Hologic Inc (HOLX) 2006 Q1 法說會逐字稿

Greetings, ladies and gentlemen, and welcome to the Cytyc Corporation first-quarter 2006 earnings conference call. (OPERATOR INSTRUCTIONS). Also, 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 now began.

Thank you. Good morning, everyone, and welcome to Cytyc Corporation's first-quarter 2006 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 Form 10-K and other filings with the Securities and Exchange Commission that could cause actual results and outcomes to differ materially from those projected in the forward-looking statements. Please remember that these statements speak only as of today's date and 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 arbitration and stock-based compensation. 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 website 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 would like to turn the call over to Patrick Sullivan, Chairman, President and Chief Executive Officer of Cytyc Corporation.

Thank you. Good morning, ladies and gentlemen. I would like to welcome you to our teleconference to report on the performance of the Company for the first quarter of 2006.

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 then turn the call over to Tim for more details on our strong financial performance. Dan will then provide an update on various aspects of our Diagnostics, Surgical Products and International divisions.

Overall I'm very pleased with our strong performance for the first quarter of 2006. As noted in our press release, revenue reached a record 140.5 million, a 24% increase over the same period last year. Net income was particularly strong with 29.4 million for the quarter or $0.24 per diluted share. I believe this is a very solid start to a very good year for the Company.

For 2006 we have established very specific targets for each of our businesses. First, we expect to deliver a topline revenue in the range of 600 to $625 million, an increase of approximately $100 million in growth in 2005 and well on our way to our goal of $1 billion in revenue by the end of 2008.

Second, we expect to maintain our ThinPrep Pap Test market share at approximately 9 million tests per quarter and grow the use of the Imaging System to become the standard of care for cervical cancer screening in the United States. Shipments of the ThinPrep Imaging System reached an all-time record level during the first quarter of 2006 with 44 units shipped.

Third, we expect to grow our Surgical Products business by approximately $65 million versus 2005. The results of this segment of our business for the first quarter were a very good start on this growth trajectory with 73% increase over the first quarter of 2005.

Fourth, we're committed to capitalizing on the opportunities in global markets and have transferred some of our most talented executives to drive our growth for all of our products in International markets. I believe the first-quarter results of over $15 million in revenue is an early indication of the results of that investment.

And finally, we will continue in our search for acquisitions to provide clinically proven best-in-class products to physicians, laboratories and women around the world.

2006 is the 10-year anniversary of Cytyc as a public company and the 10-year celebration of the approval of the ThinPrep Pap Test. Since approval we have shipped over 220 million ThinPrep Pap Tests, and over the past 10 years, the incidence of cervical cancer in the United States has decreased by 28%. To celebrate the 10-year approval of the ThinPrep Pap Test, we will open the NASDAQ market on May 22.

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

Thank you, Pat, and good morning, everyone. My remarks today will compare the financial results of the first quarter of 2006 with the results of the first quarter of 2005. I will also provide selected comparisons to the fourth quarter of 2005.

As we noted on our last conference call, for fiscal year 2006, we will report the International Surgical Product revenue in the International division. For comparative purposes, the references to the 2005 Surgical Products and International revenue amounts will be adjusted to conform with the 2006 presentation format.

Total worldwide revenue for first quarter of 2006 was $140.5 million, which represents a 24% increase from the first quarter of 2005. Total revenue from the domestic Surgical Products division was $44.7 million. Revenue from the domestic Diagnostic Products division was $80.7 million, and revenue from the International division was $15.1 million. The 44.7 million of revenue from the domestic Surgical Products division represents 32% of total company revenue and a 73% growth over the same period in 2005. The domestic Surgical Products revenue for Q1 was comprised of 37.4 million from sales of NovaSure products and 7.3 million of revenue from MammoSite and GliaSite products, which represents a $1 million increase from MammoSite and GliaSite as compared to the fourth quarter of 2005. The 80.7 million in revenue from the domestic Diagnostics division was comprised of 60.6 million from sales of the ThinPrep Pap Test, 13.8 million of revenue from the ThinPrep Imaging System and 6.3 million of other revenue, primarily from sales of instruments and non-GYN tests. The 80.7 million of revenue from our Domestic Diagnostics Products division represents an increase of $5.7 million or 8% from the first quarter of 2005. This increase was primarily driven by the growth in the Imager business.

During the quarter we shipped 44 Imagers in the U.S. market, bringing total domestic shipments since the inception of the Imager program to 334 units. At the end of the quarter, 313 of these units were revenue generating, an increase of 44 revenue generating units during the quarter. For Q1 of 2006 we estimate that the average annual revenue per Imager to be approximately $205,000. This average is down from the $220,000 that we reported last quarter and is primarily attributed to the increase in Imager placements at LabCorp and our increased penetration into the small lab market.

As we noted last year, we made some modifications to the Imaging System which reduced the cost of the Imager by approximately 30%. This allows us to place the Imager in lower volume labs while maintaining our target margins. We believe this segment of the market is strategically important as we continue to grow our domestic Diagnostics division with the ThinPrep Imaging System.

