Hologic Inc (HOLX) 2006 Q3 法說會逐字稿

Greetings, ladies and gentlemen, and welcome to the Cytyc Corporation third-quarter 2006 earnings conference call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. (OPERATOR INSTRUCTIONS). As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Ms. Anne Rivers, Investors Relation Manager of Cytyc Corporation. Thank you, Ms. Rivers. You may begin.

Thank you, operator. Good morning, everyone, and welcome to Cytyc Corporation's third-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 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 concerns certain financial information determined by methods other than with Generally Accepted Accounting Principles, GAAP. Specifically, these non-GAAP measures may exclude items such 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 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 8-K form 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 re-recorded or rebroadcast without the Company's express permission, and your participation implies consent to the taping.

With that, I'd 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 third quarter of 2006. Joining me on the call today are Dan Levangie, President of Cytyc Surgical Products; Tony Kingsley, President of Cytyc Diagnostic Products; and Tim Adams, our CFO.

During this morning's call, I will provide an overview of the businesses for the quarter as well as an update on recent developments. I will then turn the call over to Tim for more detail on our strong financial performance. Dan will provide an update on the various aspects of our surgical products division as well as our international divisions. Tony will provide an update on our Diagnostic Products division.

Overall, I am very pleased with our strong performance for the third quarter of 2006. As noted in our press release, revenue reached a record of $154.3 million, an 18% increase over the same period last year. Net income was $36.1 million for the quarter or $0.31 per diluted share. As noted in our press release, we demonstrated strong performance across all aspects of our businesses during the third quarter. Specifically, surgical products quarterly revenue increased 33% year over year. International revenue increased nearly 40% from the same period last year and, despite an historically seasonally slow quarter, increased $1 million from Q2 of this year.

The ThinPrep imaging system revenue grew 47% year over year and we shipped 38 ThinPrep imaging systems during the quarter. The ThinPrep pap test volume remains steady with over 9 million tests shipped in the United States. Cash flow from operations was particularly strong during the quarter, with over $43 million in cash generated.

On September 17th, we announced plans to acquire Vision Systems Limited in Australia. And while we believe the acquisition represents an ideal opportunity to leverage our worldwide sales, service and laboratory support infrastructure, we remain disciplined in our acquisition strategy and metrics on a focus on providing appropriate return for our shareholders.

Therefore, on October the 9th, the Company announced that it would not increase the AUD3.25 cash per share tender offer. Our unconditional AUD3.25 cash offer remains open for Vision Systems shareholders to accept. We expect to extend our tender offer to approximately November 17th, or about one week before we believe the Danaher agreement is scheduled to close. And as of now, we intend to tender our entire stake in Vision Systems of approximately 25 million shares to Danaher.

During today's call, we will cover two additional topics that were the subject of yesterday's press releases. The first is the introduction of a new product to prepare cell blocks for material remaining in the ThinPrep vial for both gynecological and non gynecological applications. This product, named Cellient will be introduced at the upcoming American Society of Cytopathology meeting in Toronto at the beginning of November.

In total, we believe this product represents a $100 million market opportunity worldwide. Tony will provide you with some more details on the Cellient system.

The second is a product to treat endometriosis, a condition that affects approximately 7 million women annually in the United States and 16 million women worldwide. We acquired certain assets of Helica, a UK-based company with a novel ablation technology to treat endometriosis.

Our growth strategy is clear -- we will continue to leverage our sales and marketing presence in the laboratory, ob-gyn offices, and surgical centers by increasing sales of our existing products and by selling additional products that are internally developed or externally acquired. The two that we announced yesterday are complementary and represent an excellent fit with our existing sales and marketing organizations. The Cellient system will be sold by our existing laboratory sales force and the Helica product will be sold by our NovaSure territory managers.

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

Thank you, Pat, and good morning, everyone.

My remarks today will compare the financial results of the third quarter of 2006 with the results of the third quarter of 2005 and some selected comparisons to the second quarter of this year.

Total worldwide revenue for the third quarter of 2006 was $154.3 million, which represents an 18% increase from the third quarter of 2005. Revenue from our domestic Surgical Products division was $53 million. Revenue from the domestic diagnostics products division was $84 million. And revenue from the international division was $17.3 million. The $53 million in revenue from domestic Surgical Products represents 34% of total Company revenue and a 33% growth over the same period in 2005. The domestic Surgical Products revenue for Q3 was comprised of $44.9 million from sales of NovaSure products and $7.2 million of revenue from MammoSite, an approximate increase of 34% and 33% for NovaSure and MammoSite, respectively, as compared to the same period last year.

The $84 million in revenue from the domestic Diagnostics division was comprised of $61.7 million from sales of the ThinPrep Pap Test, $16.4 million of revenue from the ThinPrep Imaging System and $6 million of revenue from sales of instruments and non-GYN tests.

The growth in our domestic Diagnostics Products division was driven by a 47% year-over-year increase from the ThinPrep Imaging System. In Q3, approximately 39% of all ThinPrep pap tests were imaged as compared to 27% in Q3 of last year. During the quarter, we shipped 30 imagers in the U.S. market, bringing the total domestic shipments since the inception of the imager program to 389 units. At the end of the quarter, 364 of these units were revenue-generating with an increase of 27 revenue-generating units during the quarter.

