Hologic Inc (HOLX) 2005 Q2 法說會逐字稿

Greetings, ladies and gentlemen, and welcome to the Cytyc Corporation second-quarter 2005 earnings conference call. At this time, all participants are on a listen-only mode. A brief question-and-answer session will follow the formal presentation. (OPERATOR INSTRUCTIONS). As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Ms. Anne Rivers, Investor Relations Manager of Cytyc Corporation. Thank you, Ms. Rivers. You may begin.

Thank you, operator, and good morning, everyone. Welcome to Cytyc Corporation's second-quarter 2005 conference call. If anyone has not received a copy of the press release issued yesterday, please call The Ruth Group at 646-536-7017 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 of 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 replace undue reliance on them. In addition, please note that this call is being recorded by Cytyc Corporation and it's 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'd like to turn the call over to Patrick Sullivan, Chairman, President, and Chief Executive Officer of Cytyc Corporation. Pat?

Thank you, Anne. Good morning, ladies and gentlemen. I'd like to welcome you to our teleconference to report on the performance of the Company for the second quarter of 2005.

Joining me on the call today are Dan Levangie, Executive Vice President, Tim Adams, Chief Financial Officer and John McDonough, SVP of Development and Operations.

During this morning's call, I'll provide an overview of the business for the quarter and then turn the call over to Tim for more detail on our financial performance. Dan will then provide an update on various aspects of our ThinPrep, NovaSure, and Proxima businesses. John will then provide an update on specifics regarding the integration of Proxima therapeutics.

We delivered record performance for the second quarter of 2005. As noted in our press release, revenues reached a record for the second quarter of 2005 of 125.4 million with net earnings of 28 million or $0.23 per diluted share. Worldwide, NovaSure sales during the quarter were 29.4 million, a 64% increase over last year and an increase of nearly $5 million from the first quarter NovaSure's revenues of 24.8 million. Total Proxima sales for the quarter were 6.2 million with MammoSite representing 85% of that revenue. I'm pleased to report that our Proxima integration efforts are ahead of schedule and the business was accretive to earnings in the second quarter. Our International Diagnostic Product business delivered 12.8 million in revenue, an increase of 19% over the same period last year.

Our base ThinPrep business, including our ThinPrep imaging business, delivered 77 million in revenue for the quarter. Domestically, we shipped 9 million ThinPrep Pap Tests and 34 imaging systems during the quarter and ended the quarter with an installed base of 211 revenue generating units.

As you may have heard from the Laboratory Corporation of America conference call, we have now completed the implementation of the ThinPrep Imaging System in the LabCorp network and it's been an outstanding success. We are now very active in driving physician demand with our LabCorp partners for the ThinPrep Imaging System.

Last night, we were pleased to announce the signing of an exclusive agreement with Olympus for the distribution of the ThinPrep System in Japan, where approximately 10 million Pap tests are performed annually. We are very excited about this relationship and believe Olympus is the ideal partner to drive implementation of the ThinPrep System in Japan.

As you know, our previous supply agreement extension with Quest Diagnostics expired on June 30th, 2005. We now have a working arrangement in place with Quest that includes specific terms to supply both instrumentation and disposables to meet their physician demand. This arrangement is similar to the way in which we work with the majority of our customers. These solid results reflect our ability to continue to deliver strong financial performance while we strategically diversify our business. We delivered record performance in both our surgical and diagnostic product divisions.

I'd like to now turn the call over to Tim for the financial highlights.

Thank you, Pat, and good morning, everyone. My remarks today will compare the financial results of the second quarter 2005 with the results of the second quarter 2004. Total worldwide revenue for the second quarter of 2005 was 125.4 million, which represents a 26% increase from the second quarter of 2004. Worldwide revenue from our high-growth Cytyc Surgical Products division was 35.6 million for the quarter, which was comprised of 29.4 million from sales of NovaSure products and 6.2 million of revenue from sales of MammoSite and GliaSite. This represented over a 60% growth in NovaSure revenue over last year.

Total revenue from the Diagnostic Products Division was 89.8 million, which is comprised of 77 million from the U.S. market and 12.8 million from international markets. Revenue from the Domestic Diagnostic Product Division was comprised of 62.3 million from sales of the ThinPrep Pap Test, 9.1 million of revenue from the ThinPrep Imaging System, and 5.6 million of other revenue from sales of instruments in non-gyn tests.

The 77 million of revenue from our Domestic Diagnostic Products Division for Q2 represents an increase of 6.2 million or approximately 9% from the second quarter of 2004. This increase was primarily driven by the growth in the Imager business.

During the quarter, we shipped 34 Imagers in the U.S. market, bringing total domestic shipments since the inception of the Imager program to 227 units. At the end of the quarter, 211 of these units were revenue-generating compared to the 184 revenue generating units at the end of the first quarter 2005. For Q2, the average annual revenue per Imager was approximately $198,000. This estimate is calculated by dividing the Q2 2005 domestic Imager revenue of 9.1 million by the number of revenue-generating units in the U.S. at the end of Q1, the 184 units. And the result is then annualized.