Revenue from our International division was $15.1 million for the first quarter, which increased by approximately $2.5 million or 21% compared to Q1 of 2005. If we exclude the approximate $1 million unfavorable impact from foreign exchange, our International revenue and local currency increased by approximately 28% over Q1 of 2005. The growth in our International business was driven by the continued adoption of the ThinPrep Pap Test in the UK and NovaSure sales in Europe, which more than doubled compared to Q1 of last year.

As you are aware, the Q1 2006 results include the expenses associated with FAS 123 accounting for stock-based compensation. The total pretax charge for Q1 2006 was $6 million or $4.1 million on an after-tax basis. This resulted in a $0.03 decrease to Q1, 2006 diluted earnings per share and is consistent with our guidance. The detail of the FAS 123 expense is shown on the consolidated statement of income that was included in our press release.

In order to compare the true operating results on a year-over-year basis, I will break out the expenses associated with FAS 123 for Q1 of 2006 when discussing operating expenses and earnings per share amounts.

The overall Company gross margin percentage for Q1 was approximately 79%, which is consistent with the gross margin for the first quarter of 2005. Total company operating expenses during the first quarter were $64.5 million as compared to $55 million in Q1 of 2005. If we exclude the FAS 123 expense this quarter and the arbitration expense from Q1 of 2005, the normalized increase in operating expenses year-over-year is approximately $11.7 million. The majority of this increase is driven by the growth in the Surgical Products division, which includes the ramp-up of the Commercial Operations group supporting MammoSite and our continued investment in the growth of NovaSure, which includes expenses associated with the direct to consumer advertising campaign.

Our income from operations including FAS 123 was $46.3 million or approximately 33% of revenue. If we exclude the FAS 123 expense, our income from operations was $52.3 million or 37% of revenue as compared to income from operations in Q1 of last year of $42.3 million or 37% of revenue which excludes the charge related to the arbitration. Our estimated effective tax rate for 2006 is 36.5%, and accordingly this rate has been reflected in our first-quarter results. Reported first-quarter 2006 net income was $29.4 million or $0.24 per diluted share, which includes the after-tax charge of $4.1 million or approximately $0.03 related to FAS 123. If we exclude the expenses associated with FAS 123 and the arbitration, our adjusted net income for Q1 of 2006 was $33.4 million or $0.27 per diluted share, which represents a 29% increase compared to adjusted net income of 25.8 million for Q1 of 2005.

Next I would like to take a moment to discuss 2006 guidance, which includes the impact of FAS 123. For full-year 2006, we are reconfirming our worldwide revenue guidance of 600 to $625 million and diluted earnings per share of $1.03 to $1.12. For the second quarter of this year, we expect revenue to be in the range of 145 to $150 million and diluted earnings per share to be in the range of $0.25 to $0.27. We expect our gross margin to be approximately 78 to 79% and operating margins to be in the range of 33 to 34%.

Now moving to the balance sheet. Our cash balance as of March 31, 2006 was approximately $223 million. Once again, we experienced another strong quarter of operating cash flow as we generated $53.8 million in cash from operations before the 11.4 million arbitration payment.

Additionally, during the quarter, we made two significant investments. The first was the $21 million earnout payment related to the Proxima Therapeutics acquisition, which was completed March of 2005, and the second was the $22 million repurchase of our common stock. Even after both of these significant investments, we ended the quarter with a strong cash position.

In addition to the shares repurchased through March 31, we also repurchased an additional $28 million of our common stock in the month of April, bringing the total 2006 year-to-date repurchases to $50 million. Days sales outstanding of 52 days at the end of the first quarter improved by one day compared to last quarter. Inventory turnover was 4.8 during the quarter as compared to 5 reported for Q4 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. Thank you and I will now 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 domestic revenue of $44.7 million, up from the previous quarter's revenue of $43 million. Of the 44.7 million of Surgical Products domestic revenue, 37.4 million were revenues of NovaSure products comprised primarily of single use disposable devices.

Also, during the quarter, we placed an additional 141 NovaSure controllers in the field. For the first time, this quarter we are seeing a growing number of physicians performing NovaSure in the office setting, and revenues from in-office use were 4 times the amount of revenue from in-office use in the previous quarter. While the absolute number of physicians performing in-office NovaSure procedures remains small, we believe that their utilization on a per physician basis is significantly higher than the average physician performing procedures in the hospital setting. Overall 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.

I would like to now highlight the results of our direct to consumer advertising campaign that we launched last fall in two markets. We have now had the opportunity to conduct direct research with a significant number of women from both of those markets who saw our ads who then visited our website and requested information about NovaSure. We have conducted a series of e-mail surveys of these women and are now able to draw a number of conclusions from this research.

First, it is very clear that TV is the most effective medium for raising awareness and motivating patients to act. Second, of the patients surveyed who have not yet had a endometrial ablation procedure performed, more than 80% said that they were planning on having a procedure. Their timetable in which to have the procedure was a bit longer than we expected with 70% saying that their plan was to have the procedure within the next to six to nine months.

