Hologic Inc (HOLX) 2006 Q2 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the Cytyc Corporation second quarter 2006 earnings conference call. (OPERATOR INSTRUCTIONS). As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Ms. Anne Rivers, Investor Relations Manager of Cytyc Corporation. Thank you, Ms. Rivers, you may now begin ma'am.

Thank you. Good morning everyone and welcome to Cytyc Corporation's second 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 conditions and business strategy. These statements are subject to a number of risks and uncertainties, including those detailed in the Company's press release issued yesterday and in its Form 10-K and other filings with the Securities and Exchange Commission that could cause actual results and outcomes to differ materially from those projected in the forward-looking statements. Please remember that these statements speak only as a today's date and 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 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 (technical difficulty) trends.

Reconciliations from the financial purporting 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 10-K we filed 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 expressed permission, and your participation implies consent to our taping.

With that I would like to turn the call over to Patrick Sullivan, Chairman, President and Chief Executive Officer of Cytyc Corporation.

Good morning, ladies and gentlemen. I would like to welcome you to our teleconference to report on the performance of the Company for the second quarter of 2006. Joining me on the call today are Dan Levangie, Executive Vice President and the new President of our Cytyc Surgical Products division; Tony Kingsley, the new President of our Cytyc Diagnostic Products division; and Tim Adams, Chief Financial Officer.

During this morning's call I will provide an overview of the business for the quarter and some brief remarks regarding our formation of a division structure as described in the press release we issued this morning. I will 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. Finally, before we open the call up to questions, I have asked Tony to introduce yourself to all of you.

I'm extremely pleased with the strong performance of the Company for the second quarter of 2006. As noted in our press release, revenue reached record of 150.4 million at $25 million or 20% increase over the same period last year.

Net income was 31.7 million for the quarter or $0.27 per diluted share. As I stated last quarter, we have established very specific objectives for each of our businesses. With our performance for the first half of the year we believe we're well on our way of achieving our $100 million in annual revenue growth over last year, and well on our way to reach our one goal of $1 billion in revenue by the end of 2008.

During the second quarter we met our ThinPrep goal of shipping 9 million ThinPrep Pap Tests during the quarter and growing our ThinPrep imaging installed base. During the quarter we shipped 25 ThinPrep Imaging Systems, bringing the total to date to 69, ahead of our goal of shipping 120 to 130 instruments for the year.

The $50 million in revenue from our surgical products business for the second quarter represents a 42% increase over the second quarter of 2005, bringing year-to-date growth to 33.8 million, over half the way to meeting our goal of $65 million of year-over-year growth.

During the quarter we relocated some of our most talented business executives to both Europe and Asia Pacific to drive our growth for all of our products in international markets. I believe the second quarter international product revenue of 16.3 million is a strong indication that this investment is paying off.

And finally, we continue on our search for acquisitions to provide clinically proven testing class products to physicians, laboratories and women around the world.

Before turning the call over to Tim, I would like to make a few brief comments about the press release we put on the wire this morning describing formation of the organization into four focused operating divisions -- Diagnostic, Surgical, International and Development.

It is my distinct pleasure to announce that Tony Kingsley has joined Cytyc from McKinsey & Company as President of our newly created Diagnostics division. Tony ran the healthcare practice in the Boston office of McKensey, and I personally worked with him on a variety of projects over the last five years.

Dan Levangie it is now President of our Surgical Products division. And as you know, Dan has led our commercial operations of all our various businesses for the last 15 years. This change will allow Dan to focus all of his energy and efforts on two of the key growth drivers of our businesses, NovaSure and MammoSite.

David Harding will continue to lead our international business, and is doing a great job as evidenced by our continued quarter on quarter growth. And finally, John McDonough is now President of Cytyc Development Corporation, and remains Senior Vice President of Corporate Development. In this role John will focus on making equity investments in early-stage venture companies, as well as lead our merger and acquisitions activity.

Some how is this different? Since the acquisition of Novacept and Proxima we are basically been organized in functional organization, with Dan running the commercial operations of all of our products, and John ran the engineering and operation organizations in Marlboro and Mountain View, as well as his role in corporate development. This new organization structure will more closely align each of our businesses with their respective customers and streamline the interface between marketing and product development.

