Hologic Inc (HOLX) 2005 Q4 法說會逐字稿

Good morning ladies and gentlemen and welcome to the Cytyc Corporation fourth 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. Good morning everyone and welcome to Cytyc Corporation's fourth quarter 2005 conference call. If you have not received a copy of the press release issued yesterday, please call the Ruth Group at 646-536-7017 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 10-K and other filings with the Securities and Exchange Commission that could cause actual results and outcomes to differ materially from those projected in the forward-looking statements. Please remember that these statements speak only as of today's date and that you should not place undue reliance on them.

In addition, this presentation contains certain financial information determined by methods other than with Generally Accepted Accounting Principles -- GAAP. Specifically, these non-GAAP measures may exclude such items as charges related to litigation and share-based expense. We believe that this information is useful to both investors and to management and can aid them in understanding the Company's current performance and performance trends. Reconciliations from the financial reporting measures prepared in accordance with GAAP to the non-GAAP measures are set forth in the press release we issued yesterday as well as in the Form 8-K we filed yesterday with the U.S. Securities and Exchange Commission, both of which are available on our web site at www.Cytyc.com.

In addition, please note that this call is being recorded by Cytyc Corporation and is copyrighted material. It cannot be rerecorded or rebroadcast without the Company's express permission and your participation implies consent to our taping.

With that, I'd like to turn the call over to Patrick Sullivan, Chairman, President and Chief Executive Officer of Cytyc. 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 fourth quarter and the full year 2005. Joining me on the call today are Dan Levangie, Executive Vice President and chief Commercial Officer and Tim Adams, our Chief Financial Officer. During this morning's call, I will provide an overview of the business for the quarter and the year and then turn the call over to Tim for more detail on our strong financial performance. Dan will provide an update on various aspects of our Diagnostics, Surgical Products and International Divisions.

Overall, I am very pleased with our strong performance for the fourth quarter of 2005. As noted in our press release, revenue reached a record of 138.6 million, an $8 million increase over the third quarter, and we delivered net earnings of 33.4 million, or $0.27 per diluted share.

I'm also equally pleased with the performance of the Company for the full year of 2005. When we started the year of 2005, we had very clear performance objectives for each of our businesses. Number one -- deliver over $5 million in topline revenue. We delivered over $508 million in revenue, up $115 million in growth from 2004.

Maintain the ThinPrep Pap Test market share and grow the Imaging System was our second objective. For Q4, we shipped 9 million ThinPrep Pap Tests. And if you go back in our shipment history for the past three years, we've consistently delivered 9 million tests per quarter with minor fluctuations above and below that number from quarter to quarter. Our expectation is that this pattern will continue for 2006.

The Imaging System delivered strong results with nearly a total of $42 million in revenue, up from $17 million in the prior year.

Number three -- generate over 50 million in revenue growth from our surgical products from 2004. In total, we grew this segment of our business $83 million year-over-year.

Number four -- generate 30% topline revenue growth in our international business. If you include sales of NovaSure and MammoSite products, we exceeded our 30% growth target.

Number five -- acquire a product or a technology that can generate over $50 million in revenue in a three-year period. In the past two years, we've made two acquisitions that have met this objective and significantly diversified our revenue base. These acquire businesses represented 16% of revenue in 2004 and 29% of revenue in 2005.

As we look forward to another terrific year for 2006, we have also established very specific objectives for the year. First, we will maintain our existing ThinPrep Pap Test volume and continue to grow the adoption of the ThinPrep Imaging System with our laboratory customers. Our goal is to have the ThinPrep Imaging System become the standard of care in the marketplace.

Second, we expect our Surgical Products businesses to grow over $65 million in revenue versus 2005. Third, we're dedicated to becoming a global company and that made recent moves on some of our most talented executives to drive our growth for all of our products in the international marketplace. And finally, we will continue in our acquisition quest to provide clinically-proven best-in-class products to physicians, laboratories and women around the world.

2006 is the 10th-year anniversary of Cytyc as a company and the 10th-year celebration of the approval of the ThinPrep Pap Test. Since approval, we have shipped over 212 million ThinPrep Pap Tests. If you look at the incidence of cervical cancer in the United States since our approval, it has decreased by 28%. Since our IPO in March of 1996, the market value of the Company has appreciated over twelvefold. We're pleased and gratified by our contribution to women's health and our commercial performance over the past 10 years and look forward to another decade of excellence and innovation.

I would now 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 fourth quarter and full year of 2005 with the results of the fourth quarter and full year 2004, along with some selective comparisons to the third quarter of 2005.

Total worldwide revenue for the fourth quarter of 2005 was $138.6 million, which represents a 25% increase from the 110.6 million for the fourth quarter of 2004. Worldwide revenue from our high-growth Surgical Products Division was 44 million for the quarter, or 32% of total company revenue, which was comprised of 37.7 million from sales of NovaSure products and 6.3 million of revenue from sales of MammoSite and GliaSite. This represented a 54% growth rate in NovaSure revenue over last year and a 9% increase in Surgical Products as compared to Q3 of 2005.

