference over to Anne Rivers, Investor Relations Manager of CYTYC Corporation.

Thank you. Good morning, everyone, and welcome to CYTYC Corporation's first-quarter 2005 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 detailed in the Company's press release issued yesterday and in its Form 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 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 express 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 first quarter 2005. Joining me on the call today are Dan Levangie, Executive Vice President; Tim Adams, Chief Financial Officer, and John McDonough, Senior Vice President of Development and Operations.

During this morning's call, I will provide an overview of the business for the quarter and then briefly discuss where we are in the integration of Proxima Therapeutics. I will then turn the call over to Tim for more details on our financial performance. Dan will provide an update on various aspects of both our ThinPrep and NovaSure business, and finally John will provide more of the details regarding the specifics of the integration of Proxima Therapeutics.

We delivered a strong performance for the first quarter of 2005. As noted in our press release, revenue for the first quarter of 2005 was 113.4 million with net earnings of 25.8 million or $0.21 per diluted share, excluding the (inaudible) arbitration decision which had a $0.03 impact on the quarterly results.

Our base ThinPrep business including the ThinPrep imaging business delivered 75 million in domestic revenues for the quarter. Domestically we shipped 35 ThinPrep Imaging Systems during the quarter and ended with an installed base of 184 revenue generating units, an increase of four units from the end of the year. Revenue from the ThinPrep Imaging System increased 39% Q1 over Q4 of last year.

Total CYTYC Surgical Products sales during the quarter were 26.4 million, and during the quarter, we did see the effects of some seasonality in the NovaSure business which Dan will discuss in more detail. For the three weeks of the Proxima sales -- for the first three weeks of the Proxima sales since the close of the transaction in early March, we generated $1.6 million in revenue. Our international diagnostics products business delivered 12 million in revenue, a 23% increase over Q4.

We believe our Surgical Products division, which includes NovaSure and MammoSite, along with our other growth drivers including the ThinPrep Imaging System and international opportunities will put us on strong financial growth trajectory on both the top and bottom line.

The integration of Proxima Therapeutics is proceeding according to plan. I am pleased with the performance of our employees who successfully focused on achieving operating goals while integrating the MammoSite business. We held a national sales meeting two weeks after the transaction closed on March the 7th. The retention of the Proxima sales force provides a seasoned sales team and continuity for our MammoSite customers. And during the quarter, we had FDA inspections of both our Londonderry and Marlborough facilities as a result of a move of certain of our manufacturing operations. We passed both inspections without any 483 inspection observations by the FDA.

And finally, our current agreement with Quest expires on April 30, 2005. We have signed a two-month extension to that agreement as we continue in discussions with Quest. And due to the timing and status of our discussions with Quest, we are not in a position to provide any additional information concerning those discussions.

I would like to now turn the call over to Tim.

Thank you, Pat, and good morning, everyone. My remarks today will compare the financial results of the first quarter 2005 with the results of the first quarter 2004. I will also provide selective comparisons to the fourth quarter of 2004.

Total worldwide revenue for first quarter 2005 was 113.4 million, which represents a 40% increase from the first quarter of 2004. Total revenue from the diagnostic products division was 87 million, which is comprised of 75 million from the U.S. market and 12 million from international markets. Revenue from the domestic diagnostics products division was comprised of 61.3 million from sales of the ThinPrep Pap Tests, 8.5 million of revenue from the ThinPrep Imaging System, and 5.2 million of other revenue from sales of instruments and non-GYN tests.

Worldwide revenue from the CYTYC Surgical Products division was 26.4 million for the quarter, is comprised of 28.4 million from sales of NovaSure products and 1.6 million of revenue from the recent acquisition of Proxima Therapeutics.

The 75 million of revenue from our domestic diagnostics products division for Q1 represents an increase of 5.4 million or 7.7% from the first quarter of 2004. This increase was primarily driven by the growth in the Imager business. During the quarter, we shipped 35 imagers in the U.S. market, bringing total domestic shipments since the inception of the Imager program to 193 units. At the end of the quarter, 184 of these units were revenue generating compared to 144 revenue generating units at the end of 2004. We estimate annual revenue per Imager to be approximately 235,000.

Consistent with the method we described on the Q4 earnings call, this estimate is calculated by dividing the Q1 2005 domestic Imager revenue of 8.5 million by the number of revenue generating units in the U.S. at the end of 2004, the 144 units. And this result is then annualized.

The overall Company gross margin percentage for Q1 was approximately 79% compared to 81% reported in the first quarter of 2004 and up from the fourth quarter 2004 gross margin of 78%. The decrease from the first quarter of last year is attributed to expenses associated with the rollout of the ThinPrep Imaging System, as well as the increase in international sales which generally have lower margins compared to the domestic business.

In order to compare the true operating results of the Company, the following comments regarding operating expenses and operating margin exclude the 7.8 million charge for the DEKA arbitration in Q1 of this year and the 19.1 million related to the in-process R&D recorded in Q1 of 2004.