As Pat noted during the first half of the year, we accelerated the Imager rollout with LabCorp, placing Imagers in all six regions, enabling access to this technology at all of their labs nationwide. This increase in the number of Imagers placed at LabCorp resulted in a lower average revenue per Imager calculation. However, as the utilization at LabCorp continues to ramp up, we anticipate that the estimated annual revenue per Imager across all instruments placed will also increase throughout the year.

The overall Company gross margin percentage for Q2 was approximately 79% compared to 78% reported for the second quarter of 2004. This increase from the second quarter of last year is primarily attributed to the continued growth in our Surgical Products division, which includes the NovaSure and MammoSite products, that contribute higher margins compared to our Diagnostics division.

Total Company operating expenses during the second quarter of 2005 were 53.2 million as compared to 41.5 million in the second quarter of 2004. Approximately one half of this 11.7 million increase relates to the growth in our Surgical Products division, which includes the first full quarter of expenses supporting MammoSite, and the continued investment to support the growth in NovaSure. Additionally, we made incremental investments in R&D in support of the FirstCyte Breast Test clinical trial, we increased our selling efforts in support of the ThinPrep Imaging System, and continued to ramp our International business.

G&A expenses of 11.5 million were up from the 8.8 million in the second quarter of 2004, but continued to represent 9% of revenue. The majority of the increase is attributed to increased personnel and facility costs to support the growth of our business.

Our income from operations was 46.1 million or 37% of revenue compared to 36.3 million or 36% of revenue in the second quarter of 2004. Reported second-quarter 2005 net income was $28 million or $0.23 per diluted share as compared to 21.9 million or $0.19 per share in the same period in 2004. This brings our year-to-date EPS through June 30, 2005, up to $0.45 per diluted share, excluding the charge related to the DEKA arbitration taken in the first quarter. The $0.23 for the first quarter includes MammoSite and GliaSite, which we are pleased to announce were slightly accretive in the quarter.

Next I would like to take a minute to discuss 2005 guidance. Now that we are halfway through the year, we have better visibility into the revenue trends we are seeing in our Diagnostic and Surgical Products divisions. Therefore, we will tighten the range of our full-year 2005 total Company revenue and diluted earnings per share guidance. We expect full-year worldwide revenue to be in the range of 505 to 515 million and our full-year diluted earnings per share, which excludes the charge related to the DEKA arbitration, to be in the range of $0.95 to $1.

As we saw in the second quarter of the year, the Surgical Products division continues to do nicely and we anticipate that this trend will continue for the remainder of the year. Thus, NovaSure and MammoSite should finish the year ahead of the product guidance range we previously provided.

On the Domestic and the International Diagnostics side, we anticipate that we will finish the year below the original product guidance range. As I noted earlier, much of the focus has been on the national implementation of the ThinPrep Imaging System, which is ahead of schedule. And although the utilization will now need to catch up to meet our previous revenue projections, we believe this investment and a national Imager rollout puts us in a stronger position for the long-term and provides greater access to the state of the art technology to patients and their physicians. On balance, our business remains very strong and our total Company guidance is in line with our original estimates.

Now I'd like to take a moment to discuss guidance for the third quarter of 2005. We believe third-quarter 2005 total worldwide revenue will be in the range of 130 to 133 million, and fully diluted earnings per share will be in the range of $0.24 to $0.25. We expect gross margin to be in the range of 78 to 79% and operating margin to be in the range of 36 to 37%. And finally, as it relates to 2006 guidance, we will provide this information to you either late this year or early next year.

And now moving to the balance sheet, our cash balance as of June 30, 2005, was $97 million. Due to the strength of our business, we continue to generate strong cash flows from operations as evidenced by the 46 million generated this quarter, bringing our total cash generated from operations for the six months ended June 30 to $83 million. Additionally, during the quarter, we completed the $50 million share repurchase program that we announced last quarter.

Days sales outstanding of 49 days (technical difficulty) were lower than the 54 days reported at the end of (technical difficulty) 2005. Inventory turnover was 4.4 at the end of Q2, which was slightly higher than the 4.2 at the end of Q1 2005. As you can see, our balance sheet remains very strong and continues to provide us with the financial flexibility to support our growth. And with that, I'd like to turn the call over to Dan Levangie.

Thanks, Tim. We have great news to report in all segments of our commercial operations for the quarter. As was reported earlier, NovaSure sales in the quarter increased to $29.4 million, a $4.6 million increase over the 24.8 million recorded last quarter. As reported on last quarter's call, we believe there is seasonal variability to sales of NovaSure, and Q2 of the year is usually a very strong revenue quarter. Of the $4.6 million increase in NovaSure revenue, approximately one-third of the increase came from a price increase that became effective in May and the other two-thirds came from increased device use. In addition, during the quarter, we increase our installed base of NovaSure equipment by 141 instruments.

We are very excited by the growth prospects for NovaSure and as a result, we've made the decision to test the direct-to-consumer advertising campaign in several markets. We believe that by raising patient awareness of their disorder and the simple solution that NovaSure offers, we will expand the market and substantially increase sales of NovaSure in the future. This direct-to-consumer campaign will begin in two markets in September and will involve print, radio, and television advertising.