So it appears to us that the use of TV is effective, that women will act, but that the time to procedure is more on the order of six to nine months following exposure to advertising. We continue this research and are fine-tuning our ROI model to reflect what we have learned.

At this time, any additional DTC advertising that we conduct will be within the existing expense guidance that we provided.

We're also very pleased with the results achieved by the MammoSite team during the quarter. MammoSite revenue was $6.4 million. We remain very excited by the prospects for MammoSite and believe we remain on track to achieve significant growth during 2006.

As I stated on our last call, we believe that there are three near-term keys to success with MammoSite. First is expanded sales coverage. We have now completed the expansion of our MammoSite salesforce and have a full complement of 50 sales professionals deployed in the field. Our focus now is on providing the proper training and support that will allow these sales professionals to become fully productive and to have more and more busy breast surgeons implanting MammoSite in their office.

The second key is reimbursement coverage. At this point in time, we believe we have coverage for MammoSite from health plans that represent 122 million covered lives. Again, this is an outstanding level of coverage following the first year of CMS coverage availability, and reimbursement coverage for MammoSite is becoming less and less a barrier to adoption each and everyday.

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. During the quarter, approximately 38% of MammoSite revenue came from in-office use, an increase of almost 40% compared to the prior quarter. Of that revenue, more than 80% represented repeat sales. While reimbursement alone is not the only stimulus to increased use, it is clear that in-office reimbursement is driving more and more breast surgeons to seriously consider MammoSite for their patients.

The third key success factor is continued focus on building the data supporting partial breast irradiation and MammoSite in particular. This focus continues with the FDA data maturing to four years and showing zero local recurrences, as well as the 1400 patient American Society of Breast Surgeons Registry, which continues and likewise shows very low rates of local recurrence.

Of note is data that was presented at the most recent American Society of Breast Surgeons meeting in Baltimore. Data for more than 100 patients with ductal carcinoma in situ treated with MammoSite was presented, and the results are consistent with other partial breast irradiation data. Cosmetic outcomes were good to excellent in a very high percentage of patients, and local recurrence rates are low and consistent with whole breast irradiation. This data from patients with DCIS confirms our conclusion that the market opportunity for MammoSite is very large, and as stated before, we believe that MammoSite marketshare 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. We experienced a record quarter in our efforts to convert our customers to imaging by placing an additional 44 systems, bringing the total number of imagers shipped to 334. During the quarter, 33% of ThinPrep slides were imaged, up from 30% during the prior quarter. We also continue to make great progress with LabCorp.

At the end of the quarter, we believe that over 46% of LabCorp ThinPrep Pap Tests were being imaged, up from approximately 40% last quarter, and during the last several weeks, LabCorp conversion has exceeded 50%. 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 is clear that more and more physicians recognize the benefits of this Pap screening technology advancement.

During the quarter, we placed an additional 22 ThinPrep processes in the United States and shipped a total of 8.8 million ThinPrep Pap Tests. Large labs represented 42% of these tests, down from 43% in the previous quarter, and this customer mix led to a 1% increase in ThinPrep Pap Test average unit price.

Our International business was very strong during the quarter with over $15 million of revenue, a 21% increase compared to Q1 of 2005. In particular, our business in the UK increased 44% compared to the first quarter of last year, and our revenues in Germany increased 31%. Most of this increase is attributable to the ThinPrep Pap Test.

During the quarter, we received notice of reimbursement coverage for NovaSure in Australia and are preparing to launch into that market during the next several weeks. We're beginning to see momentum build for our introduction of ThinPrep in Japan through our relationship with Olympus. The market introduction of the ThinPrep system will occur at the Japanese Society of Cervical Cytology meeting in Yokohama in June. During the remainder of 2006, we will continue to focus on geographic expansion for all of our product lines.

Overall we were very pleased with our commercial results for the quarter. The ThinPrep business is stable, and the Imaging System continues to set a new standard of care with a record quarter of new Imager shipments. NovaSure sales grew sequentially during a traditionally seasonal quarter, and we're beginning to see measurable momentum build for in-office NovaSure procedures. MammoSite remains on track, and in-office use fueled by strong reimbursement is driving MammoSite utilization. And now our International business is becoming a key element of our growth story. Overall we remain very excited by our prospects for each of our business segments going forward.

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

Thank you, Dan. Operator, we would like to now open the call up for questions and answers.

(OPERATOR INSTRUCTIONS). Tom Gunderson, Piper Jaffray.

Tim, just a quick question on the guidance for Q2 on the earnings side. That includes SCE. Are we to assume approximately $0.03 a quarter for the rest of the year, or does it ramp up towards the end of the year?

Yes, the guidance we gave for FAS 123 back on our investor day in December was $0.12 to $0.14 for the full year, so let's call it roughly $0.03 to $0.04 per quarter.

Okay. And then, Dan or Pat, could you comment a little bit on competition on the Diagnostic side? [Monagen] received FDA approval and TriPath is reporting that they did a little bit better on growth of units than they did on growth of revenues, which implies that maybe there was some pricing pressure during the quarter. Did you feel any of that in your business?