Total company revenue from the Diagnostic Products Division was 94.6 million, which is comprised of 80.8 million from the U.S. market and 13.8 million from international markets. Revenue from the Domestic Diagnostics Products Division was comprised of 61.6 million from sales of the ThinPrep Pap Test, $13.1 million of revenue from the ThinPrep Imaging System and 6.1 million of other revenue from sales of instruments and non-GYN tests.

The 80.8 million of revenue from our Domestic Diagnostics Products Division for this quarter represents an increase of $4.8 million, or approximately 6% over the fourth quarter of 2004. This growth was driven by our continued success with ThinPrep Imaging System. During the quarter, we shipped 32 imagers in the U.S. market, bringing total domestic shipments and since the inception of the imager program to 290 units. At the end of the quarter, 269 of these units were revenue-generating, an increase of 30 revenue-generating units this quarter.

For Q4, the average annual revenue per imager was approximately 220,000, a 4% increase as compared to Q3 of 2005. The international revenue of 13.8 million for the fourth quarter of 2005 increased by $3.7 million, or 36%, compared to Q4 of 2004. If we exclude the approximate $1 million unfavorable impact from foreign exchange, our international revenue in local currency increased by 47% over Q4 of 2004.

I'm also pleased to report that the Q4 international revenue increased by $2.1 million over Q3 of 2005. The international revenue only represents the sales of our Diagnostic Products as we report the International Surgical Products revenue in the Worldwide Surgical Products revenue previously mentioned. As we noted during our investor day meeting last December, for fiscal year 2006 we will change this reporting format and include all International Surgical Products revenue in the international business unit.

The overall company gross margin percentage for Q4 was approximately 79%, which is up from the 78% we reported for Q4 of 2004. This increase was driven by the increased percentage of sales from our higher margin Surgical Products Division.

Total company operating expenses during the fourth quarter of 2005 were 56.2 million, as compared to 44.5 million for Q4 of 2004. Approximately 75% of this $11.7 million increase relates to the growth in our Surgical Products Division, which includes the operations of Proxima. These expenses relate to the build-out of the Commercial Operations Group supporting the MammoSite business and the continued investment to support the growth in NovaSure, which includes the direct-to-consumer advertising campaign launched in the second half of 2005.

Additionally, we incurred incremental non-cash charges related to the amortization of acquired intangibles. Our income from operations was $53.3 million, or 38.4% of revenue, an increase of 28% compared to the 41.8 million in the fourth quarter 2004. Net income for the fourth quarter was $33.4 million, or $0.27 per diluted share, as compared to net income of 25.4 million, or $0.21 per diluted share from the same period in 2004. This represents a 31% growth in net income over 2004.

Total worldwide revenue for fiscal year 2005 was 508.3 million, which represents a 29% increase compared to the $393.6 million reported for 2004. Worldwide revenue from our Surgical Products Division was $146.7 million, or 29% of total company revenue, which was comprised of 106.2 million from sales of NovaSure products, representing a 98% increase over the same period last year, and $20.5 million of revenue from sales of MammoSite and GliaSite.

Total revenue from the Diagnostic Products Division was $361.6 million, which is comprised of 311.3 million from the U.S. market and 50.3 million from international markets. Revenue from the Domestic Diagnostics Products Division was comprised of 246.6 million from sales of the ThinPrep Pap Test, 41.8 million of revenue from ThinPrep Imaging System and 22.9 million of other revenue from sales of instruments and non-GYN tests. This represents a 24% increase in international revenue over 2004 and a 147% increase in revenue from the ThinPrep Imaging System compared to 2004. As you can see, our three growth drivers -- Cytyc Surgical Products, the ThinPrep Imaging System and our international business -- performed very well in 2005 and continue to contribute to our revenue diversification strategy.

Adjusted net income for 2005, which excludes the charge related to the arbitration taken in Q1 of 2005, was 118.4 million, or $0.98 per diluted share, compared to adjusted net income for 2004 of 92.7 million, or $0.79 per diluted share after excluding the $19.1 million charge related to the Novacept in-process R&D. This represents a 28% increase in 2005 adjusted net income over 2004 net adjusted net income. As mentioned earlier, a reconciliation of non-GAAP to GAAP financial measures is available on our press release.

The effective tax rate for 2005 was recorded at 36.5%.

Next, I would like to take a minute to discuss Q1 2006 guidance. For the first quarter of this year, we expect revenue to be in the range of 140 to 143 million and diluted earnings per share to be in the range of $0.27 to $0.28 before the impact of FAS 123 for stock-based compensation. We estimate the impact from FAS 123 to be an approximate $0.03 to $0.04 dilution in Q1. Therefore, we expect the diluted earnings per share after FAS 123 to be in the range of $0.23 to $0.25. We expect gross margin to be in the range of 78 to 79% and operating margin before the impact of FAS 123 to be in the range of 38 to 39%. We expect operating margin after the impact of FAS 123 to be approximately 33 to 35%.