In short, both Dan and Tony will lead sales, marketing, product development and manufacturing for surgical and diagnostic products, respectively. This change allows John to spend virtually all of his time in corporate development activities, as well as focus on making equity investments in early-stage companies that may be of strategic interest, two areas that are very important growth drivers for our future growth. This new structure really positions us from an organizational perspective to achieve our continued very aggressive growth objectives in all of our businesses.

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

Good morning everyone. My remarks today will compare the financial results of the second quarter of 2006 with the results of the second quarter of 2005. Total worldwide revenue for the second quarter of 2006 was $150.4 million, which represents a 20% increase from the second quarter of 2005.

Total revenue from the Domestic Surgical Products division was $50 million. Revenue from the Domestic Diagnostic Products division was $84.1 million, and revenue from the International division was $16.3 million. The $50 million of revenue from the Domestic Surgical Products division represents 33% of total Company revenue, and a 42% growth over the same period in 2005.

The Domestic Surgical Products revenue for Q2 was comprised of 42.4 million from sales of NovaSure products and $7 million of revenue from MammoSite, which represent approximate increases of 47% and 35% for NovaSure and MammoSite, respectively, as compared to the same period last year.

The 84.1 million in revenue from the Domestic Diagnostics division was comprised of 60.8 million from sales of the ThinPrep Pap Test, $15.2 million of revenue from the ThinPrep Imaging System, and $8.1 million of revenue, primarily from sales of instruments, non-GYN tests and licensing revenue.

Revenue from our Domestic Diagnostics Product division represents an increase of $7.1 million, or 9%, from the second quarter of 2005. This increase was primarily driven by the growth in the imager business. During the quarter we shipped 25 imagers in the U.S. market, bringing the total domestic shipments since the inception of the imager program to 359 units. At the end of the quarter 337 of these units were revenue generating, with an increase of 24 revenue generating units during the quarter.

For Q2 of 2006 the average annual revenue per imager was approximately $194,000. This average is down slightly from the 205,000 we reported last quarter, and is primarily attributed to the increase in imager placements at LabCorp, which are still not fully utilized, and our increased penetration into the small lab market, which process fewer slides per imager.

As we have previously discussed, we continue to make cost reductions to the imaging system and have reduced the cost of the imager by approximately 30% since its introduction in 2003. This lower cost allows us to place the imager in smaller labs while maintaining our target gross margins. We believe this segment of the market is strategically important as the imaging system becomes the standard of care.

Revenue from our International division was $16.3 million for the second quarter, which increased by $3 million, or approximately 23%, compared to Q2 of 2005. The growth in our international business was driven primarily by the continued adoption of the ThinPrep Pap Test and NovaSure in the European markets.

As you are aware, we adopted FAS 123 accounting for share-based payments at the beginning of the fiscal year. Accordingly, the results for Q2 of 2006 include the non-cash stock-based (technical difficulty) (long silence) and our continued investment in the growth of NovaSure.

Our income from operations, including FAS 123, was $49.9 million or approximately 33% of revenue. The effect of FAS 123 expense of $5.7 million was to reduce income from operations from 37% of revenue to 33% of revenue, as compared to income from operations in Q2 of last year of $46.1 million or 37% of revenue.

Reported second quarter 2006 net income was $31.7 million, or $0.27 per diluted share, which included the after-tax charge of $3.8 million, or approximately $0.02 per diluted share, (technical difficulty) related to FAS 123. If we exclude the expenses associated with FAS 123, our adjusted net income for Q2 of 2006 was $35.5 million, or $0.29 per diluted share, which represents a 25% increase compared to the reported diluted earnings per share of $0.23 for Q2 of 2005.

Next I would like to take a minute to discuss 2006 guidance, which includes the impact of FAS 123. Now that we're halfway through the year, we have better visibility into the revenue trends we are seeing in our business, therefore we will tightened the range of our full year 2006 total Company revenue and diluted earnings per share guidance.

We expect full year worldwide revenue to be in the range of 605 to $615 million, and our full year diluted earnings per share to be in the range of $1.07 to $1.12. We expect gross margin to be approximately 78 to 79% and operating margin to be in the range of 33 to 34%.

As we saw in the second quarter of this year, all of our business units continued to perform very well. Although there may be some minor variations to the divisional revenue guidance we gave it at the Investor Day meeting in December of 2005, on balance our business remains very strong, and our total Company guidance is in line with our original estimates.