Total Company operating expenses during the first quarter of 2005 were 47.2 million as compared to 31.9 million in Q1 of 2004. This increase is primarily driven by the addition of the CYTYC Surgical Products division, which also includes the operating expenses from Proxima since March 7th of this year. Additionally we made incremental investments in R&D, we increased our selling efforts in support of the ThinPrep Imaging System, and continued to ramp up our international business.

G&A expenses of 10.7 million were up from the 7.4 million in the first quarter of 2004. The majority of this increase is attributed to the addition of administrative costs at our Surgical Products division, increased personnel costs to support -- increased personnel cost and facility costs to support the growth of our business and legal costs related to litigation. Our income from operations was 42.3 million or 37% of revenue compared to 33.6 million or 41.6% revenue in the first quarter of 2004. This decrease in operating margin percentage is primarily driven by the additional cost mentioned above, plus the costs associated with Proxima since the date of acquisition.

As a result of the 2004 Jobs Creation Act, we anticipate that our effective tax rate for 2005 will be 36.5%. And accordingly, this rate has been reflected in our first-quarter results. This is a slight reduction from the 37% rate that we included in our full-year guidance.

Reported first-quarter 2005 net income was 20.9 million or $0.18 per diluted share as compared to net income of 1.5 million or $0.01 per diluted share for the same period in 2004. Again, if we exclude the 7.8 million charge for the DEKA arbitration in Q1 of this year and the 19.1 million related to the in-process R&D recorded in Q1 of 2004, the pro forma net income of 25.8 million or $0.21 per diluted share in Q1 as compared to 20.6 million or $0.18 per diluted share in the first quarter of 2004. The $0.21 EPS includes the dilutive effect related to Proxima. Without Proxima, the diluted earnings per share would have been $0.22 for the quarter.

Over the past several months, we have spent a significant amount of time designing a new long-term incentive plan. Our primary objective was to design a plan that would continue to motivate and attract the type of employees who have made CYTYC a great Company, while aligning the plan with shareholder interests for the long-term. As a result of this effort, we're rolling out a new long-term incentive plan to CYTYC employees. The new plan will result in a lesser amount of stock options issued as compared to past practices, along with the implementation of restricted stock in a profit-sharing plan.

As most of you are aware, the SEC has decided to delay the implementation of FAS 123R Accounting for Stock-based Compensation until 2006. Thus, there will be no stock option expense reflected in the 2005 results. However, there will be a cost for the restricted stock in the profit-sharing plan in 2005 which will be offset by the savings from the lower tax rate that I mentioned earlier. Thus, there will be no change to our 2005 EPS guidance for these new costs.

Now I would like to take a moment to discuss 2005 guidance. The following guidance includes the expected results from Proxima Therapeutics. We believe second-quarter 2005 total worldwide revenue to be in the range of 121 to $124 million, and the fully diluted earnings per share will be in the range of $0.21 to $0.22. This EPS guidance includes the expected $0.01 dilution related to Proxima. We expect gross margin to be approximately 78% and operating margin to be approximately 35%.

The Q2 operating margin guidance also includes the dilutive effect from the Proxima operations as previously reported. Our full-year 2005 revenue and diluted earnings per share guidance remains unchanged from what we discussed on the year-end 2004 conference call held on February 10th of this year. We are reiterating that we expect full-year worldwide revenue to be in the range of 500 million to $522 million. Our full-year diluted earnings per share guidance, which excludes the charge related to the DEKA arbitration, is expected to be in the range of $0.93 to $1.00.

Now moving to the balance sheet. Our cash balance at March 31, 2005 was $108 million or approximately $124 million less than the $232 million cash balance at the end of 2004. This decrease in cash was driven by the initial payment for Proxima of approximately 156 million. Due to the strength of our business, we continue to generate strong cash flows from operations as evidenced by the 37 million generated this quarter.

Days sales outstanding of 54 days at the end of the first quarter were slightly higher than the 50 days reported for the end of 2004. Inventory turnover was 4.2 at the end of Q1, which was slightly higher than the 3.9 at the end of 2004.

And finally, during the second quarter of 2005, the Company will reactivate the stock repurchase program that was suspended in January of 2004. Under the plan, we will repurchase up to $50 million of our common stock in the open market pursuant to a Rule 10b5-1 program.

And with that, thank you, and I would like to turn the call over to Dan Levangie.

Thanks, Tim, and good morning, everyone. In our diagnostics business segment for the last quarter, we continue to expand the footprint of our installed base of both ThinPrep processors and ThinPrep Imaging Systems. During the first quarter, we placed an additional 95 ThinPrep processors, 42 in the United States and 53 internationally. 56 of these systems were placed in laboratories of new customers.

During the quarter, we shipped a total of 37 ThinPrep Imaging Systems, 35 in the United States and two systems to international customers, bringing the total worldwide shipment total to 202 Imaging Systems. At the end of the quarter in the United States, we had a total of 184 revenue generating Imaging Systems in the field.