Now moving to the balance sheet. Our cash balance as of December 31, 2005 was $220.6 million and we again experienced another strong year as we generated $176 million in cash from operations during 2005. Additionally, during the year, we made two significant investments. The first was our acquisition of Proxima Therapeutics for approximately $162 million, which excludes the approximate $21 million earnout payment due in Q1 of 2006. The second was the $50 million repurchase of our common stock. Even after both of these significant investments, we ended the year with a very strong cash position.

Days sales outstanding of 53 days at the end of the fourth quarter were up from the 49 days reported at that of the third quarter. Inventory turnover was 5 during the quarter as compared to 4.7 reported for Q3 of 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 finally, for the second consecutive year, we have successfully completed the Sarbanes-Oxley internal control reviews with outstanding results. I am pleased to report that there were no material weaknesses, nor any significant [deficiencies]. This is a tribute to all of the Cytyc employees who invested many long hours to ensure such a great outcome, and I want to thank all of our employees for their outstanding work on this very important effort.

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. As Tim reported, we experienced very strong growth in sales of Surgical Products during the quarter with total revenue of $44 million. Of the $44 million of Surgical Products, revenue 37.7 million were revenues of NovaSure products, comprised primarily of single-use disposable devices. Also during the quarter, we placed an additional 169 NovaSure radiofrequency controllers in the field.

We continue to see increased utilization by trained physicians who are using NovaSure more and more often as an alternative to other endometrial ablation devices, hysterectomy and treatment with hormones.

We are also very pleased with the results achieved by [the] MammoSite team during the quarter. MammoSite revenue during the quarter was $5.7 million, putting the year-end revenue at $17.6 million, which exceeds the range of guidance provided at the time of the Proxima Therapeutics acquisition. We remain very excited by the prospects for and believe we remain on track to achieve significant growth during 2006.

We believe that there are three near-term keys to success with MammoSite. First is expanded sales coverage. We are nearing completion of our sales force expansion and will have a full complement of 50 sales professionals in the field by the end of this quarter.

The second key is reimbursement coverage. At this point in time, we believe we have coverage for MammoSite from health plans that represent 117 million covered lives. This is an outstanding level of coverage following the first year of CMS coverage availability and reimbursement coverage from MammoSite is becoming less and less a barrier to adoption each and every day.

We see this reimbursement success manifest itself in increasing placement of the MammoSite device by surgeons in the office setting with strong reorder patterns by these physicians.

The third key to success is continued focus on building the datasets supporting partial breast irradiation and MammoSite in particular. This focus continues with the FDA data set remaining intact after four years of treatment and showing zero local recurrences, as well as the 1400-patient American Society of Breast Surgeon registry, which continues intact and also showing very low rates of local recurrence with on average two years of post-treatment follow-up. The market opportunity for MammoSite is very large and we believe that MammoSite market share during 2006 will be in excess of 10%.

The performance of our Diagnostics business segment continued to be very strong during the most recent quarter. During the quarter, we placed an additional 87 ThinPrep processors, 35 in the United States and 52 internationally. 37 of these were placed in laboratories of new customers. During the quarter, we shipped 9 million ThinPrep Pap Tests and large labs represented 43% of these tests, up from 41% during the previous quarter. This increased use by the large labs segment led to a 1% decline in the ThinPrep Pap Test average unit price.

We continued to make strong progress in our efforts to convert our customers to imaging by placing an additional 32 systems during the quarter, bringing the total number of imagers shipped to 290. During the quarter, 30% of ThinPrep slides were imaged, up from 27 during the quarter -- third quarter. Also during this quarter, we made great progress with LabCorp. At the end of the quarter, we believe that over 40% of LabCorp ThinPrep Pap Tests were being imaged, up from approximately 30% last quarter. LabCorp continues to see the ThinPrep Imaging System as one of their key growth drivers for the remainder of 2006 and given their rate of conversion, it's clear that more and more physicians recognize the benefits of this Pap screening technology advancement.

International revenues were very strong for the quarter, coming in at $13.8 million, a 36% increase over Q4 of 2004. During the quarter, this revenue growth was primarily driven by sales of the ThinPrep Pap test in the UK as the National Health Service conversion to liquid-based cytology continues. Total 2005 international revenues totaled $50.3 million, an increase of 24%, with the UK growth representing the largest contributor to this revenue growth. We believe the international segment of our business represents an opportunity for accelerated growth and we're focusing resources in targeted international markets to support that growth. We're beginning to see real momentum in NovaSure sales in Europe with the majority of this use occurring in the UK, which represents the most developed and attractive market for endometrial ablation.

