Hologic Inc (HOLX) 2005 Q3 法說會逐字稿

Greetings ladies and gentlemen and welcome to the CYTYC Corporation third quarter 2005 earnings conference call. At this time, all participants are in 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. Good morning everyone and welcome to CYTYC Corporation's third quarter 2005 conference call. If you have not received a copy of the press release issued yesterday, please call the Ruth (ph) 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 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 a 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. They 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.

Thank you, Anne, and good morning ladies and gentlemen. I would like to welcome you today to our teleconference to report on the performance of the Company for the third quarter of 2005. Joining me on the call today are Dan Levangie, Executive Vice President, and Tim Adams, Chief Financial Officer. During this morning's call, I will 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 diagnostics and surgical products businesses.

Overall, I'm very pleased with our strong performance for the third quarter of 2005. As noted in our press release, revenue reached a record for the third quarter of 2005 of 130.8 million with net earnings of 30.1 million, or $0.26 per diluted share. Our goal is to become the leading women's health care company by providing clinically proven best in class products to physicians, laboratories and women around the world.

During the third quarter, our total revenue continued to diversify with over 30% of total company revenue coming from our Surgical Products Group. That includes our market-leading NovaSure and MammoSite products. Our third quarter worldwide revenue from our Surgical Products Division was 40.5 million, a 106% increase from the third quarter of 2004. Our NovaSure business revenue was up 74% to 34.2 million.

In addition, our MammoSite product for breast cancer treatment acquired in the first quarter was accretive to our operating results for the second consecutive quarter.

In our Diagnostics business, our third quarter revenue was 90.3 million, up 9% compared to the third quarter of 2004. Our ThinPrep Pap Test volume during the quarter remained strong with 8.8 million test shipped to our laboratory customers. We did feel the effects of Hurricanes Katrina and Rita during the quarter and believe the revenue was negatively affected by about $0.5 million.

I'm particularly pleased with the two pre-market approvals we received from the Food and Drug Administration during the quarter. This significantly improves our package insert claims for the ThinPrep Pap Test. One approval facilitates molecular testing from the ThinPrep Pap Test file and the other confirms the improved detection of endocervical and endometrial lesions using the ThinPrep Pap Test. These enhancements to our labeling are important clinical advancements for patients and their physicians and provide a key product differentiation for our cervical cancer screening technology.

Our ThinPrep Imaging business delivered a very strong financial performance during the quarter. We shipped 31 ThinPrep Imaging Systems to laboratories during the quarter and our implementation with LabCorp of America continues to grow with over 30% of ThinPrep Pap Test slides performed at LabCorp run on the ThinPrep imaging system.

We view our international business as a significant growth opportunity for the Company. In early October, we announced the promotion of David Harding to lead our international business efforts. David joined us from McKinsey & Co. about a year ago as VP of Marketing and has consistently led our domestic marketing efforts. He has accepted the challenge to further strengthen our international business and I look forward to his contribution in growing our businesses around the world.

Overall I'm very pleased with the performance of the Company for the quarter. We continue to solidify our base of diagnostic business with two very important approvals from the FDA and our Surgical Products Division continues to demonstrate dramatic growth.

I would like to now turn the call over to Tim for more comments on our strong financial performance.

Thank you, Pat, and good morning everyone. My remarks today will compare the financial results of the third quarter of 2005 with the results of the third quarter 2004, along with some selected comparisons to the second quarter of this year.

Total worldwide revenue for the third quarter of 2005 was $130.8 million, which represents a 27% increase from the $102.8 million of revenue for the third quarter of 2004. Worldwide revenue from our high-growth CYTYC Surgical Products Division was 40.5 million for the quarter, or 31% of total company revenue, which was comprised of 34.2 million of sales from NovaSure products and 6.3 million of revenue from sales of MammoSite and GliaSite. This represented a 74% growth in NovaSure revenue over last year and a 14% increase for CYTYC Surgical Products versus Q2 of this year.

Total revenue from the Diagnostic Products Division was $90.3 million, which is comprised of 78.5 million from the U.S. market and 11.8 million from the international markets. Revenue from the Domestic Diagnostic Products Division was comprised of 61.3 million of sales from the ThinPrep Pap Test, 11.1 million of revenue from the ThinPrep Imaging System and 6.1 million of other revenue from sales of instruments and non-GYN tests.