For the third quarter of this year we expect revenue to be in the range of 151 to $156 million, and diluted earnings per share to be in the range of $0.27 to $0.29. We expect gross margin to be approximately 78 to 79%, and operating margin to be in the range of 33 to 34%.

Now living to the balance sheet. Our cash balance as of June 30, 2006 was approximately $190 million. Once again, we experienced another strong quarter of operating cash flow as we generated over $31 million in cash from operations, even after making $31 million of income tax payments in the quarter.

Additionally, during the quarter we repurchased $56.3 million of our common stock. In addition to the shares repurchased through June 30, we repurchased an additional $21.4 million of our stock in July, bringing the year-to-date total repurchases to $100 million. Even after this significant investment we ended the quarter with a strong cash position.

Additionally, in June we announced the signing of a five-year $150 million senior unsecured revolving credit facility to be used for general corporate purposes. While there are no immediate plans to use the credit facility, the agreement provides the Company with the financial flexibility to continue to grow our business and take advantage of the favorable conditions in the credit markets.

Finally, our days sales outstanding of 51 days at the end of the second quarter improved by 1 day compared to last quarter. Inventory turnover was 4.8 during the quarter, which was consistent with Q1 of this year. 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.

Once again, we have great news to report from our commercial operations for the quarter. We experienced very strong growth in sales of surgical products during the quarter, with quarter over quarter growth of $5.3 million, bringing total domestic revenue to $50 million, up from the previous quarter revenue of $44.7 million.

Of the $50 million of surgical products domestic revenue, 42.4 million were revenues of NovaSure products comprised primarily of single use disposable devices, representing quarter over quarter growth of $5.1 million.

Also during the quarter we placed an additional 131 NovaSure radio frequency controllers in the field. We continue to see a growing number of physicians performing NovaSure in the office setting and are prepared to support this transition from hospital-based procedures to office procedures with a series of educational tools that facilitate that transition. In-office sales of NovaSure grew during the second quarter by more than 80% versus the previous quarter, and are beginning to contribute an increasing portion of total NovaSure revenues.

We are also very pleased with the results achieved by the MammoSite team during the quarter. MammoSite revenue during the quarter was $7 million, a 35% year-over-year growth rate. We remain very excited by the prospects for NovaSure and believe we remain on track to achieve significant growth during 2006.

As I have stated previously, we believe that are three near-term keys to success with MammoSite. First is expanded sales coverage. We now have completed the expansion of our MammoSite salesforce and have a full complement, 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 add 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 126 million covered lives. 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, which has matured to four years following treatment, and shows zero local recurrences, as well as the 1,400 patient American Society of Breast Surgeons registry, which continues likewise and shows very low rates of local recurrence.

During the quarter CMS announced plans to adjust the outpatient physician fee schedule for medical devices, and published their proposed new payment rates. These are simply proposals at this time, and there's a significant amount of debate going on as to form of the final payment rule that is scheduled to be published in November of this year.

The current CMS proposal represents a 7 to 8% reduction in the physician reimbursement for both NovaSure and MammoSite, which we believe would represent a worst-case level of payment on both NovaSure and MammoSite. We believe that even in the event of reimbursement reductions of this magnitude, that neither of these products will be impacted in a significant way, even if the proposed rate changes go into affect next year. NovaSure and MammoSite will still represent significant profit opportunities to physicians who perform these procedures in the outpatient setting.

The performance of our Diagnostics Business segment continued to be very strong during the quarter. During the quarter 38% of ThinPrep slides were imaged, up from 33% the prior quarter. Also, during the quarter we continued to make great progress with LabCorp.

During the second quarter purchases by LabCorp of imaged kits represented 59% of the ThinPrep kits purchased, up from approximately 46% last quarter. LabCorp continues to see the ThinPrep Imaging System as one of their key growth drivers for the remainder of 2006.

Given their rate of conversion, it is clear that more and more physicians recognize the benefits of this past screening technology advancement. During the quarter we placed an additional 25 imagers in the field, bringing our total shipment for the year to 69, putting us well on our way to the 120 to 130 shipment level that we predicted earlier in the year.