During the quarter, we continued to work with our colleagues from Olympus Japan as they develop their training and go-to-market strategy for the ThinPrep system in Japan. We expect a nationwide launch by Olympus during April of this year and are actively working to support that relationship.

Overall, we're very pleased with our commercial results for the quarter and for the year and are excited about our prospects for each of our business segments going forward. I will now turn the called back to Pat.

Thank you Dan. Operator, we're now ready to take questions.

(Operator Instructions). Tom Gunderson, Piper Jaffray.

Good morning. Lab One -- has there been any change with the imager use there at Lab One now that they are under the Quest umbrella?

No, Tom, there's been no change.

Can you give us an update on anything that is going on with direct-t-consumer advertising for NovaSure in the U.S.?

Yes. We continue the test in the two test markets that we started in September. We continue to see pretty dramatic response in terms of visits to the web site and visits to the site to find a physician. The market research that we have done in both markets indicate that there is a fairly dramatic increase in the number of patient requests. So everything is moving in the right direction.

I would say overall, we're still a little bit early in terms of our analysis of the return on investment to make any decisions or commitments long-term. But overall, the program appears to be having a pretty dramatic impact in both markets.

Is the next step a broader beta test, or is the next step national [D2C]?

I think the next step, if we were to take it, would be a bit of a broader evaluation in selective markets.

Last question on this round. Dan, the 10% marketshare or greater than 10% marketshare that you hope to get for MammoSite, how does that compare to end of '05? And how are you computing the denominator on that?

We use roughly 125,000 eligible patients annually for MammoSite therapy. We think we ended the year 2005 at roughly half of that number -- half of the 10%, roughly 5%.

That's a Q4 number?

Yes.

Thank you.

Glenn Reicin, Morgan Stanley.

Good morning folks. Congratulations, good quarter, I love clean quarters. A couple of questions on some of the drivers. If you look at Proxima in general, you had big revenues that were flat sequentially. Can you give us an idea of the trends between MammoSite and GliaSite, and what you expect going forward?

The MammoSite revenues were about 5.7 million for the quarter, up about 300,000 from what we saw in Q3. GliaSite was down a couple of hundred thousand Q4 over Q3. Again, I think we are very encouraged by the adoption that we're seeing in the marketplace with MammoSite. We are still confident with the guidance that we provided back in December for that Surgical Products Group, which includes MammoSite, which is consistent with the guidance specifically for MammoSite going all the way back to the acquisition about a year ago.

So what kind of tamp do you expect to see? How steep is that ramp?

We don't break that out, Glenn, specifically quarter-over-quarter, but the MammoSite revenue will be up sequentially in Q1 compared to Q4.

Okay. And I noticed your Q1 guidance in general was I thought pretty -- on the top line, pretty aggressive relative to consensus expectations. (indiscernible) go back to, at least relative to mine, I'll say. And I cannot help but think about the first quarter last year and the problems you had with NovaSure with seasonality. I'm trying to understand what you have taken into account this year in terms of that guidance for the topline for the first quarter, and what you anticipate in terms of NovaSure seasonality.

Glenn, I think we acknowledge Q1 is a lighter quarter for NovaSure based on seasonality. But looking at our expectations of growth from the main growth drivers that we saw in '05, we think those all continue in the first quarter for 2006. So we look at international, the imager, NovaSure and MammoSite -- those are the drivers that really drive the growth for Q1.

Okay. And then third question and I will get back in line. With respect to international, real nice turnaround in terms of growth. We've had disappointments internationally and fourth quarter was a pleasant surprise on the upside. What is happening there? Have you turned the corner there. Should we expect sequential growth into Q1 as well?

And then a connected question, and this is obviously multifaceted. I am intrigued by the Lancet article that came out. I thought we were sort of past the arguments about the merits of adoption on liquid-based cytology, and I would love to know whether in fact that article could have any adverse consequences internationally?

I think what we are seeing on the international front is, the UK conversion is starting to gain momentum. As you know, they announced a five-year time frame over which they would convert back in 2003. They continue to be behind schedule in terms of that rollout but it's actually starting to gain some momentum.

So I think the UK is a real driver for our European business certainly, and an overall contributor to the international growth that will continue going forward.

In terms of the Lancet article, that article is really in stark contrast to two previous meta-analyses that had been published, both of which came to the exact opposite conclusion. And our take on the quality of that meta-analysis published in Lancet is that it's certainly not of the quality of the two earlier analyses that were published.

In terms of its impact on us, we have not felt any impact and we think the argument is really over. Liquid-based paps are the standard of care certainly in the United States and emerging standards all throughout the world.

But your argument is about split-sampling; that they took essentially the same collection vial and they compared ThinPrep with conventional?