During the quarter, shipments of the ThinPrep Pap Tests were slightly below the 9 million test shipment level that we expect each quarter. Based upon reported use data from our customers, combined with surveillance reports from our field sales organization, we believe that this fluctuation in shipment levels is a reflection of ordering patterns of some of our large customers and is not a reflection of actual usage levels of the ThinPrep Pap Tests. We believe that use of the ThinPrep Pap Test is approximately 9 million tests per quarter, and any minor fluctuation in shipment levels is a reflection of lab ordering patterns.

Going forward we believe that we will see shipment levels of the ThinPrep Pap Tests average 9 million tests per quarter. During the quarter, average unit pricing for the ThinPrep Pap Test increased slightly as a result of customer mix.

We're very pleased with the performance of the team with the ThinPrep Imaging System during the quarter. Total Imager up-charge revenue was $8.5 million in the United States, slightly ahead of expectations. We continue to make strong progress with our rollout of the Imager in LabCorp. At the end of the quarter, systems were installed and running in four of the six LabCorp regions. Rollout of the Imager is a major initiative for LabCorp that promises the benefit of enhanced quality and laboratory efficiency. As reported earlier by LabCorp, physician clients recognize the benefits of imaging and are switching from non-automated to the automated method in significant numbers.

Sales of NovaSure devices in the quarter increased modestly compared to fourth quarter of 2004. Sales of NovaSure recorded in the first quarter of the year have historically been the lowest of the four quarters in terms of percent of annual revenue. This seasonal pattern has been observed consistently during the three years since market introduction of NovaSure and may be influenced by a number of factors, including higher insurance deductible liabilities for patients choosing elective surgery early in the year. We believe second-quarter revenues will be higher than the first quarter based upon increased utilization of the NovaSure device, combined with the impact of a device price increase that becomes effective on May 1st of 2005. This price increase was planned earlier in the year and is based upon the increase in reimbursement allowed by CMS in the 2005 fee schedule. We timed this increase on May 1st, 2005 to coincide with implementation of increased reimbursement by private payers. We continue to believe the total worldwide sales of NovaSure during 2005 will be between 115 and $120 million.

We are very pleased with the results achieved by the MammoSite team during the quarter. Following the transaction, we held a sales integration meeting with the MammoSite sales force that was very successful. The team has remained intact and is focusing on capitalizing on this opportunity. Demand for MammoSite training is very strong with our most recent event in Chicago attracting more than 120 physicians for training. Reimbursement for placement of the MammoSite device in a physician's office is driving a good portion of this interest, and we saw strong growth in sales of MammoSite for use in the office during the quarter.

We continued to make strong progress with our international business during the quarter with revenue of $12 million, a 23% increase. The majority of this growth came from the UK where we continue to focus on implementation of the national health service decision to convert the screening program entirely to liquid-based pap tests. We're strongly positioned in the UK to earn a majority of this 4.5 million test market.

We officially launched NovaSure in Europe last month with the introduction of NovaSure at the International Society of Gynecologic Endoscopy meeting in London. Several international markets appear to be attractive for NovaSure sales including the UK, Italy, Germany and Australia.

In the UK, the NICE Committee has published guidance recommending that global endometrial ablation be considered as an alternative to hysterectomy. As a result, our initial focus in Europe will be in the UK where we believe there is a potential market for NovaSure of approximately $20 million. The sales effort in the UK is underway, and we are already seeing revenue from that effort.

Overall we were pleased with our commercial results for the quarter. We believe use of the ThinPrep Pap Test continues at the 9 million test per quarter level. Placement of the ThinPrep Imaging System was strong during the quarter and rollout of the imager at LabCorp is gaining momentum. While sales of NovaSure were impacted by some seasonal effect, we believe total sales for the year will be in line with earlier guidance. Our international business is making great progress with both ThinPrep and in launching NovaSure, and finally we feel very good about our initial integration efforts with Proxima Therapeutics and about the sales progress we're seeing with MammoSite.

I would like to now turn the call over to John McDonough who will provide an update on the Proxima integration.

Thank you. The acquisition of Proxima Therapeutics was completed on March 7th, at which time Proxima was added to our CYTYC Surgical Products or CSP division. The first quarter included roughly three weeks of sales for the MammoSite and GliaSite products, and as such, those products contributed approximately 6% to CSP revenues in total.

Both of Proxima's primary products, MammoSite for breast cancer and GliaSite which is used for the treatment of malignant brain tumors, allows physicians at the 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. We previously reported that we expected 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. Based on our initial experience with the market and our current state of integration, we remain confident in that initial guidance.

Although we believe GliaSite is a very promising product -- it 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, we are seeking a strategic partner who has the capabilities to expand the usage of GliaSite. Until a strategic partner is in place, we will continue to sell the product through the current direct sales force of nine people, and revenue will be combined in the revenue we report for the CYTYC Surgical Products division. We expect GliaSite revenue to be less than 5% of CSP quarterly revenues.

As we have stated in the past, our objective is to build a diversified women's health franchise. With the addition of MammoSite to our product portfolio, we have expanded 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 patient benefits over the current standards of care.