The 78.5 million of revenue from our Domestic Diagnostics Product Division for this quarter represents an increase of 5.3 million, or approximately 7% from the third quarter of 2004. This increase was driven by the growth from ThinPrep Imaging System. During the quarter, we shipped 31 imagers in the U.S. market, bringing total domestic shipments since the inception of the imager program to 258 units. At the end of the quarter, 239 of these units were revenue-generating, an increase of 28 revenue-generating units during the quarter.

For Q3, the average annual revenue per imager was approximately $211,000, a 7% increase as compared to the second quarter of this year.

The reported international revenue of $11.8 million for the third quarter of this year increased by $1.9 million, or 19%, compared to the third quarter of 2004. This revenue only represents the sales of our Diagnostic Products as we report the international NovaSure sales in the worldwide NovaSure revenue previously mentioned.

The Q3 international revenue was down approximately $1 million from Q2 of this year primarily due to the traditional vacation season experienced in the European community and the continued strengthening of the U.S. dollar. We experienced this same summer seasonality last year. However, we expect to see sequential growth in the fourth quarter of this year from our international operations and we believe our full year 2005 international revenue will increase by over 20% compared to full year 2004.

The overall company gross margin percentage for Q3 was approximately 79% and is consistent with the third quarter of 2004. Total company operating expenses during the third quarter of 2005 were 52.5 million as compared to 40.2 million in the third quarter of 2004. Over half of this $12.3 million increase relates to the growth in our Surgical Products Division. These expenses relate to the MammoSite business and the continued investment to support the growth in NovaSure, which includes the direct-to-consumer advertising campaign launched during Q3.

Additionally we increased our selling efforts in support of the ThinPrep Imaging System and we incurred incremental non-cash charges related to the amortization of acquired intangibles. Although G&A expenses of 11.5 million were up from the 8.4 million in the third quarter of 2004, these expenses continue to represent approximately 9% of revenue and were flat compared to Q2 of 2005.

Our income from operations was $50.4 million, or 39% of revenue, compared to 41.3 million, or 40% of revenue, in the third quarter of 2004. Reported net income for the third quarter was $31.1 million, or $0.26 per diluted share, as compared to net income of 24.8 million, or $0.21 per diluted share, from the same period in 2004. This brings our 2005 year-to-date diluted earnings per share through September 30 up to $0.71, which excludes the charge related to the arbitration taken in the first quarter.

The diluted earnings per share of $0.26 for this quarter includes the results related to MammoSite and GliaSite, which we are pleased to announce were again accretive is to operating results in the quarter, and we expect this trend to continue.

Next, I would like to take a minute to discuss Q4, 2005 guidance. For the fourth quarter of this year, we expect revenue to be in the range of 137 to $140 million and diluted earnings per share to be in the range of $0.27 to $0.28. We expect gross margin to be in the range of 78 to 79% and operating margin to be in the range of 38 to 39%. When this guidance is added to our 2005 year-to-date results through September 30, we expect full-year worldwide revenue to be in the range of $507 to $510 million, and our full-year diluted earnings per share, which excludes the charge related to arbitration, to be in the range of $0.98 to $0.99. This full-year guidance is in-line with the guidance we provided on the Q2 call.

The Company will be hosting and webcasting an investor and analyst day on December 7, 2005, in New York City. At this meeting, we will provide 2006 guidance and we look forward to seeing you at the meeting.

And finally, moving to the balance sheet. Our cash balance as of September 30, 2005 was $152.8 million. Due to the strength of our business, we continue to generate strong cash flows as evidenced by the 43 million in cash flow from operations generated this quarter, bringing our total cash generated from operations for the nine-month period ended September 30 to $126 million. Days sales outstanding of 49 days at the end of the third quarter were consistent with the 49 days reported at the end of the second quarter. Inventory turnover was 4.7 at the end of Q3, which represents an improvement from the 4.4 for reported for Q2 of this year.

As you can see, our balance sheet remains very strong and it continues to provide us with the financial flexibility to support our growth. Thank you, and with that, I will turn the call over to Dan Levangie.

Thanks, Tim. Once again, we have great news to report from our Commercial operations for the quarter. First, I will comment on the Surgical Products segment of our business.