During the quarter we placed an additional 17 ThinPrep processors in the United States, and shipped a total of 9 million ThinPrep Pap Tests. Large labs represented 44% of these tests, up from 42% in the previous quarter. This customer mix led to a 2% decline in the ThinPrep Pap test average unit price.

During the quarter, Merck received FDA clearance to market their HPB vaccine, Gardasil. As a part of this approval, FDA emphasized in the Gardasil's package insert the need for continued screening for cervical cancer using today's standard of care, arguably the ThinPrep Pap Test, in all sexually active women, including those who receive the vaccine. We believe the public awareness of the role of HPV in cervical cancer, and the continued need for cytologic screening, will steadily increase over the coming years. And that screening with the ThinPrep Pap Test will continue to be the cornerstone of cervical cancer prevention.

Our international business was very strong during the quarter with $16.3 million of revenue, a 23% increase compared to Q2 of '05. Year-over-year growth in our European business was 31%. And in the UK our business increased 70% compared to the second quarter of last year. The majority of this increase in Europe is attributable to the ThinPrep Pap Test. However, NovaSure sales were responsible for 40% of this growth during the quarter.

The market introduction of the ThinPrep system occurred at the Japanese Society of Cervical Psychology meeting in Yokohama in June. And during the remainder of '06 we will continue to focus on geographical 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. Public awareness of the need for regular Pap testing will increase. The imaging system continues to setting a new standard of care with 38% of ThinPrep slides imaged during the quarter, and conversion at LabCorp has accelerated. NovaSure sales growth was robust. And we continue to see more and more physicians begin to provide this procedure in their office. And MammoSite is showing strong year-over-year growth in in-office, fueled by strong reimbursement is driving MammoSite utilization.

Finally our international business, driven by accelerating growth in Europe, is becoming a key element of our growth story. Overall we remain very excited by prospects for each of our businesses going forward. I will now turn the call back to Pat.

Before we open the call for questions, I would like to ask Tony Kingsley to introduce yourself.

Good morning. I am very happy to introduce myself, Tony Kingsley. I joined Cytyc from McKinsey & Company, where I had been a senior partner leading our med tech and biotech practice in Boston. I have worked extensively with Cytyc over the last five years, both on growth strategy issues, market assessment business development, but also on operations issues across multiple functions.

I'm very excited to be here. I think I know this business as well as an outsider coming in could. I think it is a terrific business. I think I'm the right guy to lead it at this point, and I look forward to interacting with all of you more in the future.

Operator, you may now open the call up to questions and answers.

(OPERATOR INSTRUCTIONS). Tom Gunderson of Piper Jaffray.

Just a detail on U.S. diagnostic. Other was I think 8.1 million, up from 6.3 last quarter. Can you breakout other? Is there something else going on there or is that just normal quarterly moving around?

This Tim. For the most part it is consistent. The instruments – non-GYN test roughly run about 6 to 6.5 million every quarter. What we enjoyed this quarter was a technology and licensing agreement that we put in place that generated about 1.5 million of revenue for us. Again, we think it was a very wise thing to do. That is why you see that little bump up in other for this quarter.

Can you tell us what the licensing is, and is that a onetime?

It is onetime thus far. This is the first time I believe we have done this. In the spirit of confidentiality with the other party -- that is a part of the agreement -- we will not get into the details of that. But again I will tell you it is a credit to John McDonough and his group in Biz Dev. They are out looking for a variety of opportunities that make good financial and strategic sense. And we like this deal. So it generated a little extra revenue in the quarter for us.

GliaSite. I didn't hear you mention GliaSite. Is the MammoSite number of 7 million include that or is there something else going on?

No, if you add up all the numbers that I had in my prepared comments, GliaSite is about 600,000 for the quarter. MammoSite only was $7 million.

Imager in Q4 was 220. It dipped to 205 in Q1. And I think we expected maybe a little bit of an increase in Q2, and yet it went down again. It this a trend that we should -- continue to bring down a little bit or what is going on there?

There are a couple of factors going on there. You know, as I mentioned earlier in the call, strategically we're very focused on how much marketshare can we gain with the imager. I think we stated on a previous conference call 36 million ThinPrep Pap tests. We would like to get the majority of those to be imaged Pap tests.