Tom, I would say we felt no significant change, no change really when the Monagen approval occurred. But we have not seen any activity in the market, frankly, and with respect to TriPath, we kind of see the same activity as we have in the past. So no significant difference.

Okay. I did not quite catch, Dan, what you were saying about MammoSite in the office. Could you run through that again and add a little color?

Yes, it is very important that the breast surgeon is where it all starts. The patient is initially referred to the surgeon for workup and then for the lumpectomy procedure. Then once that occurs, we need to have the surgeon implant the catheter. Because reimbursement was established in January of 2005, that's a real stimulus to that happening. So what we're seeing is more and more physicians, breast surgeons are buying the MammoSite catheter for their office and are implanting in the office. So that is a very positive sign for that business.

So post lumpectomy, they are disconnecting it from the OR procedure?

Yes, that is correct. What they typically will do is perform a surgery and then wait for the pathology report to determine and to be certain that they have got clear margins. Once that report is received, which is usually three to five days later, they will have the patient return to the office, and that is where they will place the catheter.

Glenn Reicin, Morgan Stanley.

Just a little feedback here. Sorry. I was assuming -- I just want to talk a little bit about the ThinPrep business. It looks to me -- well, first, I was assuming that pricing is around 670 versus 688 a slide in Q4. I just want to know if that sounds right? And if that is right, I actually have you gaining a little bit of share from Q4 to Q1. I would just love for you to comment on that.

The 684 from Q4 I believe is what you mentioned is very close. In fact, and I think Dan mentioned it in his prepared comments that the average pricing actually went up in Q1 by about 1%.

Right, and why is that?

It is probably really more customer mix. It is really customer mix going --

Large labs were 43%. In Q4 they were -- excuse me, 44% in Q4, they were 43% in Q1.

I see and it is 1% sequentially?

Yes.

Great. Just a couple of housekeeping issues. On the NovaSure business, can you give us a breakout on the controller revenues and what you think the number of procedures were in the quarter?

You know, we have always talked about the NovaSure revenue being 90% on the disposable and roughly 10% on the controller. Plus or minus a little bit, that number still holds pretty true.

Okay. How many procedures do you think were performed?

Let me see if I have that number handy. Roughly 37,000.

Okay. ASPs are holding, going down, going up?

They are fine.

Holding.

Holding? Okay. All right. And then internationally, did you give us a breakdown of those revenues by business?

No, we did not give a breakdown.

Would you like to?

Would I like to? We are going to reserve that for when David Harding joins us in a future call here. But no, seriously I think we saw some exciting growth compared to Q1 of last year across the board. I mentioned the adoption of the ThinPrep Pap Test as we have the rollout with the NHS in the UK. That was very strong. Germany had a great quarter. Europe in general was up compared to last year. We're seeing some nice traction over in Asia. We're seeing some good traction in Canada, and the NovaSure device is getting some very nice traction compared -- the revenues albeit still relatively small more than doubled from Q1 of last year for NovaSure.

Okay. So that gives me like 1 6 compared to .8 last year?

Both of your numbers are a little bit high.

Okay. So what was the ThinPrep number?

ThinPrep for International, it is about two-thirds -- it is about two-thirds of the total number. The other thing you have to remember with Europe our non-GYN business is very strong, and of course, we have the estimates and the Imager as well over there. But the core ThinPrep is roughly two-thirds.

Okay. Do you mind just giving us instrument revenues on a worldwide basis?

I'm sorry, which revenue?

Instrument revenues.

ThinPrep estimates. Give me one minute to dig that up. It is a little bit over 500,000 in the U.S., and let me see what we have overseas. It is probably 1.5 million on the International side.

And Dan, it has been a long time since you have updated us. I don't know if Dan is the right person or not, but update us on the installed base of T2000s and 3000s?

Yes, we have kind of gotten away from that. You know, the United States, it is kind of a steady-state of 20 to 30 instruments a quarter. The larger movement on the ThinPrep instruments are in the International markets. (multiple speakers)

And they are pretty much all 2000s?

I'm sorry?

They are pretty much now all 2000s?

In the U.S. it is mostly T2000. In International markets, it is mostly the T3.

David Lewis, Thomas Weisel Partners.

I guess, Dan, just starting off with the in-office Her Option trend, not Her Option trend I should say, but NovaSure trend I want to talk about Her Option obviously. We've always assumed kind of a 95/5 split in terms of hospital procedures versus in-office procedures. There seems to be sort of a really rapid turnaround in sort of physician preference, which I assume is being driven from reimbursement. Maybe give us a sense of at the end of the year, what could that mix be in your estimation? And other technologies like Her Option people have talked about being more apt for the in-office environment, and has that been an increasing competitive threat here in the last two to three months?

We have not made any estimates, David, about in-office use of NovaSure by year-end, but this was really the first quarter that we saw an appreciable movement from primarily hospital-based procedures to in-office. So I really could not give you any numbers, but obviously it is on the way up.