There is a number of flaws in this study. Among them are, six of the studies that they used in their analysis did not use the FDA-approved ThinPrep device. It used -- those studies employed a prototype device many years ago. The conclusions that the authors based their conclusions on -- rather, the data -- that the authors based their conclusions on represent about 2% of the data that they interpreted. So they drew their conclusion from a very small subset of the data. But there is a series of flaws in the methodology of that meta-analysis that lead us to believe that it's of lower quality than the two that were published earlier. And, again, we are not seeing any impact and we think the argument is over.

I'm surprised it even got published.

Last follow-up, I promise. What do you think right now penetration of ThinPrep is in Europe in total of the 8.8 million quarterly tests that are done there?

Let me get back to you on that, okay?

That's fine, thank you.

David Lewis, Thomas Weisel Partners.

Good morning, congratulations on the 10-year anniversary. I hope you save the champagne until after the call, but I have to be honest, I can't tell yet.

Okay.

I have three quick questions here. I guess the first one is for Tim. Looking at gross margin, it appeared to me that there was somewhat of an inflection. It's stronger than four quarters ago and the strongest gross margin quarter sequentially in three quarters. Tim, are we sort of on the verge of Proxima cost-cutting in imager, as well as NovaSure, where we should start seeing that gross margin really turn around, or this is just simply a one-quarter affect?

David, we're still comfortable with the 78 to 79% guidance for full-year '06 as that rolls into Q1. You do have to bear in mind, there is an impact of FAS 123 that hits the gross margin that brings it down a little bit, and that's embedded in the 78 to 79%. The growth that you saw really Q4 of '04, Q4 of '05, a lot of that happened at Surgical Products. And I think it's really a tribute to the team doing a great job of just driving the cost out of the business.

There are a couple of things going in our favor. You have the operational efficiencies because of just the volume increase in NovaSure alone, allows us to take advantage of operational efficiencies. We moved more of that operation down to Costa Rica, that gave us a little bit of pickup, and the team did a great job just negotiating with suppliers on material cost. So all-around, it's -- the volume helped a lot and the team did a terrific job out there. I think that's why you're really seeing the increase year-over-year into '05.

Tim, is it a safe assumption, barring any unforeseen incident like the image replacement at Quest, that gross margins should continue a steady climb upwards, although slight?

David, I think we're still comfortable at the 78 to 79 in total.

And then as a segue either for Pat or Dan, we've kind of heard some rumblings in the channel with a couple of different large centers. Can you cite any specific examples where Cytyc and LabCorp have sort of got together and been able to displace Quest at large customers because of the imager?

David, I'd rather not make any specific comments about any particular laboratory. I can tell you that physicians are very interested in the value and the benefits that their patients receive from a ThinPrep slide that's imaged. And in fact, there are physicians that are moving their business and changing laboratories as a result of the availability or the lack of the availability of the imager. That is happening and it's happening fairly frequently.

Fair enough, very well put, Dan. Then lastly on Proxima and how it's impacting the [Q]. Obviously, it sounds like the sales force is building, but it has been somewhat flattish in the last three quarters. I guess, given the reimbursement change and the positive sentiment, at least for a significant portion of doctors who are already convinced of the data, are the other reasons, Dan, why Proxima would be flattish? And are you expecting somewhat of an acceleration off of San Antonio heading into the first quarter?

There has been increases each and every quarter in revenue for MammoSite, and we started the sales force ramp the time of the acquisition. We went out in the market and began to hire folks. But frankly, it has taken us longer than we had hoped that it would. We're not going to be done until the end of this quarter. And if you add to the sales force growth about a 90-day lag time between hiring and initial effectiveness, which is really the case of a surgical product I believe, we are just now getting towards what we think is critical mass in terms of the number of salespeople. And with smaller numbers, their efforts were diluted. And now we're able to focus on the busiest surgeons. And I would attribute much of what we saw during the year 2005 in terms of growth ramp directly related to the sales force ramp. And I think we are just now getting to what I call critical mass.

So it hasn't been exactly what you would have expected, but you really don't seem particularly concerned as you head into 2006?

Again, we finished the nine-month period at a revenue level higher than the guidance that we had given at the time of the acquisition, but we're not concerned.

The total year revenue for MammoSite was 17.7 million. The original guidance at the date of the acquisition was 15 to 17, so we feel very good about exceeding that target. And quarter-over-quarter, going back to Q2, it has grown approximately a couple hundred thousand dollars of revenue per quarter.

Do you still feel good about the old target provided for the [forward-year] guidance? I believe the gave a number around 30, 35 million for MammoSite?

(MULTIPLE SPEAKERS) 35 to 40 and we feel fine.

Alright, I'll jump back in queue. Thank you.

Sara Michelmore, SG Cowen.

Good morning. I guess just two questions for me. First on the large labs segment, any changes or feedback in terms of some of the labeling changes that you guys had approved in the fall, particularly related to additional molecular testing out of the vial? Any changes there in terms of the customer practices based on the new labeling seen in the fall?