Let's just say for sake of argument that 90% marketshare of the 36 million is ultimately where we would like to be. Pat and Dan will tell me 100%, but let's call it round numbers 90%. We estimate that that gives us a market opportunity in the U.S. only of somewhere in the neighborhood of 125 to $150 million. In order to achieve that, you have to move into this small lab marketplace. Again, we think that is fine. What that will do, that will drive down the 205, the 200, the 195. The number probably stays in that range. But strategically we think it is very important to capture the marketshare with all of these smaller labs, because it does a couple of things.

Not only does it give us incremental revenue from an imaging perspective, once they adopt the imager, and they again enjoy the medical benefits of the imager, the economic benefits both from a revenue and a productivity side. And they start to change their operational flow inside the lab, the imager will stay and ThinPrep will stay. We think that is very important from a competitive perspective.

Overall we think it is a very intelligent part of the market that we need to be in. The way we think about it is the cost of the imager that we ship out to the lab, and we are looking for what type or revenue per instrument we can generate that yields the type of target gross margin and ultimately return on investment. Even in that small lab imager, if the revenue per instrument does go down over time, the margins are still where we want them to be. It gives us revenue growth at the end of the day.

I will do one last question and that is on LabCorp and imagers. 50% I think in April, and then an acceleration up into 59% with a gold of 67% by the year. Do you think that maybe we get past that goal by end of year?

Dan, do you to hit that one?

Yes. The 59% of course is based upon their purchases of tests. We are really excited about getting to the 59% rate. We think there is some upside to the 67. But all I can say is the two organizations, Cytyc and LabCorp, are working diligently to convert physicians. As you know, their approach to the market is to convert a physician at a time to use of the imager. And we're having great success with that. I wouldn't want to give any guidance that is different than we have given in the past, but we are very excited about getting to 59%.

Dan, just a clarification. You tried to clarify on the shipments, or emphasize the shipments, but I'm guessing that LabCorp doesn't carry a whole lot of inventory and this is pretty much a just in time kind of operation. Is that right?

That is correct.

Glenn Reicin of Morgan Stanley.

Can you explain a little bit why given the mix ThinPrep in the quarter -- why gross margins were a little bit weak?

You're talking overall gross margins of 78%?

Yes. For the Corporation.

I think it is a function of a couple of key drivers. You have FAS 123 in there compared to a year ago, which we did not have. So that hits it a little bit. When you look at the product mix, international is growing rapidly, which is good news. It does carry a lower margin overall Company. And then the product mix inside the international number was a little more instrument weighted this quarter, which carries slightly lower gross margin. The imager, again growing nicely for us, carries a little less margin. Those are really the primary factors.

Those would not -- those are not expected to turn anytime soon? How does that $1.5 million payment work? Does it all flow to the bottom line.

Yes.

That actually helped gross margins?

Yes, it did.

By a little bit. Okay. And then can you give us a sense of what the single use revenues were for NovaSure, how many tests were performed?

Let me dig into two some detail for that. I will tell you would talked in prior days that it was 90% disposable, 10% controller. That numbers is moving more to the 95% plus range as the dominant factor. You want disposable unit sales for the quarter?

Yes, that would be great. You usually say number of procedures.

It was just under 44,000 in the quarter domestic.

Wow, a big number.

Yes, it is showing terrific growth over Q1 of this year.

If you don't mind I will keep on going here a little bit. I'm coming out with a price per ThinPrep test in the United States of around 675?

You are in the ballpark. Correct.

What was it internationally?

International in general, runs -- we have not disclosed that number in the past -- but I will tell you pricing is very strong internationally. Overall international runs anywhere from 80 to 85% of the U.S. price. In Europe we enjoy even stronger prices. It is probably in the high 80%, low 90% percentile, therefore Asia being a little bit less.

David Lewis of Thomas Weisel Partners.

A couple of quick questions here. Dan and Pat, in obviously in some of the prepared comments we have a lot of words being used like acceleration of the imager business, acceleration internationally. I guess looking at the third quarter revenue guidance are we to assume that the $1.5 million payment, at least for the short term, will not be in that guidance number?

This is Tim. That is correct. You would take that out of your runrate coming out of Q2, if you will, to start looking at Q3.

As we look at the third quarter trend off this second, the only thing that really sticks out would -- obviously you're still expecting international slowdown in the third quarter, which is more seasonal in nature, and maybe imager utilization is a little lower. Is there anything else besides those two items that would explain the conservative guidance or some of the conservative guidance?