With respect to competitive products in the office, it is interesting. What we are seeing is physicians who are NovaSure advocates that are using NovaSure in the hospital are those that are moving into the office. So there's really not a lot of competitive dynamic going on there. These are NovaSure users. They have become very comfortable with this procedure in the hospital, and they just want the convenience of office, and they take the product there and put in place all the logistics required. So I would not say we're seeing any particular competitive pressure from any of the other offerings in the office.

And Dan, is it your since that doctors are getting over this issue that you need IV constant sedation, they are getting past that?

Definitely. Yes, the physicians that we're seeing taking into the office -- I don't have a percentage to give you -- but my sense is the majority are using oral analgesics and a paracervical block and having good results with that.

Okay. And then sticking with this theme of competition, there has been a couple of 510-K approvals that are competitive to Proxima in the last three to four months, one two weeks ago and one obviously a couple of months ago. Is it still your opinion that these companies' clinical use data is simply too far behind Proxima to be particularly competitive?

Absolutely. At the most recent American Society of Breast Surgery meeting as an example, [Zoft] presented their data, and their data is on six healthy adult nubian goats. So there is no human data for that product. There is no human data from the North American Scientific product, and I think as we are very aware, one needs human data to support the use and adoption of the product.

Well, you're not going to make goat advocates around the world very happy with that comment, Dan.

We did not do the study.

Okay, just a couple more quick ones here. On HPV there's obviously a lot of sentiment concern that HPV and broader advertising awareness is going to pressure ThinPrep on the short-term, and I think you have been very consistent in saying you don't think that is going to be the case.

Take the other side of that argument, a lot of the advertisements recently, specifically the DTC ads, are really talking about women's health and Pap Tests. I know this is a little kind of counterculture, but is it at all possible that this massive branding about gynecological health actually drives greater penetration of Pap Testing in the U.S. over the next three years and, therefore, helps you a little bit?

I think that one could draw that conclusion very easily, David. If you have seen the television advertising campaign that has been launched by Merck, the call to action in that advertising is to talk to your doctor and get a Pap Test. So I think it is a very good campaign, and I think there's going to be increased awareness of the need for women to be screened. So you could I think very logically assume that this would have some lift.

Okay. And then last question for Tim before I jump off here. On gross margin inflection, Tim, I think we asked the question last quarter and I think you were somewhat guarded in terms of, is there gross margin inflection driven by the mix in your business? We're seeing that trend net of stock-based comp again this quarter. Is it safe to assume that gross margins are heading -- they seem to be heading in the right direction, even though you're giving sort of that 78 to 79% gross margin guidance. But they seem to be heading up.

Yes, David. Full-year guidance is 78 to 79. Q1 came in at the high-end. Q2 guidance is the same. I think we are comfortable with that guidance for the year. Clearly we're doing everything we can to focus on operational efficiencies. Our Costa Rican operation continues to perform extremely well for us. Volume certainly helped that out a bit as well.

So I will tell you that we are very focused on driving it to the higher end of the range. As we have stated before, the Imager does carry a slightly lower margin than a NovaSure, a MammoSite and the ThinPrep Disposable, as does the International business. So it does come down the mix a little bit, but it is top of mind share for us to stay focused on the higher end of that range.

Sara Michelmore, Cowen & Co.

I guess for Dan, it sounded like maybe you were a little bit more enthusiastic for the prospect of the ThinPrep launch in Japan. I guess you guys had sort of had tempered expectations or at least cautious optimism regarding that opportunity. I was wondering if there is any change there given the timeline that you mentioned?

No change. I think we are enthusiastic about the partnering we have in Japan and their effort on behalf of ThinPrep, and I think the June launch will be a big success. So no particular change.

Okay. As I recall correctly, in terms of what you guys had laid out for expectations of your International business, it really did not include a lot of contributions from Japan and ThinPrep.

That is correct.

Okay. I guess another follow-up for you, Dan. I was just a little confused on your DTC/NovaSure commentary. I know that that was a pilot that you guys had kicked off in the fall, and I was unclear in terms of what the go forward message was. It sounds like you're not aggressively rolling that out at this point, but it sounds like you still have some dollars in the budget to continue to do some DTC TV. Is that the correct interpretation?

What I was trying to communicate is that what we have learned from the women who actually came to the website and requested information is that 80% say they are going to have a procedure. We had thought that the time from the advertising to the procedure would be roughly three, maybe six months. What they are telling us is their plans are six to nine months. They are interval from seeing the advertising to getting the procedure is more like six to nine months, and we are about six months out from the beginning of the campaign right now.

So the message is, we are trying to make sure that the revenue lift is there and that we see incremental revenue before we go forward more aggressively. I think we had thought we would have seen that by now, but given the research, it seems we are going to see any revenue -- incremental revenue from the advertising is likely to happen six to nine months post-advertising campaign.

Okay. So it has just changed I guess the parameters in terms of what you guys look at for revenue return for that expense?