As was reported earlier, in spite of some seasonal weaknesses anticipated during the summer months and some minor impact from the hurricanes in the Gulf region, we experienced very strong growth in the sales of NovaSure during the quarter. Of the $4.7 million increase in NovaSure revenue, approximately 80% came from increased device use and the other 20% came from a price increase that became effective in May of 2005.

During the quarter, approximately 90% of our revenue came from sales of the NovaSure disposable device. In addition, strong sales of the NovaSure to -- strong sales of the NovaSure device during the quarter, we increased our installed base of NovaSure equipment by 216 instruments.

As we discussed last quarter, in September, we launched a test of a 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'll expand the market and substantially increase sales of NovaSure in the future. This direct-to-consumer campaign began in two markets in September and involves print, radio and television advertising. The initial reaction to the advertising message has been dramatic with visits to our NovaSure website more than triple the rate that we saw prior to the advertising and use of the Find-a-Physician capability of our web page increasing 20-fold in the two markets in which the advertising is running.

In fact, more than 900 women visited our website last week alone to find a local physician who offers NovaSure. We believe that these two early indicators bode very well for the impact that this program can have in driving patient awareness and increased use of NovaSure.

In addition, the clinical story of NovaSure continues to evolve. Next week at the American Association of Gynecological Laparoscopy, 10 papers will be presented that describe a variety of positive outcomes with the NovaSure device, including the five-year follow-up of patients treated with NovaSure, that shows a 98% success rate. This level of clinical performance clearly differentiates NovaSure from competitive offerings.

We are also very pleased with the results achieved by MammoSite during the quarter. MammoSite revenue during the quarter was $5.4 million. As we reported earlier, we fully integrated the MammoSite Sales and Marketing Group within CYTYC Surgical Products and based on our early success with MammoSite, we decided to accelerate our sales force expansion plans. We're currently in the process of expanding the MammoSite sales force from its current staff of approximately 40 to 50 individuals by the end of this year. Demand for MammoSite physician training continues to be very strong and reimbursement for placement of a MammoSite device in a physician's office is driving a good portion of this interest. Once again this quarter, we saw strong growth in sales of the MammoSite device for in-office use.

Another important driver of increased use of MammoSite is the continued maturing and strengthening of the MammoSite clinical data set. At last week's American Society of Therapeutic Radiation Oncology meeting in Denver, the four-year follow-up results from MammoSite FDA clinical trial were presented. These data document the effectiveness of MammoSite with zero recurrences in this group of patients in addition to very good cosmetic results. These data created a good deal of at ASTRO and we continue to believe that MammoSite has the opportunity to change the standard of care for breast cancer patients electing breast conserving therapy.

In our Diagnostics business segment for the 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 96 ThinPrep processors, 61 in the United States and 35 internationally, 47 of these placed in labs of new customers.

With respect to the ThinPrep imaging system, our lab customers today are telling us they require an imaging platform based upon computer-assisted interactive human review that provides increased sensitivity for abnormality with improved laboratory productivity. The ThinPrep Imaging System is the only FDA-approved imaging platform that provides those benefits, and as a result, we continue to make strong progress in our efforts to convert our customers to imaging by placing an additional 31 systems during the quarter.

Also during the quarter, we made great progress with LabCorp. At the end of the quarter, we believe that approximately 30% of Lab Corp.'s ThinPrep Pap Tests were being imaged, more than double the rate of image slides from the last quarter, and that our goal of leaving the year with a run rate of 50% conversion to Imager at LabCorp is within our reach.

LabCorp has stated that it sees the ThinPrep Imaging System as one of their key growth drivers for the remainder of 2005 and 2006, and they believe that significant adoption of imaging by their customers indicates that physicians recognize the benefits of this PAP screening technology advancement. From the clinical standpoint, the data supporting the increased effectiveness of the Imaging System to detect abnormalities and improved lab productivity continues to build. At next month's American Society of Cytopathology meeting in San Diego, there will be 13 papers presented by laboratories using the ThinPrep Imaging System. They report on a variety of findings with the Imaging System, including increased sensitivity and specificity, reduced false-negative rate, increased laboratory capacity and workload, as well as reduced turnaround time. We expect that most of these papers will become manuscripts and will be published in peer reviewed journals.