On the surgical side, we have very strong second and fourth quarters. We have a slowdown it seems in the first quarter and to some extent in the summer. I think there is some dampening of the growth of NovaSure and MammoSite potentially in the third quarter that typically rebounds in Q4.

So a little 1 to 2 to $3 million here and there, but nothing fundamental that you're saying, at least as we start the third quarter here?

As I say every year, August is August. And we will see slowdown in -- particularly in our European businesses. They are always on vacation.

It is hot in the summertime. That is just on the guidance piece. I guess secondarily, just Dan, on the NovaSure piece, you talked about about last quarter you had lost a couple of markets. We weren't saying the pull through. You made a move in the second quarter here to accelerate into other markets. Was that the direct result of starting to see pull through in Houston and Hartford?

The performance in the second quarter I would say we would not attribute that to the television advertising. I would like to clarify a bit on the direct-to-customer that we have done with NovaSure. We continue to go very hard at direct-to-customer outreach through both the Web and through public relations efforts on behalf of NovaSure. We're being very successful in both of those areas.

Our Web hits on our sites are up consistently month over month. We've got more and more women that are visiting the website to find a physician to perform NovaSure. All of those are very good signs.

On the PR side we're having a record run of the number of local PR stories that are hitting related to NovaSure. Those have a direct impact on sales in those local areas. I think from a direct-to-consumer effort standpoint those two are clearly working, having an impact. And I think some of the second quarter growth could be attributed to those initiatives.

As far as the television advertising component of direct-to-customer, we did two markets. We have not yet seen a return on investment that makes us invest more heavily in television. But as I said on the last call, we think it is a delayed reaction, and we're looking into the end of the third or early fourth quarter to see that reaction. If we see it and we believe we have got an ROI that makes sense, we will further invest. But if not, we will continue on with our public relations and Web activity.

That is very helpful. When you talk about in-office trends, I think you were very cautioned -- at least made cautionary stations statements last quarter that we shouldn't get too excited about this business. I'm trying to get a sense of if the in-office business is nice if it happens, or it is starting to emerge in your mind as something that could drive comparable growth to, let's say, a conversion of the hormone replacement opportunity?

We are very encouraged by what we see in terms of growth in the in-office segment. As I said it grew at more than 80% versus the previous quarter. But overall it is still a small portion of our revenue for NovaSure. Until it gets to be a more sizable amount, I think we are going to remain a little bit cautious and guarded as to what contribution in-office will make to our growth. But at this time all signs are positive. But I still would take a wait-and-see attitude.

Just two more structural or strategic questions. The first of which is, with this divisional structure change are there middle management changes that are also being made in line with these senior divisional structure, and any operating expenses associated with this divisional structure creation?

This is Pat. There will be no changes to the operating expense structure of the P&L. And the alignment will be at the Vice President level, aligning Diagnostic Surgical Products under Dan and Tony.

No middle management disruptions?

No.

And then lastly, Pat, talking about your goal of $1 billion in sales by the end of 2008, whether that is '08 or sort of in a runrate basis towards the end of that year, given your last several acquisitions which have typically been, you're buying on the sort of catalyst or acceleration precipice and growing that business more substantially, as you start thinking about getting to 1 billion, and the core business can get you to 800, 850. You still need to fill with 100 or 150 million. Are you sort of signaling to us that the acquisitions that could come, if you're going to make it, is going to be of a more mature nature, or you still believe you can buy the historical acquisitions we have seen and grow those businesses and get to your '08 target?

I'm not trying to signal anything by this change in the organizational structure. I would say that when we look at both the Proxima and Novacept acquisitions, those were great acquisitions for us. And we like that size and growth trajectory of both of those products. As we look at opportunities, it is more in that nature.

[Doug Shenkal] of Cowen & Co.

The first question is on -- is anything that suggests that the momentum that seems to be building with LabCorp on imaging is pushing any other labs to implement imaging as well?

I would say overall with LabCorp, at more than half of their sides being imaged, that puts market pressure on all labs out there. LabCorp is a national player. And you know obviously the local labs in each of their markets compete with LabCorp. And I think LabCorp is very active in promoting the imaged slide as a better test, better medicine. There is undoubtedly pressure that is put on all labs in that marketplace.