MammoSite also increases our participation in the medical device marketplace with another high margin high-growth product with significant market potential. MammoSite is an alternative to whole breast irradiation after tumor removal surgery. The efficacy of partial breast irradiation has been investigated by a number of institutions and has been found to be comparable to whole breast irradiation. In addition, three-year follow-up of patients enrolled in MammoSite's clinical trials demonstrated a 0% local recurrence rate.

There are several compelling advantages of MammoSite over whole breast irradiation. Treatment times are reduced from 30 to 35 days to 5 days, significantly increasing patient convenience and physician productivity. In addition, due to the localized delivery of radiation associated with the MammoSite product, only 12% of healthy tissue receives a prescription dose of radiation compared to 49% for conventional breaky (ph) therapy and 90% for whole breast. To date over 8000 breast cancer patients have been treated with MammoSite. Of the estimated 260,000 new patients of breast cancer and DCIFs (ph) 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.

MammoSite's eligible market reflects adjustments for tumor size, breast size, pathology and age. Reimbursement for MammoSite compares favorably to whole breast radiation. Breast surgeons who are key decision-makers in the treatment process receive no reimbursement for whole breast radiation, but receive in office reimbursement of approximately $4900 for placement of the MammoSite catheter. Both in office and facility reimbursement were not established by Medicare for the MammoSite product until January 1st of this year, though reimbursement was in place under existing CPT codes for delivery of the radiation treatment.

In Q1 we saw a significant change in catheter placement procedures, moving from the surgical center into the office. We estimate that approximately 20% of procedures were performed in the office in the first quarter versus less than 5% historically. We feel that this change in reimbursement and movement of procedures to the office will help accelerate adoption of MammoSite, and we expect this trend to continue.

Our organizational integration efforts are well underway. The MammoSite sales force and regional management team has been left in place, and our plan is to grow the sales force from 30 people to 50 people over the next 18 months.

In late March a national sales meeting was held for the MammoSite sales force, and we feel confident that this team is focused and aligned with our goals and objectives for the business. We're leveraging our existing marketing and medical education efforts by combining those groups with our existing teams in Marlborough, Massachusetts. We believe that this will allow us to more aggressively drive adoption of MammoSite over the coming quarters.

Manufacturing and R&D activities are being integrated with our CYTYC Surgical Products group in Palo Alto, California, and that integration is proceeding on course. All G&A functions are being integrated with the appropriate functions in our base business, and we expect to close the existing Proxima corporate offices sometime in the third quarter.

In summary, our goal is to be the leading women's health company in the world. ThinPrep, the Imaging Systems, NovaSure and now MammoSite represents best-in-class products addressing large market opportunities in cervical cancer, breast cancer and endometrial ablation. Our women's health franchise is becoming more diverse, but our focus on women's health remains clear. We're excited about our growth initiatives and look forward to adding more best-in-class products that make a difference in women's lives.

I will now turn the call back to Pat Sullivan.

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

(OPERATOR INSTRUCTIONS). Tom Gunderson, Piper Jaffray.

(technical difficulty) -- a little bit more on Promixa Therapeutics. The MammoSite, one of the things that I believe you are working on is generating more clinical data, published peer reviewed clinical data. Can you give us a little bit of a time calendar for that?

The clinical data that we see being submitted and published over the next 12 to 18 months includes about five major submissions, manuscripts that will be published. There is some overall data on the Proxima device that is follow-up data to the patients that were in our initial FDA clinical trial. There is some data related to patients being treated with MammoSite for DCIS. There is another paper related to Cosmises or the cosmetic effect of partial breast surgery and irradiation, and there are other technical papers related to placement technique as well as infection rates. We would see those papers being published over the next 12 to 18 months.

There has been a manuscript submitted to a major journal related to the three-year follow-up data from our FDA clinical trial, and there is also an abstract that has been submitted to Astro on four-year follow-up data. So I think we have got a wealth of data that we will see hitting publications or being presented at scientific meetings over the next year.

And if there is one that you would put at the top, maybe the three-year data publication, maybe something else, when would be the first one? What should we look at as a catalyst here?

Well, the one that has been submitted and been under review for the longest period of time, my understanding is the three-year follow-up data to the FDA trial. And that would be very important information for us.

Okay. And do you know where it has been submitted and don't want to say apparently, but is this one that you would expect in the next three to four months?

It is real tough for me to predict.

Okay. More on Promixa Therapeutics. If we take the three weeks and 1.6 million and just for rough back of the envelope, say, that is 500,000 a week and we have got 39 weeks left and you've got 19.5 million, some of that is GliaSite. But John, could you remind us or Dan, what are you doing to build that number because that is just looking at a flat rate based on Q1?

I think it is execution in the field at this point. The reimbursement that we are seeing for in office placement is coming through very strongly. A high of interest on the part of breast surgeons to be trained. So I think, number one, is we need to train additional breast surgeons in the placement technique. And then it is driving the sales through the expanded sales force. We're adding -- as John said, we're taking the group from 30 to 50 over the next 18 months. So our ability to execute on those two parts of the plan I think are key to generating additional revenue.