During the quarter we shipped a total of 8.8 million ThinPrep Pap Tests and the average unit pricing increased slightly from the previous quarter due to customer mix.

During the quarter, we announced two important regulatory milestones for the ThinPrep Pap Tests. First, we announced expanded product labeling that allows the claim that the ThinPrep Pap Test is more effective than the conventional Pap smear for the detection of glandular abnormalities of the cervix. While these lesions continue to be rare in comparison to the more common squamous abnormalities, the rate of these lesions has doubled in recent years with an increasing incidence, particularly in younger women. These lesions are difficult to detect using the conventional Pap smear and we believe that this labeling claim provides another important point of differentiation for the ThinPrep method compared to any other method of testing.

Following that announcement, we received FDA clearance which facilitates ancillary molecular testing from the ThinPrep patient specimen vial prior to processing this sample using the ThinPrep instrument. This is a very important development for our laboratory customers in that it first simplifies testing for STDs in young, asymptomatic women, a practice widely recommended by a number of prominent medical societies and insurance carriers; and second, provides the lab a very attractive source of additional revenue. We believe that this change in methodology for the laboratory greatly simplifies the FDA-approved processing of ThinPrep samples from molecular testing of HPV, Chlamydia and gonorrhea and should provide customers an easy and convenient single sample for testing for cervical precancer, as well as these common STDs.

This easy to use method, which involves no change in procedure for the gynecologist or patient, will now facilitate physicians in their labs in the use of the only FDA-approved method of simultaneously sampling the patient and receiving multiple laboratory results. For the laboratory, each ThinPrep vial now provides the lab the opportunity to generate revenue for HPV, Chlamydia and gonorrhea testing, in addition to their reimbursement for screening the ThinPrep Pap Test.

In total, this incremental revenue now easily available with the ThinPrep Pap Test could generate approximately $150 in additional revenue for patient specimen for the laboratory. We believe this is another important differentiator of the ThinPrep Pap Test that is being enthusiastically received by our OBGYN and laboratory customers.

On the international front, we officially launched NovaSure in Europe at (ph) the end of last quarter and now have a sales team in place and are beginning to see sales momentum build, particularly in the UK where we see a potential market for NovaSure of approximately $20 million. During the quarter, we worked with our colleagues from Olympus, Japan as they developed their training and go-to-market strategy for ThinPrep in Japan. We expect a nationwide launch by Olympus by midyear of next year and are actively working to support that relationship.

Overall, we were very pleased with our commercial results for the quarter and are excited by our prospects for each of our business segments going forward. I will now turn the call back to Pat.

Thanks, Dan. Operator, you may now open the call up for questions and answers.

(Operator Instructions). Tom Gunderson, Piper Jaffray.

Good morning. Three quick questions. Number one, you talked about MammoSite at the show last week. Can you remind us what the N is that four-year study? How many patients have gone for years? And also, were there -- any color you can give us on focus groups or marketing research that you did there that might help us better with understanding that story?

The second question is, any changes in the Imager use at Lab One, up or down, recently? And third is, remind us of the buyback program for your stock and what happened during the quarter, if anything.

On the MammoSite clinical trial, there are 43 patients enrolled in that trial, the FDA trial. And again, the follow-up now has averaged four years and the great outcome is zero local recurrences in that group of patients.

We had a series of events that we conducted at ASTRO, including an evening symposium that was standing room only sold out kind of an event at which this data was discussed. And as I said in my script, there was a tremendous amount of buzz generated by this approach, articles that appeared in USA Today the next day, et cetera. So I think there was a lot of enthusiasm to see the maturing of the MammoSite data and the results that are really terrific results.

In terms of your second question, Imager use at Lab One, we have seen no change in their utilization of Imager at this time.

Your third question on share repurchase. We did not repurchase any shares in the third quarter of this year. As you probably recall from our second quarter, we announced the share repurchase plan and we repurchased $50 million worth of stock, a little bit over 2 million shares in Q2 of this year.

Thank you very much.

David Lewis, Thomas Weisel Partners.

Good morning. A few quick ones here hopefully. Dan, just real quick on Imager. Has LabCorp in your discussions with them shared that in any key markets they're seeing market share gains on ThinPrep because they're offering the Imager to customers?