We are also very pleased with the results achieved by the MammoSite team during the quarter. MammoSite revenue during the quarter was $5.2 million and together with GliaSite, sales of those products during the quarter recorded revenues of 6.2 million and were net income positive for the quarter. As we reported earlier, we have fully integrated the MammoSite sales and marketing group within Cytyc Surgical Products, and based upon our early success with MammoSite, we've decided to accelerate our sales force expansion plan. We are currently in the process of expanding the MammoSite sales force from its current staff of 30 to approximately 50 individuals to be completed by the end of this year.

Demand for MammoSite training continues to be very strong. 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 the MammoSite device for in-office use during the quarter.

In our Diagnostics business segment for the last quarter, we continued to expand the footprint of our installed base of both ThinPrep processors and ThinPrep Imaging Systems. During the quarter, we placed an additional 85 ThinPrep processors, 21 in the United States and 64 internationally. 52 of these systems were placed in laboratories of new customers. During the quarter, we shipped a total of 34 ThinPrep Imaging System, bringing the total worldwide shipment total to 236 systems. At the end of the quarter in the United States, we had a total of 211 revenue-generating Imaging Systems in the field, an increase of 27 from the 184 revenue-generating units at the end of the first quarter. During the quarter, we shipped a total of 9 million ThinPrep Pap Tests, which is a return to historical shipment levels. Based upon reported use data from our customers combined with reports from our field sales organization, we believe that some fluctuation in shipment levels will occur from quarter to quarter, but 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 laboratory ordering patterns. Going forward, we believe we'll see shipment levels of the ThinPrep Pap Test average 9 million tests per quarter.

During the quarter, average unit pricing for the ThinPrep Pap Test declined slightly as a result of customer mix. We continue to be pleased with the performance of the team with the ThinPrep Imaging System. Total Imager up-charge revenue was $9.1 million in the United States, representing a 184% increase compared to the $3.2 million in Q2 of 2004. We continue to make strong progress with the rollout of our Imager and LabCorp facilities, and as recently reported by LabCorp, their launch of the ThinPrep Imaging System has been an outstanding success.

According to LabCorp, ThinPrep Imaging is being requested on 12% of all ThinPrep Pap Tests ordered by their physicians. Both Cytyc and LabCorp believe that this significant adoption rate clearly indicates that clients of LabCorp recognize the benefits of this technology to their patients. At the end of the quarter, systems were installed and running in all six of LabCorp's regions, providing nationwide availability of ThinPrep Imaging to their physician customers.

We continue to make strong progress with our International business during the quarter, with revenue of $12.8 million, a growth rate of 19% compared to Q2 of 2004. The majority of this growth came from the UK, where we continue to focus on implementation of the NHS decision to convert their screening program entirely to liquid-based pap tests. We are strongly positioned in the UK to earn the lion's share of this 4.5 million test market.

We officially launched NovaSure in Europe during March and are beginning to see sales momentum build, particularly in the UK, where we see a potential market for NovaSure of approximately $20 million. The sales effort in the UK is underway and we're already seeing revenue from that effort.

In an effort to strengthen our reach into Asia, we were pleased to announce an exclusive agreement with Olympus in Japan. With this announcement, Olympus will become our exclusive distribution and marketing partner in Japan and will initially focus on bringing the ThinPrep Pap Test to that 10 million Pap test market. We believe that Olympus will be an excellent partner. They have a long history of success beginning in 1919. And they are currently the market leader in Japan, supplying microscopes to medical laboratories and their direct sales force of 50 professionals will begin training in the near future to promote the ThinPrep Pap Test to medical professionals throughout Japan. We're excited to announce this collaboration and look forward to a long and profitable relationship between our companies.

Overall, we were very pleased with our commercial results for the quarter and are excited by our prospects going forward. Sales of NovaSure rebounded strongly from a seasonally slow Q1 and we are investing in a direct-to-consumer advertising campaign this quarter. Sales of MammoSite were strong during the quarter and we continue to see a high level of interest from breast surgeons in implementing this technology. To capitalize on that opportunity, we have accelerated our sales force hiring plan to bring our sales force to 50 by the end of this year.

In our core business, use of the ThinPrep Pap Test continues with no evidence of declining use or price. Placement of the ThinPrep Imaging System was also strong during the quarter and rollout of the Imager at LabCorp is proceeding at a rapid pace. Cytyc and LabCorp are now promoting ThinPrep Imaging to physicians nationally and they are responding in large numbers. Our International business is making great progress with both ThinPrep and in launching NovaSure and our new relationship with Olympus in Japan positions us very well to capitalize on this untapped 10 million test opportunity.

I'd like to now turn the call over to John McDonough.

Thank you, Dan. 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 second quarter represented the first full quarter of sales for the MammoSite and GliaSite products as a part of Cytyc, and as such, those products contributed approximately 17% of 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 (technical difficulty) 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 the financial impact of the acquisition of Proxima to be $0.01 to $0.02 dilutive to earnings in 2005. We are very pleased to report that our integration efforts are ahead of schedule and that the business was slightly accretive to earnings in Q2, ahead of our initial expectation of achieving breakeven to accretive earnings by the fourth quarter. As a result, we intend to accelerate our efforts to expand the MammoSite sales force, as Dan mentioned earlier.