Exactly, yes. We had thought it would happen more quickly.

Okay, fair enough. And then just lastly, on the DCIS data on MammoSite, how much would that potentially expand the market for MammoSite? I think it was a very small amount of patients, so I was just wondering what you guys are going to do in terms of pursuing some additional clinical data in that application?

We think DCIS is a very important use -- patient use for MammoSite. We have always included DCIS in our estimates of the market, and we think roughly 125,000 patients per year are eligible for MammoSite. That would include DCIS. This data now supports that because it was very good data, 100 patients out of the Registry trial. We also have a separate prospective trial underway that is focused specifically on DCIS, and we would assume we would see the same kind of results. So it is more data to support the use of MammoSite in that population, but again we have always included that in our estimate of the market size.

Okay. That is very helpful. Thank you.

Wade King, Montgomery & Co.

Two questions, please. A number of my other questions have already been answered. Are you considering an expansion of your Costa Rica facility? While you have an extremely efficient operation in Massachusetts, the tax benefits of Costa Rica could be significant. What are your plans there?

This is Tim. We are running close to capacity in Costa Rica. So we are considering opportunities to expand primarily driven by the demand of NovaSure. The tax benefit, yes, is very important to us, and that is a factor. But clearly it is the demand of the business that would drive that decision. I had the opportunity to go down to our facility last month, and I will tell you I think our team has done a great job building a world-class facility. It is amazing to watch this operation at full speed. It is performing extremely well, and again they have done a great job of taking cost out of the equation to improve the gross margins. It is something we will watch very carefully in terms of the growth going forward.

You would not necessarily be considering manufacturing other products down in your Costa Rica facility if you had an option for more space there?

We certainly would consider other products that would be conducive to that type of operation. It is a great operating environment down there.

A second question. Could you just comment a little bit further on all the attention focused on HPV? Clearly Digene makes a great point of highlighting clinical studies and certain clinicians that are vocal about HPV and its role in cervical cancer screening going forward. Can you at least address how you expect this to play out differently in the U.S. versus the International markets since the International markets are much earlier in development here for post-Cytyc and also others interested in this market?

Yes, I think our perception is that the level of interest in HPV testing is highest in the United States as compared to outside the U.S. where there is I think limited level of interest. I think that the Digene test is a great complement to the ThinPrep Pap Test. The two go hand-in-hand and certainly in patients with (indiscernible) Pap Test results. I think the HPV test used in primary screening with ThinPrep is again a very compatible product offering.

What I talked about earlier in response to a question by David Lewis is that with Merck coming into the market with their vaccine and later Glaxo SmithKline coming in with their vaccine, there is obviously going to be a very much heightened awareness of patients for the need for screening. That screening is clearly going to be based upon cervical cytology, the Pap Test.

So I think we're in a very good position. I think as this will play out in the United States is that the Pap Test will remain the foundation of cervical screening. The HPV test will be used as an adjunct in certain patient populations, and the HPV vaccine will have an impact but years from now.

Okay. Thanks, folks.

Amit Hazan, SunTrust Robinson-Humphrey.

I wanted to ask a couple of questions with regard to your most recent 10-K where in it it looked like sales requests were down about 11 million in 2005 relative to 2004. Questions related to that would be, number one, whether that was maybe on the side of volume or on the side of price, if you could give us some color on that?

And secondly, being normalized for LabOne, what you see sales trends of sales requests as we go through this year, will they continue to decelerate?

And then thirdly, with your Pap volume still at about 9 million, is it safe to assume that LabCorp, that LabCorp is actually gaining Pap Test share? So in the large labs are we seeing LabCorp take Pap Test share from Quest?

We have not given specific market share of our market for ThinPrep for the lab segments. But what we have consistently said is our volume is tracking at roughly 9 million testd plus or minus 100,000 or 200,000 per quarter. That has remained consistent.

There is fluctuation in volumes from one segment to the other that occurs over time. We have seen growth in the all other segment. We have seen some growth in LabCorp. So we are seeing movement, but overall our volume is pretty much stable.

Is your volume at Quest stable as well?

It has been stable for the past three quarters.

Okay. I was just wondering if you could comment on how traction, if any, is going with Quest relative to the Imager?

I guess I would say that Quest has not changed their position regarding the Imager.

Okay. And then lastly on LabCorp, with the 50% of testing imaged recently here, how do we look at it throughout this year? Do you still stick to your kind of 65% by year-end number?

Yes, that is the target. We would like to get to about 2/3 their volume being imaged by the end of the year as we exit the year.

Bruce Cranna, Leerink Swann & Co.

I guess a couple of things, guys, just in terms of -- to make sure I heard the number correctly. On Proxima, does the -- the 6.3 I think is what Dan said. So (indiscernible) was 900,000 in the quarter, is that right?

Yes, that is correct.

And then I did not hear -- and I apologize if I missed it -- an actual placement number on the equipment side outside U.S. in the quarter?

Let me look that up.

Bruce, specifically on the Imager?