Yes. In particular at one of our very large customers, the [3-quad] approval, which is the ability to take the molecular sample from the ThinPrep vial before you make the slide, has caused them to really start to ramp up testing out of the ThinPrep for Chlamydia and gonorrhea. A number of our other customers interpreted that approval in the same way. It just makes it much more -- it's just easier for the laboratory to process these samples and to do additional testing from the vial using that approval.

On Proxima, another question in terms of the sales force expansion there. It sounds like that in your mind is going to be the key driver for this product in 2006. Can you just talk about the changes in coverage there, particularly detailing the community-based oncologists or breast surgeons relative to those at academic cancer centers who may require a little bit more data? Can you talk about the expansion of calling on community-based doctors?

At the time of the acquisition, Sara, we had about 27 salespeople in the field. And with our hiring ramp, we are now in the mid-40s range and we'll get to 50 by the end of the quarter. But, again, if you back out the first 90 days of tenure, we had roughly 30 effective representatives in the field in Q4 this year. So I think a lot of what we're seeing here in terms of ramp on Proxima is related to getting a critical mass of salespeople fully effective in the field and it's taking us a little longer than we had hoped.

But is it fair to think that just because of differences in terms of what they require, vis-à-vis clinical data, that the community-based docs may be easier for you guys to penetrate hear-term than --?

I don't think there's any question. Reimbursement is going to be a big driver. And in private practice situations, reimbursement is very important. In the academic setting, it's probably a little less important. So I think the community-based private practice breast surgeon is going to be motivated pretty strongly by the reimbursement that's available.

That's helpful. Thank you.

Wade King, Montgomery & Company.

Congratulations. Can I ask a couple of follow-ups, please? First off for Tim, I assume that there is no change to the overall '06 guidance that you laid out in the analyst meeting?

Wade, that is correct.

Thank you. And secondly, Tim, can you give us to a little bit more color -- the DSOs increase four days in the quarter. On an absolute basis, it was about $11 million sequentially. I know it takes a lot to move the DSO needle at Cytyc, yet you have a great record and it's creeping up. The international only increased a couple of million bucks, so I wouldn't expect that to account for a significant percentage of that. Can you give us a little bit more color -- what's going on and what do you expect the trend to be from here, please?

Sure, Wade, a couple of things. Just on the $11 million increase in the receivables, I think you're looking at the year-end balance of about 83 million compared to the 72 million coming out of Q3. So there really are a couple of things there. If you just look at the revenue growth, in Q4, it's about 8 million. If you to the DSO calculation, that would give you about another 4.5, $5 million of growth in receivables tied to the growth in revenue.

The other item we had in here was, in Q3, we had a large payment close to $5 million that was due to come in in early October; it came in in September. So the AR balance at the end of September was lower by about 5 million for that item. So that I think really explains roughly the $11 million increase. The DSO in Q3 would have been higher had that payment not come in, in late September, so it would give you a more normalized comparison. DSO did pick up this quarter. I'm not going to sugarcoat it. I think we can do a little bit of a better job just in our collections effort, but again, our reserves are adequate and there are no concerns about collectibility. We saw this same phenomenon last year, it ticked up a little bit at the end of the year and it came back down in Q1 of '05. So our expectation is that it will come down in Q1 of '06.

Very good, thanks for that color. The next product, next question please for Dan. Dan, can you give us a little better idea of what specific utilization metrics you're able to track regarding NovaSure? Maybe it's just the law of large numbers and the expectations keep growing. Obviously, that this has been taking phenomenally for you. At the same time, can you give us the specific idea of what metrics you're able to follow to judge the growth in the business and where you may actually need to provide more intensive sales coverage?

I would say the one metric we looked at pretty carefully is the number of trained physicians, and that continues to grow each and every quarter. That's a direct reflection I think of the sales growth. With respect to markets where we're doing direct to consumer advertising, we are measuring the impact of that in terms of consumer visits to the website, as well as revenues compared to control markets. But I think we have a fairly healthy set of metrics that we watch very carefully to determine future growth of the product.

Are you following disposables per controller scientifically? Are you able to do that, or no?

It's a bit of a complicated issue, given the fact that one controller in a hospital can be utilized by 10, 15 or 25 physicians. But in fact, we do measure sales by controller.

Are there any changing dynamics there that are worth talking about, or no?

I would say no.

Thank you. Last question please. At the analyst day, you highlighted growth opportunities in the international front in Germany and China. Your international growth in the latest quarter was strong and you contribute that mostly to the UK as we would expect. At the same time, you did spend a fair a lot of time talking about those two markets -- Germany and China. What can you tell us about the foundation being laid there for future international growth?