GliaSite represents a promising product that plays an important role in the treatment of brain tumors, and the business is growing and contributing to Cytyc's bottom line. As previously reported, we are pursuing a strategic partner who has the capability to further expand the usage of GliaSite. Until a strategic partner is in place, we will continue to build the business and revenue will be combined in the revenue we report to the Cytyc Surgical Products division. We expect GliaSite revenues to be less than 3% of CSP (technical difficulty) revenue.

Our organizational integration efforts are now complete, ahead of our initial schedule. All infrastructure, including systems and processes, have been migrated to Cytyc's standard business operations. We have leveraged our existing marketing and medical education efforts by combining those groups with our existing teams in Marlborough, Massachusetts, where we maintain and grow the MammoSite sales organization.

Manufacturing and R&D efforts have been fully integrated with our Cytyc Surgical Products group in Palo Alto, California. Finally, all G&A functions have been combined with the appropriate functions in our base business.

In the past 16 months, we have acquired two best-in-class companies and have developed the ability to integrate companies quickly and effectively. Our objective is to continue to grow the business in part by adding new best-in-class products that leverage our existing business and expand our presence to the women's health market. We remain 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.

Thank you, John. Operator, I'd like to now open the call for questions and answers.

(OPERATOR INSTRUCTIONS). Tom Gunderson, Piper Jaffray.

Good morning. I wanted to ask about both the Quest arrangement and Japan. On the Quest arrangement, not a contract? Is that right? No time period associated with it? Does it have any material impact to your ASPs, if you can give us a little bit more color on that?

Yes, Tom, basically we have pricing and terms in place with Quest that will continue indefinitely. That pricing and those terms are subject to change after some reasonable notice period by us. We are very happy with this kind of arrangement and comfortable with it. We've had this arrangement with many, many customers and as a result, there is no change to the guidance that we've given as a result of this arrangement.

And, does it -- I think it says instrumentation in the news release and I'm assuming that does not include the Imager at this point?

That's correct, Tom. Quest has indicated that they are not interested in the Imager at this time.

Okay. And then on Japan, help us understand that market a little bit better. Is this similar to the U.S., where women go in every one to two years and it's processed for the most part by large labs? And what will it take in order to get ThinPrep approved and commercialized in Japan? What kind of time line?

Yes, it's fairly similar to the United States in that the patients will see their physician on a regular basis. Pap tests are sent to a variety of academic hospital laboratories as well as some very large laboratories that we see in Japan.

In terms of introduction of the product, we're ready to introduce ThinPrep as we speak. We are planning the training sessions for the Olympus sales force that will occur before the end of this year, and early next year, they will be ready to launch the product. So we will see revenues in our '06 estimates from that activity.

In terms of what it's going to take, it's going to take promotion to the physician based upon the clinical benefits of the test and establishment of coverage, reimbursement coverage, for the increased costs associated with ThinPrep. So not unlike the United States model.

And have you been working on approval or are diagnostics different than devices in Japan?

Different than devices in Japan.

And is anybody else that you know of in Japan with a monolayer?

Yes.

David Lewis, Thomas Weisel Partners.

Good morning. A couple of quick questions here. I guess Dan, not that it's a material piece of revenue, if you net everything out, look at the Imager, look at the 9 million paps per quarter, on your domestic business, it does appear that for 2005 versus 2004, business is going to be down 1 to 2 million bucks per quarter. Like I said, not material revenue, but I just want to have you maybe rectify that for us. Is it simply that with tier pricing contracts at Quest and LabCorp heading into 2005, pricing was net lower than it was in '04 and that makes up the differential? Because it doesn't seem like you're losing share. Volumes have fluctuated at the large labs, but generally speaking have been stable, so price seems to be the only arbiter. And I just want to kind of rectify that so we can move on.

Yes, price is down a little bit. If you look at the first half of the year, the ThinPrep business is about $124 million. You could just run that out for the rest of the year, we think we'll be in the 248 range. I think the earlier guidance we had given was around 250, so we are off with a couple of million dollars. The majority of that related to price.

Great. Perfect. And then on LabCorp penetration, Dan, we talked about this -- at LabCorp, talked about a 12% num. Where would you like to see that number be by the end of the year, and how much control do you have over that and how much do you depend on LabCorp?

I think it's a cooperative effort by the two companies. Our sales forces are working together to increase that number. Our objective would be to get a run rate in December of about 50% of their volume or about 3 million tests imaged by the end of the year. That's the goal.

Okay. And I understand why net utilization per box would obviously fall, pushing this national rollout at a large reference laboratory. I guess I'm having a hard time understanding, Dan, it's just sequentially, the business kind of went from 8.5 million Imager to something in the 9 range. Does that kind of imply something about the core market penetration that we should be aware of?

I think, David, it's more a reflection of the way in which LabCorp is rolling the product out in that we're contacting physicians, educating them about imaging, and then asking them to order the test. So the ramp-up at LabCorp that we see is slower than we see at other customers. And because their installed base represented a larger portion of the total installed base, revenues were a little bit lower than we had expected.

Dan, is it possible that in the quarter, the sales force focused a lot more on LabCorp national rollout than method penetration at hospitals? Because I assume LabCorp is sort of gravy. The core business should've kind of kept on going and LabCorp should have been upside. So was there some of that going on in the quarter?

I hope so. We think the LabCorp rollout is very strategic and very important to us and we are fully supportive of that effort. So if we took our eye off the all other ball during the quarter, I am okay with that.