We haven't had specific discussions about market share gains. We have anecdotal reports of customers migrating from one lab to LabCorp for the Imager and some substantial OBGYN practices that have done that, but we have not got into discussions about market share shifts at this point.

And then on Proxima, it sounds like the sales force's, the expansion of 30 to 50 is on track. Looking at the trend just sequentially, it was not as dramatic as you would've liked. I'm wondering, is that just sort of August surgical procedure slowdown, Dan? Is there anything going on there that surprised, given the reimbursement in trends and the higher sales force where you would have expected just a slightly higher number?

A couple of things, David. The sales force, while we have hired additional salespeople, there's a ramp-up time associated with them, and it's at least 90 days before we would begin to see an impact. So the hiring we did in Q2, we're just beginning to see impact in Q3. And then in Q3, we will see impact in Q4. So I think it's a little bit early for that impact.

The seasonality question regarding Proxima. When you think about breast cancer diagnosis, it's obvious that there's probably not seasonality associated with that. The same number of women are identified with early breast cancers in the summer as are in the winter. But in fact, the breast surgeons that are placing MammoSite catheters in patients do take vacation in the summer, and so there's fewer of them around at some points during the summer. And as a result, those patients that are diagnosed in the summertime are likely being referred for whole-breast irradiation. So we did see a seasonal impact. We had sequential growth over Q2 and it was in-line with our expectations, and we see a rebound going into Q4.

In terms of referral patterns, Dan, what do you think the percentage of surgeons versus radiation oncologists that is now performing the procedure?

Actually placing the catheter?

You got it.

That's weighted highly towards breast surgeons at this point in time.

So, could it be 70/30 breast surgeons?

That would be a good guess.

Great. Moving onto NovaSure, where do you think your market share, Dan, stands right now? And if you had to rank one, two, three, in terms of where growth was coming from, whether it be hysterectomy, share from J&J, market growth, therapeutic kind of refractory penetration; where would market share position be, and how would you rank the top-three growth catalysts?

Our estimates are that we're in the 40 to 45% market range. We think we're the market leader at this point in time. We continue to see gains from the competition, which the remaining lion's share behind us continue to be J&J. But we're seeing an increasing number of patients that are opting to have NovaSure in place of extended hormone therapy, as well as patients are opting for NovaSure, rather than a hysterectomy. I think those would be my order -- competitive take-aways, hormone conversion and hysterectomy.

Okay, and then last question, I promise here, just for Pat and Dan. I think the Markman hearing transcripts on CYTYC TriPath are out this morning. And besides it being interesting reading for all of us for the weekend, anything you can share regarding how you think that went initially, and maybe an update on timing?

The Markman hearing was held in August -- in the August time frame. There's nothing new at this point to report. We're in the process, expect the trial would probably be sometime next year.

Okay, thank you.

Glenn Reicin, Morgan Stanley.

Good morning, folks, nice quarter. A couple of questions. On NovaSure, I'm estimating around 33,100 devices. Can you give us the actual?

Glen, we do not break out that detail, but you're probably in the ballpark there.

And the SP's (ph) in the 795 range?

That's a good -- real close -- good estimate.

Can you talk a little bit about international revenues for NovaSure? What were they in the quarter?

We historically have not broken those out. Where we're seeing the traction right now is in the UK. As we talked before, we've ramped up the sales force over there. There's eight reps that are now up and running and we are seeing some pretty good traction in Canada. So that's really where we're seeing it, but we chose this year not to really break out that level of detail.

Okay. And then on the other product line, you have other non-GYN instruments, and then you have this category that's sort of other tests. Can you break down the quarter, the revenues between those three buckets?

Glenn, the 6 million that I mentioned earlier, probably half of that is the non-GYN test; the rest is primarily instruments.

I was hoping at some point we would start to see some revenues being generated from Eurovision and some of the AVID (ph) tests. And I was hoping this would be a driver next year, which it sounds like it's going to be optimistic. But maybe talk about what is happening on that front?

Glenn, The Eurosite product that we developed, the collection system and slide preparation system, is available. It's in the market. Abbott's customers are purchasing it from us. I would say that Abbott's promotion of that product, their view of promoting that product has changed since the earlier days and there's not a lot of activity, frankly, on the part of Abbott in promoting that product. Next week's American Cytopathology meeting has I believe three papers being presented, all of which are very favorable about the Eurosite product, but in fact, the sales effort behind it by Abbott has not materialized.