No, I'm sorry on the ThinPrep on T2 or --

On T2s and T3s, I gave out a revenue number of approximately 1.5 million, but we did not quantify the number of units. We can get that for you. We can get back to you on that.

I guess -- I'm also sorry if I missed this -- but you mentioned the two DTC markets for NovaSure. What exactly -- which two markets are those?

They were Hartford and Houston.

How did you pick those two?

It was a combination of the number of trained doctors in each of the markets, the number of controllers they had in place in the hospitals in those markets, as well as their kind of moderately priced direct to consumer markets. So all of that combined was how we chose them.

And Dan, how do you sort of think about the duration of the campaign in any given market, that is --

We ran the advertising for about six months in each of those. Basically what we're trying to do is determine the interval from the advertising until we really see revenue impact. That is looking to us more like six to nine months than what we had originally thought, which was about three to six months.

Do you have any thoughts yet about how many markets you might do DTC in, sort of I guess the remainder of the year and maybe in '07, or is it too early to say?

Yes, I would say we would rather not commit to anything at this point.

Okay, Bruce. It is Tim. The number of T2 and T3 units in the International markets in Q1 was approximately 60, and that is up from approximately 50 in Q4 of last year.

Okay. Thank you. I just have a couple more. One is just thinking about it, and maybe this is a Tim question, but the second half of the year, I'm thinking about Japan, Olympus. Kind of a modeling question. Should I be thinking of or should we be thinking of Japan and the evolution of that market as costing you a little bit on the margins, or is it really just working capital delta?

It is probably more working capital, Bruce.

I don't think it is going to affect the margins. The margins should be fine. Very good pricing in Japan.

And in terms of your sales effort?

It is mostly going to be done by Olympus. So, as a typical distributor type arrangement, we're not bearing a lot of those costs.

Well, I understand. So you're not obviously putting too many executives in Japan to oversee that?

No.

Lastly, I'm curious on NovaSure. Your volume number looks pretty solid, but do you have any data -- I guess for lack of a better term -- kind of a same-store number over prior year? So when you kind of look at docs that were converted or (inaudible) last year this quarter, any sense as to what kind of trend you're seeing, same doc volume trend year-over-year?

We look at that. It is a rough estimate because we estimate the number of trained doctors, frankly, and then we use that to determine the number of procedures. It is obviously going up faster than the number of doctors we trained. So the utilization per doctor is up.

Double digits, mid double digits?

It is a pretty soft number, Bruce, in that a lot of this is estimated by us in terms of the number of docs that are trained and then how many physicians are actually using the product on a regular basis. So I would rather not get -- I would rather not commit to a percentage increase.

(OPERATOR INSTRUCTIONS). Jayson Bedford, Raymond James.

Just a couple of quick questions for you. The 44 Imagers was ahead of our expectation here. Is this a level that we should expect going forward?

No, we have not changed our assumptions about the total number that we would ship during the year. We had obviously a very strong quarter. We are happy about that, but I would not get away with -- would not let it get away from us, frankly.

We ship about 30 a quarter average.

Okay. And then just on the same vein, $205,000 per Imager, is this a level of utilization given that you're now getting into smaller labs that we should expect? (multiple speakers) -- or will it spike back up to 220?

We think it is going to be in the 200, $225,000 per instrument per year range.

Okay. And then outside U.S., beside the UK, was there any other particular region that was stronger? And then were there any initial stocking orders in Scotland or Ireland?

As Dan mentioned, Germany had a very strong quarter. China had a very nice quarter. Canada had a very nice quarter relative to Q1 of last year.

And there really was no stocking going on in that Scotland has already converted, and the Irish program is relatively small. So no material stocking going on there.

Okay. And then lastly, in Japan I had in my notes that you guys were going to launch in April. Now it sounds like it is June. Is that just a normal pushback? Is there anything to read into that?

No, that is when the meeting is scheduled.

Yes, we just have refined our understanding of the timing of that meeting, that is all.

The Japanese Society of Cervical Cytology meeting that occurs in Japan in June.

Todd Robbins, Robbins Capital Management.

Two quick questions. One is maybe I have got a typo, but I'm looking at the cash flow statement, and I'm curious given the strong growth you guys have shown in the placement of instruments on a year-over-year basis, why is it that depreciation has dropped almost 60% on a year-over-year basis?

Tom, show me exactly what you're looking at? Just share with me the numbers, please?

On cash flows it looks like depreciation in the March quarter a year ago -- this is depreciation and amortization -- was 20 million and then this quarter it was 8.1.

Right. No, I see it. Tom, it is probably related to the -- there is probably additional amortization in 2005. I need to go back and check that for you.

Okay. Has there been any updates that you can offer us with respect to the litigation that is ongoing in Boston?

There are no updates other than what is out there in our Ks and Qs.

Glenn Reicin, Morgan Stanley.

Just two questions. Have you laid out there -- I cannot remember if you have laid out there a penetration goal ultimately for Imagers of your business. If you had 33% today and you look out at '08, '09, is that number 100%, or is there sort of a goal that we can look forward to?