Are those 20 net adds to CYTYC?

They are.

Okay. And then just so we can do the back of the envelope a little tighter, can you break out the 1.6 between MammoSite and GliaSite?

It is predominantly MammoSite. The majority of that number is MammoSite. GliaSite is not material. About 80% MammoSite, about 80%.

Okay, great. Thanks.

David Lewis.

I want to focus in on the ThinPrep business. You mentioned this 9 million test per quarter number holding. However, it is the lowest ThinPrep business we have seen in the last two years. So it looks like to us it was light by about 220,000 paps. We have seen inventory fluctuations. So I am just trying to get more granular there. Maybe you can give the percentage of large labs you saw in the quarter versus last quarter, or potentially give us a sense of have inventory levels changed at either Quest or LabCorp on a sequential basis?

I think it is important to keep the magnitude here in context. If you think about our 9 million tests per quarter level, it is roughly 160,000 tests per day. So we are looking at one, maybe two days shipment fluctuation around the 9 million test number. And I think that is what we saw this quarter, a fluctuation of roughly two days of shipments.

In terms of the split between all other and large labs, do you have that?

Yes, there is really no material shift in the historical balances. David, the 9 million a quarter has run pretty true historically. We saw that bump up a little bit in Q4. But, again, we talked about 36 million tests per year domestically. This kind of quarter is pretty consistent.

And in terms of inventory at the large labs, David, our sense is that they run a very lean operation. In fact, our largest customers are on electronic ordering, and so they place orders the day they need the product, and their inventory levels are I believe very low.

And the reason I ask just looking at the second-quarter guidance, you've got a consumable business here. So if ablation is working and MammoSite trends look positive, Imager trends look positive, I am just trying to rationalize the 121 to 124 guidance range. The only kind of disconnect would be if your ThinPrep business does not rebound. Assuming it does rebound back to a historical 9 million level, the 121 to 124 does not make sense to me given the guidance you have provided. So are you forecasting that the business will rebound into the second quarter?

David, the core ThinPrep business should be back at around approximately the 9 million tests for Q2.

Okay. All right. Maybe I will take the guidance question off-line. Maybe, Tim, focusing on Imager profitability, can you give us a sense of where we are from gross margin given the depreciation was pushed out to six years or in EBIT contributions as it relates to the Imager? I know there is a lot of service cost you are having on the front-end, but trying to get a sense of when that inflection point on profitability as it relates to the Imager could occur in your '05 number or '06.

Yes, David, the Imager is profitable. It runs in the low 70% gross margin range. Again, the way we try to think about the Imager 225 to 250,000 annual revenue per box, 235 coming out of this past quarter. And, again, the investment, the onetime investment we make for the equipment is approximately 200,000. So when we run the ROI calculations, it makes sense to get these imagers out in the marketplace. But it does carry a lower gross margin than the core ThinPrep business.

Okay. And this investment in the service infrastructure as you roll out these Imagers, is there a point at which you think that rate of investment is going to slow?

It does. It takes a little time once the Imagers are in the market. The client has to except the Imager, and it takes a little while to work through that process. But it does stabilize over time.

Okay and then lastly and I will jump back in the queue. On international business, you talked about this principally being kind of a UK adoption. What other contribution are you getting in this quarter or forecasting the next couple of quarters coming from Asia-Pacific RIM or other areas outside of the core UK?

I don't think we have broken out specific countries in the past. Just to say that the UK is the predominant contributor to the growth throughout the remainder of the year in the plan that we have laid out.

Glenn Reicin, Morgan Stanley.

I want to just press a little down on the ThinPrep business in Q4. You saw this unanticipated ramp-up in the core ThinPrep business, and now we have seen this anticipated ramp-down. Can we just assume there was about a million or 2 of inventory that was taken in by large labs in the fourth quarter that came out of the first?

Yes, I think according to -- just to reinforce Dan's point -- you've got a couple of days of shipping there at the end of the year, so there was more large lab orders in the fourth quarter than there were in the first quarter. And it literally is a couple of days of shipments.

Was there a difference in business days between this year and --?

Yes, there were. There were 63 in the fourth quarter versus 62 in the first quarter.

So we were short one day, and the difference -- the fluctuation around 9 million again is about two days of shipments.

Okay. So we are looking again in the 62, $63 million range in Q2 roughly on the core ThinPrep business then?

Yes, we think it will be around 9 million.

Okay. What were ASPs in the quarter domestically at least?

Overall they were up about 3%

From the last quarter?

Yes.

Okay. From Q4 or from Q1?

Q4. Quarter over quarter, they were up 3%. Volumes were down.

Okay. And I just want to again press on this inventory level thing. Obviously there is some history here about inventories. You are absolutely certain you have your hands around inventory levels at the customer?

Yes, there is no attempt, no promotional programs in place, no special efforts to increase the buy at the end of the quarter either in Q4 or in this quarter. It strictly was -- in my mind, it is a result of the ordering patterns of the customers.