Okay. And I assume we should not be thinking that anything on the first sight line is going to materialize next year either, correct?

That's correct. Still conducting the clinical trials.

Okay and then you talked about the 8.8 million tests, and you said that ASPs were up. That 8.8 million includes 50 to $100,000 -- sorry -- 50 to 100,000 test impact from hurricane Katrina?

Something along that order, yes.

Okay. And then when we start thinking about sequential pricing, what, up by about a couple of pennies?

Order of magnitude, correct.

What sort of magnitude is it? A couple of pennies, a lot of pennies?

A couple of pennies.

A couple of pennies, okay. And, again, can we assume with Katrina, a lot of these products are stocked. I was surprised in fact that you got hurt, because I would have thought that, if you have a center in Mississippi, those tests are just lost, that you would have to replenish the inventories somewhere and that you actually could have benefited ironically from the hurricane. Does that benefit happen in Q4 from the replenishment?

Glenn, I think in part it's a function of patients were not going in for tests during a very difficult time down in the Southeast. Hard to predict how quickly they will be going back for testing and how soon that's going to happen. I think it's tough to call what the impact would be for Q4.

What about the amount of inventory in Mississippi and Louisiana that you have out there? I assume it's just gone.

I wouldn't assume that it was gone. I just don't think it was used, and therefore, the orders were -- didn't come in from those affected areas.

So maybe talk about a little bit about the next 12 months. You do have another competitor potentially coming into this market. What are your share expectations, just generally speaking, in the core business?

I think share expectations, we expect the ThinPrep business to be stable. I think when you look at all of the labeling claims that we have for this product versus any another competitor, including the use of the Imaging system that we think is a key product differentiator, that our expectations is the base business will remain stable.

Do we have any updates on (indiscernible), what has happened after?

We do not.

We do not. And do you have any idea when they're expected to hear from the FDA?

They have been in FDA review for quite some time, so it's likely that they've passed the typical six-month review window with FDA and are likely working on issues.

Okay. I know I'm jumping around here, just specifically on your guidance. You used to quantify what total international would be for the year. What is implied in your guidance now for international?

Glenn, if you go back to 2004, it was approximately $41 million of revenue. And the comment from earlier was that it would grow year-over-year in excess of 20%, so that will help you get to that number for full year '05.

I assume it's down from -- I think you formerly gave guidance of 52 million, around that range. So it sounds like NovaSure is exceeding your expectations, international is coming up a little short.

Yes, that's correct. If you go back to the comments we made on the Q2 call when we talk about full-year guidance, we did talk about international being down a bit relative to the guidance gave a year ago, and NovaSure doing better.

I promise this will be the last question. On NovaSure, it does look like you benefited from some pretty hefty instrument sales. You placed more than I thought at 250, and I think that was the number you gave. Can we assume you can still get sequential growth over that very strong Q3 number, in Q4?

In total?

In total.

Yes.

Wow, okay. That's a good business. Thank you.

Wade King, Montgomery Company.

Hey, guys good morning. A number of my questions have been asked, but I have three left, please. Number one, are there any Imagers being evaluated by Quest (ph)?

No, there are not.

Okay, thank you. Secondly, the gross margin in the quarter, despite the strong performance, was slightly below our expectations. I know that you have quite a mix going right now impacting gross margin. Can you tell us, was there anything in particular that restrained gross margin in the second quarter?

We had guided 78 to 79%, it came in at 78.7%, so just a touchdown from the high end of the range. It really is product mix, product mix of the Imager in international, which do carry a slightly lower margin than what we see in core (ph) and prep disposable, NovaSure and MammoSite.

How was your NovaSure margin trending now, compared to your U.S. ThinPrep disposable margin?

NovaSure margin on the disposable has been very strong, very healthy.

Is it comparable to your U.S. ThinPrep disposable margin?

Probably slightly ahead.

Okay, very good. And lastly, when are you going to start to detail the impact of option expensing in your guidance? Is that going to be in the New York City forum when you talk about '06, or some other time?

Wade, it is still an open item, whether that happens on December 7 or if it happens in January or early February when we have the Q4 call. As you know, the rules for FAS 123 are very complex and we're still working through that accounting guidance. And we are making some revisions to the long-term incentive plan that ultimately will impact that as well. So just want to be a little cautious not be too premature on December 7, but we're working very hard to get to those numbers and we will certainly have them and it will be part of '06.