Okay, and last question and I'll jump back in queue, just in terms of this International penetration, following up on Tom's question, heading in the European market, obviously, I know Germany and France are going through lovely DRG-driven systems. Japan is obviously playing around with the same type of reimbursement structures. Given your experience, obviously, with France and Germany, with ThinPrep penetration, how would you kind of juxtapose the Japanese market to those two markets in terms of the ability to penetrate?

I think we are -- I think the environment in Japan is very similar to what you described. However, I think we've got a very, very strong partner in Olympus that has a long history of working within the Japanese system and they've got a very large organization that they are going to put behind the product. So I would expect better results in Japan than we've been able to achieve in France or Germany. And again, we'll be providing guidance about the Japanese penetration in the 2006 guidance we give.

Great. Thank you very much.

Glenn Reicin, Morgan Stanley.

Good morning, folks. Congratulations on a good quarter. I don't say that very often!

We know! But thank you anyway.

Just a couple of clarifying questions. So with Japan, what does it actually take to produce revenues in terms of the approval and reimbursement process?

There is no approval process, Glenn. We are free to market the product today in Japan. I think initially, we'll see use from the early adopter types, as we have in the United States, but long term, we're going to have to increase reimbursement as we did in the states.

How do you do that?

Through Olympus and their experience in working the reimbursement system. It's primarily going to be pressure as we exerted in the United States through physicians demanding the test, recognizing the benefits and advocating for increased reimbursement.

But it is a single payer system?

It is. Like the UK.

So it's going to be bumpy, essentially?

I think it is, yes.

But you said you're going to provide guidance on '06. It does imply that you're expecting something in '06?

We are. Yes.

Okay, so Olympus is basically thinking they can make progress? Or is there a private portion of that market that can be addressed immediately?

There is some private pay. In fact, there's more private today in Japan than ever before. There have been some legislative changes that allow private payment to take place in Japan.

And that's really where the revenues would come from?

Initially, yes.

Okay, so we'll hear more about that shortly. On the Imager, you mentioned 190,000 per Imager per year run rates. Where do you see that ramping? And how would the ramp go forward now?

Yes, Glenn, this is Tim. We do see the number going back up the second half of the year. I think it gets back into that 225 range approximately through the balance of the year.

Okay, and then as we look in '06, do you think it actually goes up from there?

Still a little tough to call, Glenn. I'd rather hold that one until we get out into the '06 guidance at the end of the year.

Okay. And then just triangulating here, on NovaSure, I have just shy -- I think 29,900 procedures at $912 per procedure. What are the actual numbers?

Glenn, we do not give that detail out as we go forward. But I think you are pretty close.

You're in the range.

Your math is good.

Okay. And then GliaSite, what -- are you in discussions in terms of finding a strategic buyer there, or should we just assume you're going to keep it indefinitely?

This is John McDonough. Yes, we are in discussions. I think your assumption at this time should be that we keep it and look at a strategic buyer as being an upside opportunity for us.

Okay. And then final question I promise and then I'll get back in line. Share count for the year, you actually bought back stock. Thank you very much on behalf of shareholders. What should we expect in terms of share count for the year?

Glenn, it should remain fairly stable for the balance of the year. We do assume in our models as we go out, some exercise of options. I think if you put a modest amount in by quarter, that should get you in the ballpark.

And you define modest by how much?

A few 100,000-ish.

Okay. Thank you very much. I'll get back in line.

Ed Shenkan, Wells Fargo.

Good morning, and great quarter, gentlemen. I wanted to ask you a little bit more about the direct-to-consumer campaign that you're going to have for NovaSure. Could you tell us what markets you are going to go into initially? What are your expectations that you can do with direct-to-consumer? And what are the metrics that you look for in evaluating it, whether or not you'll roll it out nationally?

Ed, this is Dan. I'd rather not identify the two markets there. I will tell you they are two mid-sized markets that we're using. We also have test markets that we're observing. In terms of metrics, we're looking at revenue growth compared to the test markets -- excuse me, compare to the control markets.

We have a revenue model that we've built based upon our previous experience with BTC (ph) and we would see incremental revenue in the 2006 timeframe in those -- we would hope to see increased revenue in the 2006 timeframe from those two test markets. Based upon the results of those tests, that will help us determine our increased rollout of direct-to-consumer advertising in '06 and '07 if we choose to do that. But again, it's a test. Two markets, middle size, we'll keep you posted.

Okay. And do you think that there's enough public awareness right now for direct-to-consumer campaigns to really have effect? And what were your hesitancies, and why are you going with just two pilot markets? Why isn't your conviction higher that you could just roll it out across the country?

Well, we want to be prudent and thoughtful and make sure it does in fact have an impact. Here's what we know. We know that the awareness by women of a 90-second procedure that will relieve them of this disorder is very, very low. And that's the objective of this campaign, is to raise the awareness by patients who have the disorder that there's a simple and easy and effective solution. We want to do that in markets where we have a large base of trained physicians and enough instrumentation in the marketplace so that they can accommodate the patient demand that we anticipate. So we chose those markets carefully. And again, it's a test. If it works, you'll see us roll this out more much more broadly.