A couple of things. The adoption in the UK we expect to continue to be strong in 2006. There is a reimbursement discussion that is pending in the first half of 2006 in France. Our folks over there tell us they are optimistic that it will be favorable for us, and that could really open up the market for us. We have ramped up the NovaSure sales force in the UK. We're at about 10 coming out of the end of the year, and that should give us some very nice traction. We're seeing some nice traction in Canada for NovaSure as well. And then with our agreement with Olympus, we expect to see a little bit of traction there as well in Japan.

With respect to Germany and China, Wade, in Germany, we continue to see continue growth of the ThinPrep Pap Test at very good average unit pricing. But there, we play in the private pay segment of the market, which is somewhere between 10 and 15% of the total available 15 million paps. But we continue to see growth there. In China, it is the law of large numbers there. The population is so large, we see continued growth in the use of ThinPrep in the urban areas of China. We have a very good distributor on the ground in China with a fairly large sales force and we are optimistic about our prospects there, given the size of that opportunity.

Can you give us any detail on the number of feet on the street with your distributor in China? And for that matter, also as it relates to your efforts in Germany in the private pay market?

The feet on the street in Germany are direct representatives, sales folks, that are Cytyc representatives, and roughly 12 in Germany. In China, our distributor has a sales force of roughly 100 people.

Of which can sell ThinPrep?

That's all they sell.

Very good. Thank you very much folks.

Amit Hazan, SunTrust Robinson Humphrey.

Hi, guys, just a couple of questions. First of all, your competitor on the Domestic Diagnostics side, TriPath, was -- reported a couple of days ago they were down sequentially in the large labs. And they commented, it was due to some inventory buildup from the prior quarter. First of all, A, did you see any of that same inventory buildup, granted you had a very good strong or large lab showing? And then second of all, with your continuing to guide toward 9 million tests per quarter, it seems like you clearly took some share in the large lab. You have the imager, which clearly seems to be providing some market advantage, and you have HPV still as a market advantage. Can you just comment on whether you're being conservative with the 9 million tests a quarter, or is there something else that's kind of making you be conservative? Thank you.

With respect to the first quarter question of inventory build at large labs, we did not see that and have not seen that. I think the large lab, our sense of their inventory levels is that with ThinPrep, it's fairly much just-in-time inventory. And with respect to being conservative or not on the 9 million tests, that's what we think we're going to see going forward. That's what we've seen for the last couple of years. And we don't see any dramatic shift from 9 million, with the exception of -- we see fluctuations of 1 to 200,000 tests a quarter, up or down, around that 9 million number. But I wouldn't expect to see any big differences there.

Just to push you a little bit on that one. If you do have the imager, which is clearly helping you, is there something on the negative side that's offsetting that? Are you seeing less pap tests generally in the U.S. market, or anything else that's offsetting your competitive advantage?

No, we're not seeing a decline in pap tests. We're selling 9 million a quarter. As far as imager goes, our progress at LabCorp continues and we think we're making great progress there. Physicians are ordering image tests more and more often; they're at 40%-something by the end of the year. So we're not seeing any dramatic changes in the pap market and don't see dramatic changes on our penetration of that market.

Okay, then just two more questions. Number one, can you remind us -- and I'm sorry if I missed it -- with the LabCorp, what are the image slides that you expect as far as a percentage by year end '06 that's inherent in your guidance?

I think the expectation that we have heard from LabCorp is they expect to be two-thirds of their volume would be imaged by the end of this year.

Okay, perfect. And then lastly, with regard to MammoSite, we saw that the competitor [Zoft] just recently got FDA approval. Can you comment on what impact you would expect, if any, on the market this year from that competitor and maybe just remind us where you see your advantages relative to that product?

In terms of impact, we would not predict near-term impact from the Zoft. The only impact you might see would be do some continued support of and growing interest in partial breast irradiation. With respect to advantages of MammoSite, we have tremendous advantage in the marketplace. We have an FDA approved product that's going on the market with four years of follow-up data. And as I think you all know, the key to the data set in the United States with respect to cancer treatment is the number of years that patients have been followed following treatment and the subsequent recurrence. And Zoft has no data. In fact, to our knowledge, there has not been a single human being treated with the Zoft device to this day. So we think they have a data gap that's going to take them awhile to fill certainly.

Great, thanks very much.

Bruce Cranna, Leerink Swann.

Sorry to go through this again, but I missed the MammoSite thing. I heard Tim say 6.3 million in the quarter, and then I heard Dan say 57. Is the different there just GliaSite?

Yes, Bruce. These 6.3 that I referred to in the prepared comments, that is the combination of MammoSite and GliaSite. So MammoSite was 5.7 of the 6.3 for the quarter.

And then just curious on the fourth quarter, the ThinPrep number, the volume of 9 million. Is that -- I seem to recall last quarter, there may have been a little bit of Katrina-inspired volume drop. Do you think some of that wound up back in the fourth quarter, or is that level really representative of where you are, do you think?

I think we said it was a real minor impact from any of the weather issues that occurred in the previous quarter. We didn't really see a significant impact at all.

I think was $0.5 million, as I recall.