And is it fair to assume that possibly, the changes to the plan you refer to are a combination of restricted stock and options, or some other plan?

That is a fair assumption.

Okay, very good, folks. Thanks very much.

Amit Hazan, Suntrust Robinson Humphrey.

Good morning guys. Just a couple of questions. First of all, with regard to Proxima, we just Varian Medical on their call last night talk about HDR afterloaders as being very solid growth for them. I just wanted to know, maybe you guys could give us a little bit more color on how you're working with them with regard to getting those into clinics, and where you see the installed base right now, perhaps where you see it growing to in the coming year?

We do have a relationship with Varian. They actually manufacture a product called MammoSource, which is specifically designed to be used together with the MammoSite product. It's a single-source afterloader. We don't have really visibility into the installed base, Varian, or the number of new instruments that they are placing. I will tell you that we have, in our estimation, certainly enough HDRs out there to accommodate our plan. But we work with Varian on trying to place more of those obviously and we have had some success with that program, but I don't have visibility into their installed base.

And just one on or two questions I Quest real quick. Just a follow-up on Lab One. Maybe you can give us a little bit more color on how you see the Imager there at Lab One after Quest completes the acquisition. Do you expect any change at all there? And how do you view that in terms of Quest? Could this act as a kind of informal evaluation period for them?

I don't think I can comment on the what -- the future with respect to Imager at Lab One. I can tell you about the past. And in the past, Lab One is 99% converted to imaging today. They are very satisfied with the product, and in fact next week at the American Society of Cytopathology meeting, there's a paper being presented by Lab One that talks about the productivity benefits, reduced turnaround time, reduced labor costs associated with the Imager. So they're very a satisfied customers. As far as what happens going forward, that's not our decision.

Okay, thanks very much.

Bruce Cranna, Leerink Swann.

Hi, good morning. Just a couple of odds and ends here. First, on the Imaging side, I think you guys mentioned revenues -- let's see, 211,000 this quarter per box per year run rate. And I think last quarter -- so clearly it ticked up, but I think there was some mention last quarter of maybe that can get to maybe 2-1/4 run rate by year end. Is that still attainable in your opinion?

That is correct. that's what we said on the call us quarter, that in the balance of the second half of the year, that it would approach the 225. And we do anticipate that that 211 number will continue to grow in Q4.

As we look further down the road into next year, our engineers have done a great job developing a second model to the Imager, which is tailored for the small labs. And we think that gives us a great opportunity to move those imagers into the smaller lab segment. Those Imagers would have a lower revenue per Imager. However, the cost is down compared to the original Imager by about 30%. And so we think economically, it's about the same, and strategically, it's very important to continue to capture market share in that smaller lab.

And when do you roll that out?

It's being rolled out now.

It has already begun.

There's not a filing?

No.

Okay. And then, can you comment about, specific to LabCorp, whether or not Imaging revenues on a per-instrument basis were up in the quarter there as well?

Imaging revenues at LabCorp were up 45% per instrument versus the prior quarter.

And sequentially?

Yes.

So that's not your view; that's sequentially?

That's sequential.

Got it. Last question on the Imager, and I will stop. Just doing the quick math, are we somewhere around 20% ratio of image slides to total ThinPreps? Is that about right?

It's about 27.

So my math is getting me somewhere around $6 and change on a per-image slide basis, incremental reimbursement, is that about right?

Reimbursement or price?

Well, I get -- yes, to you, what you're seeing, I suppose, is what I'm saying.

Bruce, it's lower than the $6, all in.

It's 2.11 per instrument, per year, and there's a variety of prices at various volumes.

Okay, and then just lastly -- thank you, that's helpful. And then lastly on the ThinPrep side, I think Dan mentioned the net adds on the instruments in the quarter. Can you just remind us, are you selling these instruments at sort of a 50-50 sale to lease situation, or how does that split work?

There's a variety of acquisition programs, from usage agreements to capital purchases. I would say today, it's probably two-thirds usage agreement and one-third some other method.

Not a sale?

No, about one-third would be classified as a sale, the two-thirds would be a usage agreement.