Okay, and how do you explain the DSO increase?

There is really nothing that attributes the DSO, a little bit of mix on the international side. We threw some Proxima receivables in the mix this year, but no concerns on DSO collectibility issues, etc.

Okay. A couple of other things. Options, I'm glad that you're addressing the options expensing issue now rather than waiting, and it is nice to see that it is not going to impact this year's bottom line in terms of replacing the restricted stock. Any sense what you think the annualized impact of 123R will be by this time next year?

I think it would be premature to try to throw a number out for '06 which would be giving guidance. We will do that later in the year, early next year when we give guidance for the whole (technical difficulty).

But I think directionally what you can take away, when you take a look at the 10-K from last year, you will see the stock option expense in the footnotes. And when you take a look at the 10-Q for the first quarter, you will see the number for the quarter, and you will see directionally that it is down from where we were a year ago. The quantity granted is down, and so the expense will follow suit.

And that slope will increase as the year progresses?

I'm sorry?

That downward slope will increase in magnitude as the year progresses?

I would not go that for, no. I would not go that far because the plan was implemented at the beginning of the year.

Okay. Then just one last set of questions here. On NovaSure you gave a worldwide number of what, 26.4 for the entire surgical business, but then you talked about international is in the context of the 12 million. I assume whatever international revenues you had in NovaSure was in that 26 number, not in the 12 number, and I would like to know what that number is.

That is correct. It is included in there, and it is a pretty small number. It's a few hundred thousand dollars. (multiple speakers)

At least domestically, can you give us some perspective of what the breakdown was between (inaudible) pieces and disposables?

Pretty consistent with what we saw in past quarters. It is about 90% of the revenue comes from the disposables.

Okay. You usually give us a little bit more data on that stuff in terms of ASPs, number of handpieces shipped, etc.

Yes, Glenn, when you look at the revenue quarter over quarter on the domestic side, the disposable quantity was up modestly Q1 of this year compared to Q4 of last year in terms of the domestic disposal.

And ASPs were pretty much unchanged from the previous quarter.

Okay. And how many handpieces did you ship?

90% of that revenue.

You are not going to give us numbers?

No.

Bruce Jackson, Wachovia Securities.

Can you tell us what percentage of slides were imaged during the quarter?

About 20%.

20%? Okay. And then what percentage of business came from Quest and LabCorp?

Those numbers are pretty consistent with Q4, and I'm not sure I have them at my fingertips. But I tell you what, if you have another question, let me try to dig that up for you.

Okay. Final question, were there any price increases in ThinPrep that could have caused customers to do any forward buying?

No, there weren't.

Okay.

Bruce Cranna, Leerink Swann.

A couple of things if I could. I guess just I missed some of the numbers and I apologize. But the ThinPrep number for the U.S. was what again?

ThinPrep in the U.S. was --

O-U.S., I'm sorry.

I'm sorry, O-U.S. $12 million international.

And did you shoot out a number for equipment both U.S. and O-U.S.. Could you break that out?

We gave you the U.S. number, which was 5.2 million, but that is other revenue, and that includes instruments and the non-GYN tests.

You don't want to break that out?

We don't break that number out. It is primarily non-GYN tests.

Okay. And then I guess the other question I have on the Imager side, can you give us a sense for the -- I think the number was 35 imagers shipped in the quarter. What percent or what number of those were for LabCorp, and where are they in terms of meeting their installed base, if you will? Where do you think that might go?

As I said, Bruce, LabCorp represented some of those shipments during the quarter obviously, and we have got systems installed in four of their six regions at the end of the quarter. As of today, I think we're in five, almost in six. So we will be complete with the national rollout in terms of Imager availability sometime this month.

So of the 35, you don't want to tell us what percent of those were to LabCorp?

Would rather not.

Okay. What else? I guess just to put a finer point on -- I know you don't want to talk about Quest much, but I think your comment was a two-month extension. Did that mean July 31 now that it lapses?

June 30th.

I'm sorry?

June 30. It previously expired on April the 30th, so there was a two-month extension to the April 30th date.

June 30, okay. Bad math on my part. And then lastly, I guess I think it was Dan, someone mentioned a pricing increase on the NovaSure side due to the CMS reimbursement. Can you just share with us, because I have not done the math there either, the percent of the reimbursement increase that CMS posted or at least proposed. So you are still thinking that on a patient mix basis about 40% of that business is Medicare?

The CMS reimbursement for the facility in which the procedure takes place increased from roughly $1500 to $1700 under Medicare reimbursement. And so we took a part of that as a price increase and delayed it until May 1st so that the private payers could get that new rate loaded into the system. We're seeing reimbursement at that level fairly consistently.

In addition, CMS allocated reimbursement for the physician's office, procedures performed in the office at the level of 22 to $2300. We are also seeing that come in nicely. So we think the timing is good for the price increase.

In terms of the percentage of the NovaSure procedures performed on Medicare patients, it is virtually zero. All of those patients are typically between the ages of 35 and 55.

I'm sorry. Okay, I missed that.