And then also related to the Pap market and prep, have you seen any impact or do you envision any impact from I guess new entrants into that market?

I would say no. [Minagen] was approved in March of 2006. They have no data, and we continue to believe we will be consistent at 9 million ThinPrep Pap tests per quarter, plus or minus a little bit.

Just one more housekeeping question. You did state that the durable consumable breakdown on NovaSure is growing from 90 to 95%. It is still correct to assume that you guys are going to place about 130 to 160 controllers per quarter?

I think that is a reasonable ballpark. That may fluctuate from quarter to quarter, but it is reasonable.

Amit Hazan of SunTrust Robinson Humphrey.

Just a few questions. First of all just on the EPS guidance I'm just wondering does it contemplate continued share repurchases?

This is Tim. We not to disclose our intentions on continued share repurchases. Clearly there is a benefit from the big repurchase in the first half of the year that has been contemplated in that guidance for the balance of the year.

Just to follow-up on the imager really. You talked about wanting to get to 90% of slides imaged, and we have LabCorp now at 59%. You kind of had Quest out there for quite some time now that has not come through. I'm just wondering if you can tell us why we should have confidence that they are going to come through at some point here?

I think the Quest position on the imaging system has not changed. However, I think as you look at the market dynamics, as Dan discussed in his comments, that there is pressure from LabCorp in terms of offering it broadly to many of their clients.

I think when you look at the benefits of the imaging system, consistently what we have seen is that there is about a 20 to 25% increase in the detection of high-grade lesions versus manually read ThinPrep slides. So it is just a much better test for the physicians to offer to their patients. It is better technology.

You believe that that is what is going to get them to finally begin to adopt it is their understanding of the clinical -- their further understanding of the clinical data?

The product has been in the market for about three years. And consistently what we have seen is a 20 to 25% increase in high-grade disease detection. The market is shifting. I think the standard of care will be ThinPrep plus imaging. As we hit close to the 50% range of imaged slides, I think it is compelling reasons why the market is going in that direction.

Just one question on the small imager as well. If you can give us a little bit more granularity on how many units have been placed out there in the smaller regional labs, and maybe give us a little bit of detail of what the potential is if we're looking just at just at the small imager?

This is Tim. Let me try to provide to clarify this title, if you will, of small lab imager. It is really not a different imager that goes into the small lab market. Effectively what our engineering team has done -- you know, they continue to work on taking cost out of the configuration of the imaging system. And so by reducing that cost 30%, it really just becomes financially feasible for us to go and now market a smaller lab. Knowing that the total revenue we can get from that lab is going to be smaller just by a function of the number of tests they can image per year.

The number of imagers going to the smaller lab, I don't have it broken out. It is included in the total shipments of 25 and the 359 inception to date. Again, the important thing to note is by taking cost out it is now financially attractive for us to move into that market segment.

And just one final question on MammoSite. We keep hearing from Varian Medical that they are having continued, every quarter now for a number of quarters, continued strong growth in HDR afterloaders. And I wondering if you can give us an idea from your perspective on where the installed base stands right now, and what the size of the market is, and how many of the docs out there today already have access to an afterloader, and how that is setting up as we head into the coming year?

I can tell you that our perspective -- I won't give you any of the detail on the installed base, because frankly Varian knows that better than we do. But from our perspective, HDR access is really not an issue for us. It is not an obstacle to the growth of the MammoSite product. I think physicians that are interested in using MammoSite have access and availability of HDR afterloaders. We're happy to hear that Varian is placing more and more afterloaders, but we do not see that as a market obstacle for us.

Bruce Cranna with Leerink Swann & Co.

I guess first question, and maybe this is for Dan. Can you just give us for this quarter the average click charge and percentage of ThinPrep slides that were imaged?

Overall the total number of ThinPrep imaged during the quarter were 38%.

This is Tim. We don't break out the average click charge. The number runs fairly consistent quarter over quarter. Again, it will be driven by the mix, i.e., a larger lab is going to have a better price than a smaller lab.

Which is my next question, I guess, as I'm kind of tracking the click charge, if you will. Is it fair to think of that moving northward as your mix moves were to smaller lab or bigger lab?

That's correct.