And I can't help but ask a couple of follow-ups on the Quest announcement. So can you tell us why Quest maybe didn't want to trial the Imager? And is that a correct assumption that they are not trialing the Imager at this time?

Yes, Ed, as I said earlier, Quest has indicated that they are not interested in the Imager at this time. I would suggest you ask them the specific reason why not. But we are not in discussions about Imager and they are not evaluating the ThinPrep Imaging System.

Okay. Thanks very much and good quarter.

Wade King, Montgomery & Co.

Hi, guys. Great quarter. A couple of questions. In the Japanese market for products requiring approval, often local studies are necessary. I presume, given your confidence that you are ready to roll out the product, especially when you get reimbursement support, that you don't consider any local Japanese studies to be necessary here to either sell the product, one, or two, gain physician support in the Japanese market for the product?

Wade, I think as in the U.S., there will be laboratories that will study and publish their results. There already have been a number of studies published from Japan. We actually have had some operations in Japan for some time. But in terms of being a gating item to the launch with Olympus, there is no barrier to that happening in terms of clinical trials.

Okay great. And what is your specific time line estimate as relates to reimbursement coverage in Japan?

I don't have one, Wade. The initial effort in Japan by Olympus will be directed at the patient pay segment of the market and then longer term, address the government reimbursement. But I don't have a time line to provide you.

And Olympus is overseeing that 100% or is responsible for it 100%? Or is it you in concert with Olympus?

I'd say they are responsible but we are very supportive.

Okay. Actually, historically in Japan, I think what you alluded to, certainly the University hospitals tend to pay for a variety of devices and I presume diagnostics out of their own local operating budgets, and that affords early reimbursement opportunities. Is that the target market that you'll be pursuing with Olympus in the early going?

It's that as well as patient pay. There's been legislative change in Japan that now allows patients to pay from their own pocket if they choose to. So I think both of those things would be the initial approach by Olympus.

Okay. And also in Japan, historically, there's a little bit more revenue sharing as relates to fees associated with procedures done in office, like pap testing. So do you feel that the model in Japan historically affords you more immediate opportunities to sell the product because the doctors will be incented financially? Or do you view it differently?

We view it the way that you just described.

Okay. Very good. Last question, please. The 3 million tests per year -- I just wanted to clarify your comment, Dan. You said that your goal was 3 million tests in LabCorp facilities, imaged? Or 3 million tests imaged overall, your business in '05?

Yes, Wade, our ThinPrep volume at LabCorp is roughly 6 million tests per year and our objective is to converts half of that by the end of the year to imaged slides.

On a run rate basis.

On a run rate. As we leave the year in December, we'd like to be tracking at 3 million imaged slides.

Okay, on a run rate basis, 3 million tests at LabCorp facilities exclusively by the end of the year? Everything else in your Imager business on top of that?

That's correct.

What's your goal on a run rate basis overall for the imaging business?

The issue, Wade, is the all other segment of our business that have Imagers, they approach this a little differently than LabCorp. As we've described in the past, the lab that takes in an Imager usually notifies their customers that they are going to be imaging and they convert all at one time, basically. LabCorp is taking a more measured approach in going to physicians and having them individually order an imaged slide, so it's a ramp at LabCorp.

Okay, and actually, one additional question if you don't mind, maybe for Tim, would you mind breaking out the inventories in the quarter by finished goods, raw materials, etc., and also describe what related to NovaSure, related to Proxima, if you will, and for that matter, related to imaging?

Yes, hey, Wade. I do not have the raw material finished good details at my fingertips. We normally don't get into that level of detail even at a product line level. What I can tell you, we do watch inventories very carefully and clearly, we're building inventory based on anticipated demand. The terms were certainly very strong in the quarter, so concerns at all on inventory from any type of obsolescence type issues. So everything is fine on that front.

Okay. When you said building demand, you're talking about imaging, and obviously the international demand for ThinPrep? I mean when you said building demand, can you be a little bit more specific?

Yes, it's really across the board. It's certainly NovaSure, MammoSite, and as we do grow in international markets, you have a little lead time with shipping that you have to pay attention to. It's pretty much across the board.

Okay, gentlemen. Thank you very much.

Jayson Bedford, Adams Harkness.

I just have a few quick questions. Is there any way you can give us the breakout in terms of the number of imaged slides in the quarter, maybe as a percentage of total ThinPrep?

Yes, Jayson, it's approximately 20, 21%.

Okay. And from an ASP standpoint, it looks like just under $5. Is that kind of a level we should expect going forward?

Yes, I think you're in a reasonable ballpark.

Okay. On NovaSure, the breakout we had -- 93% disposable, 7% instrument. Is that fair?

Pretty close.

Okay. And then, lastly, Proxima came in ahead of our expectations. Just wondering, for the full year, maybe I missed this, but for the full year, what are you looking at from Proxima?

Jayson, we did not give specific guidance at the product level on a go-forward basis. The original guidance was 15 to 17, but we are moving away from that product-level detail. What we did say earlier in the call though is that NovaSure and Proxima certainly are performing very well and will be ahead of the original expectations we had at the product-level detail. So that's certainly one of the strong products in the portfolio.

It's fair to say though that it will increase sequentially going forward? Is that fair?

It's fair.

Okay, thank you.