It is MammoSite where a fair number are on Medicare.

And then just one other question if I could. Can you run through the seasonality again on the NovaSure side? I missed the explanation earlier. I would like a little more color on how that could be typically seen to dip in this quarter.

Yes, the first quarter of the year, as we look back historically at NovaSure sales has always been the lowest in terms of total contribution to the annual revenue number. In '03 the first quarter was roughly 15% of the total. In '04 it was roughly 17%, and if we use our 115 to $120 million guidance, the first quarter this year we see came in at about 20%.

So it has always been the lowest. There is some seasonal effect. We think some of that is due to patients' deductibles in their insurance cover. The NovaSure procedure is an elective surgery subject to a deductible payment, and patients tend to like to use that up before they sign up for an elective surgery.

So I think it has historically been true, but some of it is due to deductible insurance levels. But we feel good about where we are in terms of total year guidance.

Thank you.

Jayson Bedford, Adam Harkness.

I just have a few quick questions. The price increase, is that both on the controllers and the handpieces? And then if you could maybe quantify it in terms of what were ASPs this quarter and what will they be on May 1st?

The price increase is exclusively on the disposable device, the hand device as you called it. We would rather not disclose the price increase for competitive reasons. And this past quarter, the ASP on the device, the disposable device was about the same as it was in Q4.

All right. And can you give us how many devices you did sell in the first quarter?

Again, we would rather not give that number specifically. What we can tell you is it is 90% of the revenue that we recorded for NovaSure, and the ASP is pretty much the same as last quarter.

And controllers were 10% obviously.

And then just jumping over, I assume your Imager guidance has not changed from, I think you said 120 to 130 in fiscal '05. I'm just wondering if that guidance contemplates any Imagers to Quest?

We have never included any Imagers to Quest for the 2005 guidance.

And then lastly, I think last quarter you talked about NovaSure reps going from 80 to 100. How many did you add in the quarter?

When we add them all up, we are probably in the 89 to 90 range right now.

Ed Shenkan, Wells Fargo.

I just wanted to find out -- the ACOG meeting is upcoming next month. What good data might be presented around NovaSure at that meeting?

There is a major symposium that is going to occur on the Sunday evening of the ACOG meeting that we expect to see a great attendance, and there will be data and information presented about NovaSure at that symposium.

Great. Could you talk a little bit -- you guys have always been conservative on the tax rate, and now that you have a lot of manufacturing happening in Costa Rica, could you tell us the timeline for moving ThinPrep down to Costa Rica? How much is down there already, if any? What percent percent of sold units in the quarter were manufactured in Costa Rica? And then if you could just give us a refresher on the tax holiday that you have in Costa Rica, how long does it last? What kind of taxes do you pay on manufactured goods in Costa Rica?

We are not seeing a lot of tax benefit from manufacturing in Costa Rica. It is principally due to the lower labor rates associated with the NovaSure disposable that is manufactured in -- both in Costa Rica and certain portions of it are manufactured in Palo Alto.

None of the ThinPrep business is manufactured in Costa Rica, nor is it our intention to take any of that manufacturing processes to Costa Rica. We have moved the FirstCyte Breast Test catheter to Costa Rica in support of the c-trial, the ongoing c-trial and limited commercialization of that product. But we see major benefits from the Costa Rica manufacturing, primarily in the tremendous educated workforce as well as the labor savings.

And what do you attribute the benefits on the tax rate from?

What we need to understand about how the international tax picture comes together, the key drivers were the intellectual property effectively was developed and created. For Novacept, that happened in the U.S.. So yes, we do manufacture down in Costa Rica. Generally you have a cost-plus type relationship, so it is a modest amount of profit that is then assigned down to the offshore operation like a Costa Rica. So at a zero tax rate, that certainly helps. But it's not going to drive that rate down significantly.

We really in some of the planning that we are in the middle of is really taking a look at how the intellectual property ultimately can be developed offshore for established mature businesses that is very difficult to do because it was created in the U.S. As we make investments in the future, we're certainly looking at where those investments should come from.

I'm sure you have looked at tax rates of other companies that are out there, and you really need to understand the mix of international revenue that they have. Ours is approximately 11%, and theirs are substantially higher. So it is a combination of factors, but generally in these offshore manufacturing, it is more of a cost-plus type relationship.

And the change in your tax rate to 36.5% from 37, could you just explain why that happened?

Yes, that is the -- last year Congress passed the Jobs Creations Act, and effectively what they were trying to incentivize companies to do is to keep manufacturing labor here in the U.S. And we do have a big chunk of that. So we get a tax deduction for the domestic manufacturing expenses, the labor expenses that are here in the U.S. It is effectively the new tax law that was passed last year that is driving that.

Thanks for clarifying.

Vivian Wahl (ph), Federated.

On NovaSure if you could help us understand internationally now that the NICE Committee has recommended ablation, how fast do you think you might put infrastructure into place to sell that and train physicians overseas and what kind of expectations you might have for this year?

And then secondly on NovaSure, if you could give us a sense as April is now nearly over, of what the trends are looking like this quarter for NovaSure?