I haven't heard you talk about covered lives with respect to the imaging system recently. Do you know where you are in the U.S. on covered lives? And can you tell us if there any big payors that you feel you need to have drop into the win column, or sort of out there outstanding?

We haven't given an update on covered lives in quite some time, and that is because reimbursement is really fairly widespread and available. We work on this with our partners at LabCorp. And I can tell you LabCorp is very satisfied with their reimbursement all across the United States.

Dan, you don't feel like there are any big accounts out there you need to move into the win column?

There are some, but nothing that -- none of the big players that I would talk about specifically.

Dan, you mentioned potential reimbursement changes coming to CMS later this year. I would imagine that Medicare utilization of NovaSure is about zero. But can you give us sense on the MammoSite side what you think the payor mix is there? How many of those MammoSite patients are Medicare patients?

Yes. Rough estimates would be probably half the breast cancers occur in patients over the age of 65. So Medicare is a large component of the MammoSite reimbursement. As I said in my remarks, the proposed reimbursement reduction for MammoSite is roughly 8%, so it is really not to going to have an impact even if that reduction holds.

But I think all these proposals are still very much up in the air. There's a considerable amount of lobbying that is taking place. I think the final rule that is published in November will be different than the proposal that occurred in July.

Just so I'm clear on the timing in Japan and the Olympics relationship, should we expect some -- actually you won't break it out -- but some revenue contribution this quarter, 3Q, from that arrangement in Japan?

Yes, I would expect some revenue contribution from our business in Japan.

Last question, just to put Tony on the spot quickly. Can you give us a sense Tony as to walking in the door and looking at the business mix, what is your first priority at Cytyc?

I would say his first priority that I have given to him is to better understand the business. His first day was yesterday.

It doesn't sound like Tony.

That was not Tony. That was Tony's boss. Just to be clear.

Jayson Bedford of Raymond James.

Just a couple of quick questions. Most have been answered. It looks like NovaSure utilization accelerated a little bit here. I am just wondering if you can comment on the physician dynamics in terms of when a physician moves from the hospital into the office, have you seen an acceleration in usage -- are they using the product much more an an office setting versus a hospital?

That is the appeal of this component of our revenue -- in-office revenue growing, if in fact that continues to grow. We do see on a per physician basis increased utilization of NovaSure. It is more convenient for the physician. It is more convenient for the patient. And frankly there's a reimbursement advantage to the physician to perform this in their office. The use of the product in the office is at a higher level we see on a physician basis than in the hospital setting.

Just to provide some metrics. It is still -- would you say well less than 10% of your NovaSure revenue is in the office?

Yes, that's correct.

Where you stand with GliaSite? Are you still looking to partner distribution of that product?

This is Tim. We have invested in GliaSite. We have ramped up the salesforce. Again, our whole position has been this is a very important product to the marketplace. And it belongs in the market. We're not actively looking for a partner at this time.

That is fair. How much is left on the existing buyback program?

The Board authorized us back in November for 200 million, and we have executed half of that thus far.

(OPERATOR INSTRUCTIONS). Bruce Jackson of Miller Johnson.

With the royalty revenue agreement in the U.S. on the ThinPrep business, is that a fixed amount each quarter or is it variable?

No, it is a onetime transaction.

And then so it is onetime, and then in the future is there any kind of a variable component to it?

No.

Just a onetime thing. Okay. And with NovaSure can you comment on which countries are showing the revenue growth outside the U.S.?

It is primarily the UK and Canada are the two strongest.

And we're starting to see some in Australia.

Seeing some in Australia. And then are you expanding your international salesforce right now, and how many people do have internationally?

Total international outside the U.S. is probably approximately 150 employees. There is some expansion in different parts of Europe and in different parts of Asia. As Pat had mentioned earlier in the call, we have transferred a couple of our outstanding contributors here from the domestic side over to Asia. So we are very excited about the opportunities that they will bring for us.

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

Overall, I am extremely pleased with our very strong financial performance for the second quarter. These second quarter results, as well as the formation of the organizational structure announced this morning, positions us well to meet our aggressive growth objectives. We look forward to further growth and expansion in 2006 and beyond, as Cytyc continues to offer a diverse mix of best in class products for women's health. Thank you.

This does conclude this morning's teleconference. Thank you for your participation, ladies and gentlemen, and you may disconnect your lines at this time.