Well, we do about 36 million Pap Tests a year. That is 9 million a quarter, and our goal would be to have each and every one of those imaged.

Okay. So what has to happen in order to get there? And is that a realistic -- it may be a goal, but is it realistic?

I think it is realistic. There is a small number of customers that have volumes that just are likely to be inappropriate for the Imager given the configuration of today's Imager. So if you take out maybe 10% of our volumes, the rest of it is certainly open to the current configuration of the Imager. I think it is market pressure, and I think it is continuing publication of data that will eventually allow us to get to that level of penetration.

So you actually have in your LRP 32 million of images in the outer years, which would equate to around --?

We have not given guidance.

You're welcome to.

We will consider that offer.

Also, can you talk a little bit about procedure trends and what you expect out of NovaSure this year? Last year in the first quarter you were surprised because you thought you discovered their seasonality to the business. It looks like you figured it out correctly this year. But maybe give us a sense of what kind of growth you expect this year?

Well, when we gave the guidance back in December for the Surgical Products division, we said it would grow roughly 45% year-over-year. So that is NovaSure and that is MammoSite in both with GliaSite that are contributing to that.

We look at Q1 of this year, and it performed at a higher percentage of the total year -- of our expectation for the total year in Q1 of last year. So we think that is a very promising sign. NovaSure was relatively flat Q4 of '04 to Q1 of '05, and it grew domestically this past quarter over Q4 of '05. So we are seeing some positive signs.

Okay. Do we have to worry about the fact that the number of controllers sold this quarter is down from last quarter?

We are not worried at all. We think it is a good healthy placement number.

So what kind of placements are you expecting on a quarterly basis, similar to Q1?

You know, Q1 of last year was the low point at about 114. It has been in the 140 to 150, as high as 160 range since then. So I think anywhere in the 130 to 160 would be where we would be pleased.

Okay. And then finally, you are now seeing 44 units of the Imager sold and it is a big number. What does that do to depreciation expense?

I'm sorry. Would you repeat (multiple speakers).

It is about -- it would depreciate the imaging systems over six years. So it would increase it a little bit. What is that about 25, $30,000 a year in depreciation per instrument? (multiple speakers)

Per machine?

Right. I think depreciation actually begins when the customer accepts the unit. So we ship it, we install it, we train them, and then they sign a letter of acceptance. Once that happens is when depreciation occurs. So those 44 that we shipped, that is going to take us somewhere between 30 and 40 days from the time we ship those instruments.

Okay. So it is a matching of costs and revenues?

Right.

Great. And then if you can get back to us later on that depreciation number in the '06 schedule, it does look weird.

This is Tim. I have got it right here. I just had to pull out a detailed cash flow. The cash flow statement that you see in the press release, this is the first time we have included it. What we attempted to do here was to give a more condensed version of the cash flow because there are so many line items in our cash flow when you look at the Qs and the Ks. So I had to pull the Q out to see what the detail was.

The depreciation and amortization is actually up year-over-year, which we would expect. What we did is we lumped in this line item because it says other non-cash expense. We had a roughly $15 million deferred income tax benefit in 2005 related to partially NovaSure and Proxima as part of the purchase accounting. So when you look at the 10-Q, you will see those numbers broken out more clearly, and you will see that depreciation and amortization is actually up year-over-year, again which we would expect.

Okay, I got it. Thank you very much.

Operator, we will take one more question.

[Tom Kuccoso], A.G. Edwards.

Most of the questions have been answered already. I just wanted to ask you real quick on the R&D line, that came in a little bit higher as a percentage of sales than we were looking for. I wanted to know kind of where those dollars are going? Is there anything outside the core business or extension products you're working on, and then what should we expect going forward as we model this out?

Yes, Tom, if you compare it year-over-year, there are a couple of things. The non-cash amortization charge increased about $1 million year-over-year for the quarter. Again, that is related to the intangibles from the Proxima and the Novacept acquisition. We have invested a little more money in some R&D projects. I mentioned the benefit of one of those earlier on the call by the changes made to the Imager, which happened from the engineering team here in Marlborough. Again, they have done a great job taking costs out of the Imager so we can then get into that smaller lab market. We think that is very important.

With both of our acquisitions, Novacept and Proxima, we acquired what we believe to be some outstanding intellectual property. We have an engineering group out in California that is taking a look at some alternative uses of that technology. So we are prepared to make appropriate levels of investment.

We have not given specific guidance for the balance of the year, but I can assure you as we invest in R&D, we think they are very smart investments.

Great. That is very helpful. Thank you.

I will wrap up with a few conclusions. I'm overall very pleased with the performance for the first quarter of this year. I think the results demonstrate our successful efforts to drive growth in not only our Surgical Products business but our International markets as well, while maintaining a very strong focus on leveraging our core Diagnostics business. We look forward to further growth and expansion in 2006 as we continue to offer a diverse mix of best-in-class products for women's health. Thank you for your participation today.

Ladies and gentlemen, again we thank you for your participation in this morning's teleconference. You may disconnect your lines at this time.