Yes, in terms of the international opportunity in the UK, we have actually already begun to put that infrastructure in place. We have a sales team on the ground in the UK comprised of four individuals. We're adding to that, and I believe we're taking that number to -- in the 10 range by the end of this year.

We have established referral centers, and these will be hospital centers that will serve as training sites for physicians in the UK, and we've got agreements with five centers currently that have trained physicians that will proctor cases for other physicians that are going to be trained. So we are very enthusiastic about our chances and our opportunities in the UK.

As I said, we think the market there for NovaSure is roughly in the $20 million range, and we don't see why we should not have a substantial portion of that market in the next three years.

I would say that we are comfortable with the guidance that we have provided today.

Well, maybe just in -- does that mean that April has turned out to be a better month than January, February, March?

I think it means that we are comfortable with the guidance we gave you today. April is fine.

And can you just give us a sense as you look at the competitive dynamics out there, I mean in order for you to make your numbers, the overall market had to grow very nicely. And you are I think still assuming that you're going to gain a little share in the market.

Yes. If we looked back at 2004, we think the market grew over 2003 by about 50,000 procedures, and the markets here shake out for '04 as we see it still has J&J in a number one position with about 40%. We think we have made up a lot of ground, and we finished the year at around 27%. We would expect the market to continue to grow this year by about the same number of procedures and for us to finish the year roughly in the 32 to 33% marketshare range.

I guess I would add to that, that we did not see anything in the first quarter that would suggest the competitive dynamic in the market has changed.

Okay and just one final question on NovaSure. Are you thinking that the reimbursement is going to move this procedure to some extent to the office, or are you not thinking that this procedure is really amenable to that?

No, we think that there is some momentum towards taking this into the office. We have organized a group of thought leaders that are giving us direction on how to make sure we get it into the office smoothly. But we're seeing an increased level of interest on the part of the physician to actually take it in the office.

Okay. Thanks.

David Movalis (ph), Nexus Investment Bank (ph).

A couple of quick questions. First, is the 36.5% tax rate a sustainable rate over the next couple of years, or is that just a stepdown for 2005?

As long as the tax law that was passed last year stays in effect and that deduction is allowed, it is sustainable.

Okay. In your guidance for this year, does that assume that your Quest business sort of sustains itself at your current rate as opposed to seeing either changes in the contract or elimination of the contract?

It assumes pretty much a flat rate.

Okay. Then also, can you just talk a little bit about the UK ThinPrep business? How far converted is the market today, and when do you expect -- why kind of pacing do you expect in terms of the conversion of the UK market to liquid-based pap?

Yes, I think as we have described in the past, the actual conversion of the market in terms of labs doing liquid-based pap tests is behind schedule, not only our schedule but the NHS schedule.

In fact, recently the Department of Health, the Health Ministry in the UK, made this a priority of theirs, and as you know, there is an election coming up in the UK. And as of last week, or two weeks ago, excuse me, the Labor Party added to their election manifesto comments about accelerating the rate of conversion. So we think there is plenty of drivers there to accelerate the conversion. But it just not has come at the rate that we had hoped.

I will say that in terms of commitments, the Strategic Health Authority, the regions within the UK, are making commitments to one or another technology. And at this point, we believe we have commitments for approximately 61% of the UK market. We think SurePath, the other provider, has roughly 29%, and that leaves about 10% undecided. So as that conversion begins to take place, we think we have 60% of that market committed to us, 10% of it still up for grabs.

But the volumes at this point are only like 10% converted or something of that --?

Yes, it's low -- it is in that range.

Glenn Reicin, Morgan Stanley.

Just a couple follow-ups here. As the year progresses, what do you see as a trend in terms of average revenues per Imager? What is your anticipation (inaudible)? LabCorp is ramping up. That brings down ASPs, but then you probably have a lot of sales to some of the smaller labs. So what should be the progression as we move on through the year?

I think our plan is to try and keep it in that range that we have described earlier.

(inaudible) 235?

Yes.

Okay. And what was the actual number in terms of the dilution on the net income line caused by Proxima?

Glenn, we did not breakout the dollar amount. (multiple speakers)

That is what I'm asking. Mainly you didn't.

Yes, we did not. But as I mentioned earlier, it did push us from $0.22 down to $0.21. It was enough to drive it down to 21.

Let me ask it this way. On the Q4 conference call, you were hoping for a 38% operating margin. You came in at 37. Is that the delta?

That is the primary driver of the delta, correct.

Okay. I will get back in line.

That is all the time we have for questions. I will turn it back over to our speakers for any additional or closing comments.

Thank you, operator. I'm very pleased with our performance for the first quarter of 2005. As we have discussed during today's call, our organization demonstrated excellent execution of our key growth initiatives in both the diagnostics and surgical division of our business. I believe we are well positioned to become the worldwide market leader in providing innovative products for women's health. We are particularly excited about the Proxima acquisition 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.

That does conclude today's conference call. We thank you for your participation. You may now disconnect at this time.