Yes, it was about $0.5 million.

And then actually on the imager, if my math is right -- so in this quarter on a per-click basis if you will, it looks like sort of 485 per slide -- is that about right?

It's $200,000 annualized per instrument, and it depends upon what value you assume going through there to get to the [AFP], but --.

Pat, if I just take the 30% of the paps being imaged, so maybe 2.5 (technical difficulty) 0.7 million slides in the quarter, and take the TIS number, the revenue number, I sort of get 485, give or take per slide?

Yes, Bruce, you're right. Based on all of the information we shared on the call, you're doing -- that's a good calculation.

And of course, where I'm going with this is, I think it was $5.00 last quarter. So I guess the question is, is my math correct, or is there a little slippage there? And if there is --

It's related to mix.

That's kind of where I'm getting at. I assume the economics are somewhat less advantageous for you at the larger lab?

It's always the price-volume relationship. Certainly, you see the increase in volume at the larger lab, so you can expect the price to be a little bit different than the smaller-volume labs. Bruce, the AUP last quarter, Q3, was a little bit less than what we saw in the Q4. So it actually increased in Q4.

Wasn't it about $5.00 last quarter?

No, that number is too high.

And then I guess -- so when we think about '06 strictly on the imager side, is that sort of (indiscernible) charge?

Yes, I think we remain confident of a 200 to $25,000 per instrument, per year, is what we talked about at the analyst day meeting, and believe that's what we will see in '06.

Last question, the smaller imager is shipping -- is that right?

It's not a smaller imager, Bruce, it's basically the same imager from which we have taken a significant portion of cost out. So it allows us to place that imager in a smaller volume laboratory and still have the economics work for both the lab and for us.

I apologize for the use of the time smaller, but --.

That's okay.

That's what I was getting at. Okay, that is it for me. Thank you.

Jayson Bedford, Cannacord.

Hi, good morning. Most of my questions have been answered, just two quickies. Is there any way you can break out gross margin on the surgical versus the diagnostics side?

I think we have always stated that on the surgical side, if you look at 80% because the math is easy on margin that -- the surgical products are in excess of 80%, and the diagnostics in international have a tendency to be below 80%.

Great. And then, is my math correct on the NovaSure side -- 30,000 controls in the quarter?

Not controllers.

Disposable devices.

Is that a fair number?

It's a little bit higher than that, Jayson.

Great, thanks.

Ryan Rauch, Jeffries & Co.

Good morning. Just a couple of quick ones. Did I hear the number of controllers right for Novacept at 169?

You did.

And I'm just curious, Dan, that was down pretty significantly sequentially. What should we expect going forward? Did anything happen in the quarter from just a unit placement perspective?

It was actually up quarter-on-quarter.

I mean sequentially, it was up?

Yes. Q3 was 162; this quarter was 169.

Okay, then yes, our model's wrong. What should we look for going forward, just a continued sequential improvement there from a controller placement prospective?

I think we will get to some saturation point in the not-too-distant future. So I think we're going to see a gradual decline in the number of placements going forward.

Gotcha. Can you just walk us through your Diagnostics sales force? I think you have given us a pretty good overview of your Surgical, but where does your Diagnostics sales force stand today, both to the OB GYNs and the labs?

We have about 100 OB GYN sales force calling on the doctors in their offices, and then we have about 40 laboratory salespeople to call on our laboratory customers directly.

And then finally, do you expect Quest to use or implement the imager in 2006, or is that just yet to be determined?

That's yet to be determined.

Yes, to be determined.

Have a wonderful day.

Operator, we will take one more question.

Caroline Corner, Montgomery & Co.

Hi. I just had a couple of quick questions going back to NovaSure. Of the 169 units that were placed in this quarter, how many of them were internationally placed?

That's a relatively small number.

Okay. Is it safe to say they were all in the UK?

I would not say that.

Okay. Have you placed any of them in Australia yet? How are the efforts going there?

No. We are in a reimbursement -- NovaSure is under review currently for reimbursement in Australia. And once we are successful with that, which we think could happen this year, we will see placements there.

Can you give us a ballpark number at all for the expected number of placements you would expect in the UK going forward per quarter?

I cannot give you that.

Okay. And then for training of divisions for the NovaSure product, are we expecting the training efforts to be the same as for the United States, (indiscernible) as the sales force gets out there and --?

Yes.

Okay, that's all I have. Thanks.

Thank you, ladies and gentlemen. I will now turn the conference back over to your host to conclude.

Thank you, operator. Overall, I am very pleased with our performance for the quarter and the year. These results demonstrate our successful efforts in 2005 to drive growth in our surgical products business by maintaining a strong focus on our core Diagnostics business. We look forward to future growth and expansion in 2006 as Cytyc continues to offer a diverse mix of best-in-class products for women's health. Thank you for your participation.

This concludes today's conference. Thank you all for your participation.