Bruce Cranna, Leerink Swann.

Hi, good morning. John, just on Proxima, quickly, obviously forming a little better in terms of profitability than you guys had thought. Given the sales force uptick, shall we say, do you think the accretive nature of Proxima that carries through this year given the sales force spend?

Yes, this is Tim. As Dan mentioned earlier, we will be investing in increasing the sales force, which based on the demand we see in the market, we think that makes a lot of sense. We had a great quarter. The team did a terrific job in the integration and that's why I think it was accretive and the sales were strong, and it came in a little bit better than we had expected in the quarter. As you kind of map out for the rest of the year, it's a balance of the revenue growth and ramping up the sales force. So it's probably more in a approximate breakeven range for the balance of the year.

Okay, thank you. And then, I'm sorry I missed the comment that someone had on the average reimbursement per Imager going forward. I know we're -- it's perhaps a bit below here that we thought it would be. But what do you guys expect as a profit and sort of turnaround? Was that sort of year end? Was that the comment?

No, the comment was, we reported approximately $198,000 per revenue per Imager in Q2. And the question was where does that go for the balance of the year? We think it gets back into that 225,000 approximate range from the second half of the year.

So we're in the trough?

That's correct.

And then on the ThinPrep side, I'm looking at last quarter and I think the comment on pricing was it was actually a little better last quarter on a year-over-year basis due to mix and I think you said it was down this quarter. So was that just ordering patterns at large customers this quarter that (multiple speakers) price or was something else there?

Yes, it's customer mix and it was down roughly 1% for the quarter.

So you had a bunch of ordering by large customers in this quarter?

That tends to --

Tends to do it.

Tends to move it that way.

Yes, that would happen. And then, I guess I have to ask an Olympus question. I'm a little bit unclear that the sales force they have on the ground I assume is for the most part calling at labs. Do you know, are they focused on -- and I don't really know the lay of the land there -- is that sales force focused on the commercial lab community, kind of the central hospital lab, if you will, rather than the commercial lab? And then I guess, do you have to do some training with respect to having that sales force call on OB/GYNs? Or is that just not part of the plan?

Their sales force calls on anyone who uses a microscope. And so any size and sort of laboratory, you'll find their sales reps calling on. In terms of physician promotion, the 50 direct salespeople work through a distribution network of about 200 distributor salespeople. Those 200 distributor salespeople would be in contact with physicians offices. It's a little more complicated distribution scenario than we have here in the United States, but the 50 reps call on -- the direct reps call on the laboratory and then they work the physician side through a distribution network of 200 distributor reps.

Okay. And do you guys anticipate any I guess let's say development aspect to this contract going forward? Or should we just be thinking of this as distribution only?

Well I think the conversations about development have already taken place and continue. And I can't predict anything. That line of discussion is open and ongoing.

And last, housekeeping question, could you just give us the O-U.S. ThinPrep number stripped away for -- I know we got the total U.S. sales member, but just ThinPrep side?

Yes, I don't think we've broken that out in the past historically. But we said 12.8 million international revenue, clearly the lion's share of that is on the ThinPrep side. There is some non-gyn instruments in that number, but the lion's share of that is (technical difficulty).

Thank you.

Amit Hazan, SunTrust.

Hi, good morning guys. Just a couple of follow-up questions. On Quest, just to be clear, you have an arrangement in place if it's got terms and pricing in place, what is really the difference between what you have now and what you had when you had a contract?

There is no signed agreement in place, is the only difference.

With an expiration date, yes (ph).

Okay, and so as far as we look forward with regard to Quest, should we be thinking that there may -- is there still discussions going on? Should we be thinking that there might be a contract that would be in place or are the discussions pretty much over at this point?

I'd say frankly we are not in active discussions regarding a long-term agreement with Quest. We may be in the future. We may not be. If we are in discussions with Quest in the future about a long-term agreement, we obviously wouldn't be able to tell you about it. But if anything comes of that -- if that happens and anything comes of that, we would certainly announce that.

Got it. And just if we could get a comment from you with regard to your competitor, they've clearly been increasing their sales force. Can you just anecdotally maybe just give us an idea of what your guys are seeing out there as far as TriPath going into the physicians office?

We can counter them in our daily activity. They're out there promoting their product and so are we. I'd say there's not been a noticeable change in the level of activity in the last couple of months.

Okay, and then just lastly, I know you talked about domestic ThinPrep volume fluctuations. Maybe just give us an idea, if there's more fluctuations now than there were historically, what the reason for that might be.

I'd say there haven't been any fluctuations that have been out of the ordinary in the past couple of years. It's been on average about 9 million tests.

Okay. Perfect. Thank you very much.

Rob Talisree (ph), Blackrock Capital.

Both of my questions have been answered. Thank you.

Glenn Reicin, Morgan Stanley.

Okay folks, not to be spoon-fed or anything, but do you think maybe you can share with us your latest thoughts on annual revenue ranges for both NovaSure and Proxima for this year?

Yes Glenn, this is Tim. We've taken the decision not to have guidance at the product level detail. But when you go back to the full-year range that I laid out, the 505 to 515, the midpoint is unchanged from where we were before. But clearly, the stronger products are those two -- NovaSure and MammoSite. So for your modeling purposes, it would be higher than what we had stated last time we gave the product level detail.