Thank you.

Jayson Bedford, Adams Harkness.

Hi, good morning. Most of the questions have been asked, just a quick question. Is there any source of resistance on the part of LabCorp in adopting the Imager? In terms of looking at the penetration at 30%, it seems like that's well less than what you have in other imaging centers. And I'm just wondering, is there any pushback from LabCorp there?

No. We have said consistently, Jayson, that LabCorp's approach is to require -- or to have the physician order an image slide, as opposed to just converting their screening to imaging. So it's one doctor at a time. And when we get to the physician, we convert them and they start checking the box for image slides. And we are actually tracking just about where we thought we would be, in terms of conversion. 30% at the end of the quarter, and we think by the end of the year, we'll leave the year at about a 50% conversion rate at LabCorp.

Okay, great. That's it for me. Thanks.

Bruce Jackson, Wachovia Securities.

I noticed debt ticked up a little bit in the quarter. Is there going to be any change to interest expense going forward?

No, that's probably just the accrued interest, but it's a flat coupon at 2-1/4.

Secondly, with the market share for NovaSure, is that on a -- what's the market size assumption for that? Is it still about 350,000 procedures?

That sounds a bit high.

Okay, so what is the correct assumption?

We're on a (ph) 300,000 per-year range.

Okay. Finally, you mentioned that customer mix helped out your pricing a little bit. What's the large lab percentage of ThinPrep revenue at right now?

It's approximately 41% for the quarter.

Okay, that's it for me. Thank you.

Connor Brown, Thornbird (ph) Investment Management.

Hi, thanks. This was mentioned earlier, but I missed it. Expected Japan launch?

The middle of next year.

Middle of next year. On the international side, I may have missed this also, but the international ThinPrep versus international, other Diagnostics?

We didn't get into that detail. It is predominately ThinPrep, compared to other GYNs.

And if I back into the fourth quarter sales there, it looks like it's still a little bit of the tick-down from second-quarter international sales.

Right. What we mentioned earlier, it was down about $1 million sequentially from Q2, and we do see the impact of the summer season. Folks are just not around in Europe for a portion of the summer. We saw that same seasonality one year ago as well. And the strengthening of the dollar did hurt on the FX a bit as well.

And the strengthening of the dollar would continue to impact the fourth quarter sales?

If it continues to strengthen compared to the third quarter, correct.

Okay. And then in terms of -- I thought that was a great point on the additional approved test for ThinPrep, that being a revenue opportunity for the labs. Do you think we could expect actually a gain in ThinPrep's share of total Pap smears going forward based on that revenue opportunity?

It's not in our plan. We would hope to have something like that happen, but we have not -- you know, our guidance has not included any increased market share for ThinPrep. We have projected it as flat.

Okay, thanks guys.

(Operator Instructions). Glenn Reicin, Morgan Stanley.

Hey, sorry to get stuck in the weeds here. On the ThinPrep international last quarter, I thought it was more in the 10 million range, going 11.1, (indiscernible) was 11.8. I thought those numbers that you had given us were not total Diagnostic revenues overseas, but just ThinPrep revenues overseas. Is that correct?

Glenn, Q2 of '05, it was 12.8 million.

Right, but I thought that included instrument sales and other non-GYN sales and the like.

Yes, it does. There are three components in the international number -- ThinPrep, there's some Imager, and then there's what we call the Other Diagnostic, which is the instrument and non-GYN test. And we have consistently reported those categories in international.

So the 11.8 is versus 12.8?

Correct, down 1 million.

Okay, and again -- and then the 6 million you gave for the other businesses, that was all domestic?

That is U.S. only, correct.

Okay, thank you.

There are no further questions at this time. I would like to turn the floor back over to management for closing comments.

Thank you, operator. Overall, I am very pleased with our performance for the third quarter of 2005. As we discussed during today's call, our organization demonstrated excellent execution of our key growth initiatives in both the Surgical and Diagnostic portions of our business and I believe we're well positioned as a worldwide market leader in providing innovative, best-in-class products for women's health.

I am particularly proud of our clinical and regulatory organizations who did a superb job of receiving two very important PMA supplement approvals during the quarter. As a reminder, we plan to provide 2006 guidance at our webcast analyst day event on December 7, 2005, in New York City. Thanks for your participation on the call today.

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