Okay, just to avoid any confusion though, I want to understand this issue of sequential growth in summer months and seasonality. Let's get it on the table right now. On NovaSure, you've previously mentioned seasonality as being a factor, especially in the first quarter, and that the second and the fourth quarters would always be the strongest. So just on the record on NovaSure, do you still expect sequential growth in Q3?

Yes, we do.

Okay, so you can power through that seasonality. And then on Proxima, can we also assume we are going to continue to get sequential growth? Or was there something onetime in nature in the second quarter on Proxima that boosted that revenue number?

No, our plan there includes sequential growth for Proxima.

Okay, so. And I guess that momentum could continue into next year as well, or should continue into next year for expanding the sales force?

That's our (technical difficulty) -- that to happen.

Okay. And then can you give us an update on publications on Proxima? When are we going to get three-year follow-up and what is the nature of the publication?

The three-year follow-up -- you know what, Glenn, let me take that off-line. I do not have that at my fingertips, but I will give it to you off-line.

(OPERATOR INSTRUCTIONS). Ryan Rauch, Jefferies & Co.

Yes, good morning. Congratulations on a good quarter. Just two quick ones. Can you just give us a quick update -- I'm sorry if I missed it -- on your surgical sales force or just OB/GYN sales force -- where it is today and where you think it's going to head, both on the OB/GYN and to the laboratories?

Okay, we've got approximately 50 people that call on a lab. Those folks have been in place for quite some time now and they are obviously promoting ThinPrep and Imager. There are 100 salespeople that call on the OB/GYN in their office. There are currently about 85 surgical reps that promote NovaSure in the operating room. We're taking that number to 100. And then there are 30 Proxima salespeople and as we talked about earlier, we're taking that to 50 by the end of the year.

And where does your collaboration with Abbott stand? Did you generate any revenue in the quarter from that?

We did. The collection system for use with their product is in the marketplace. Small revenue generated in the quarter, but it's out there.

Okay. Then just two quick ones. Where do you stand in the TriPath litigation? Maybe could you give us your comments? There's a competitor coming or supposedly coming, MonoGen, later this summer. Can you just tell us your thoughts or what you've heard about their technology, etc.?

Yes, on the litigation front, Brian, that litigation is ongoing. There's really no update. If you take a look at our Q's and K's, that adequately describes where we are in the process. We believe there's a product called MonoGen that -- we understand that's with the FDA -- liquid-based technology that we've known about for probably the last nine or ten years. No data is available at this point and they are in the FDA process.

I would just point out that when you look at a new entry coming into this marketplace with the -- where we are with the ThinPrep Pap Test in terms of market share, as well as product differentiation, at both the clinical level as well as the only FDA-approved product to do chlamydia and gonorrhea as well as HPV out of the vial (ph), I think it's going to be a significant obstacle to somebody trying to enter the market.

Okay, thanks a lot.

Bruce Jackson, Wachovia.

Hi, good morning. Can we get the CapEx and depreciation for the quarter?

Yes, Bruce, give me one second to dig that up. If you want to ask a second question?

Sure. You talked about product customer mix being an issue with the pricing. What percentage of the business this quarter was large lab?

That number generally runs in the mid 40 percentile. That's been fairly consistent. Bruce, I have CapEx for the six-month period, which is about 7 million; and in the quarter, it was approximately 5 million. Depreciation for the six-month period was about 11 million. The quarter should be roughly about half of that.

Okay. And then with NovaSure, roughly how much was international this quarter?

That continues to -- this quarter was small portion. Dan had mentioned, we are really ramping up in the second quarter.

About 2 to 3%.

Two to 3%. Okay, great. Thank you very much.

Glenn Reicin, Morgan Stanley.

You did mention -- (indiscernible) brought up the Abbott revenues. Can you talk a little bit about what is the opportunity there and when we can expect to see some significant growth out of that relationship?

Yes, frankly, Glenn, I'd have to say I wouldn't expect substantial revenues from that relationship. We have developed the part of the product that we had committed to; it's in the marketplace. To the extent that Abbott gets behind their side of the product and promotes it to urologists, there will be increased use. But I would not bake any substantial revenue into any model for that product.

Okay. And second question is about the Imager. Can you give us a sense of whether Quest is waiting for the TriPath Imager to get approval? And if in fact it does not, would they then reconsider using your Imager?

Glenn, about all I can say is they have indicated that they do not have an interest in our Imager at this time. And beyond that, I have no information to provide.

Okay, thank you.

Operator, we'll take one more question, please.

There are no further questions at this time.

Great. I am very pleased with our performance for the second quarter of 2005. As we discussed during today's call, all organizations demonstrated excellent execution of our key growth initiatives in both the Surgical and Diagnostic divisions of our business. And I believe we are positioned as a worldwide leader in providing innovative best-in-class products for women's health. We are particularly excited about the performance and our relationship with Lab Corporation of America and the national rollout of the ThinPrep Imaging System and are very excited about the recent acquisition of Proxima Therapeutics and the performance during the quarter. We are very focused on becoming the premier women's health care company, delivering innovative products to improve women's lives. Thank you for your participation in today's call.

This concludes today's conference. Thank you for your participation. You may disconnect your lines at this time.