For Q3 of 2006 the average annual revenue per imager was approximately $194,000, which is consistent with the amount reported last quarter. This average annual revenue per imager reflects the impact of our penetration into the small lab market. As previously discussed, we have made significant cost reductions to the imaging system, which 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 $17.3 million for the third quarter, which increased by $4.9 million or approximately 39% compared to Q3 of 2005 and a 6% sequential growth over Q2 of this year. This was a great quarter for our international business as Q3 historically is a seasonally slower quarter. The growth in our international business was driven by the continued success and market adoption of the ThinPrep Pap Test in markets outside of the U.S.

Our results for Q3 of 2006 include the non-cash stock-based compensation expense associated with FAS 123 of approximately $5.3 million or $3.6 million on an after-tax basis. This resulted in a $0.02 decrease to Q3 2006 diluted earnings per share. The detail of the FAS 123 expense is shown on the consolidated income statements that were included in our press release. In order to aid in comparing the true operating results on a year-over-year basis, I will break out the expenses associated with FAS 123 for Q3 of 2006 when discussing gross margin percentage, operating expenses, and earnings per share amounts.

The overall Company gross margin for Q3 was approximately 77.3% compared to 78.7% from the third quarter of 2005. Along with the impact of FAS 123, this change in margin percentage is attributed to lower production volumes in our surgical products division this quarter and product mix. The product mix was driven by the growth in our international and our imager businesses, both of which have lower margins than the U.S. sales of our disposable devices.

Total Company operating expenses during the third quarter were $65.7 million as compared to $52.5 million in Q3 of 2005. This increase of $13.2 million included FAS 123 expenses of $5 million this quarter, and, therefore, the comparable increase in operating expenses year over year is approximately $8.2 million. The majority of this increase was due to the growth in the surgical products division, which included the ramp-up of the commercial operations group, supporting MammoSite and NovaSure.

Additionally, we made investments in our international business and in systems to support Cytyc's revenue growth. Our income from operations, including FAS 123, was $53.5 million or approximately 35% of revenue. Excluding the impact of FAS 123 our income from operations was 38.1% of revenue, which is consistent with the same quarter last year.

Reported third-quarter 2006 net income was $36.1 million or $0.31 per diluted share compared to net income of $31.1 million or $0.26 per diluted share for Q3 of 2005. This represents an 18% increase in diluted earnings per share.

The Q3 2006 net income included the after-tax impact of $3.6 million or approximately $0.02 per diluted share related to FAS 123, which was partially offset by a $2.2 million tax benefit related to the successful completion of several income tax audits. This tax benefit resulted in an additional $0.02 increase to diluted earnings per share in the quarter and reduced the effective tax rate for the quarter to 32.4%.

As you are aware, during October, we launched our tender offer to acquire Vision Systems and have secured approximately 25 million shares at a cost of approximately US$61 million. As Pat mentioned earlier, we believe the acquisition of Vision represents an ideal opportunity for Cytyc. However, we continue to remain disciplined in our M&A approach and are focused on providing the appropriate return for our shareholders. Accordingly, we have decided not to increase our bid for Vision Systems. If Danaher is successful with its acquisition of Vision, we anticipate that we will sell our Vision shares during the fourth quarter of this year, resulting in a gain net of all expenses associated with the transaction.

Next, I would like to take a minute to discuss 2006 guidance, which includes the impact of FAS 123 but excludes the anticipated gain from the sale of Vision shares and related transaction expenses. For the fourth quarter of this year, we expect revenue to be in the range of $160 to $165 million and diluted earnings per share to be in the range of $0.30 to $0.32. Our diluted earnings per share guidance for Q4 compares favorably to the diluted earnings per share of $0.29 this quarter after excluding the $0.02 tax benefit we recorded in Q3.

We expect gross margin to be approximately 78% and operating margin to be approximately 35%. When added to our year-to-date results through September 30, we expect full-year worldwide revenue to be in the range of $605 to $610 million, an increase of roughly $100 million over 2005 and our full-year diluted earnings per share to be in the range of $1.11 to $1.13.

Again this year, we will be hosting an Investor Day in New York City on December 12. At this meeting, we will invite some of the leading physicians in the country to talk about our products. Additionally, there will be presentations from several of our business leaders and we will also provide 2007 guidance. I hope all of you will be able to join us for this meeting. And now moving to the balance sheet.

Our cash balance as of September 30, 2006 was approximately $205 million. Once again, we experienced another strong quarter of operating cash flow as we generated over $43 million in cash from operations during the quarter, bringing our year-to-date cash flow from operations to $116 million. Additionally during the quarter, we repurchased $21.5 million of our common stock, bringing the total year-to-date repurchases to approximately $100 million. Even after this significant investment, we ended the quarter with a strong cash position.

And finally, our days sales outstanding, of 53 days at the end of the third quarter, increased by two days compared to last quarter and inventory turnover was 5.0 during the quarter, an improvement over Q2 of this year. As you can see, our balance sheet remained very strong and continues to provide us with the financial flexibility to support our growth.

Thank you and with that, I will turn the call over to Dan Levangie.

Thanks, Tim. Once again, we have great news to report from our Surgical Products division for the quarter. We experienced solid growth in sales of surgical products with sequential quarterly growth of $3 million, bringing total domestic revenue to $53 million.

Of the $53 million of surgical products domestic revenue, 85% of revenues were for NovaSure products, comprised primarily of single-use disposable devices.

One important highlight is that we experienced our highest controller placement quarter in Q3, by placing an additional 207 NovaSure controllers in the field.

In-office sales of NovaSure grew during the second quarter by 87% versus the previous quarter, while we more than doubled the number of new in-office customers during the quarter. Of total Surgical Products revenue during the quarter, 15%, came from sales of MammoSite and GliaSite products combined. We experienced solid year-over-year growth with each of these product lines during the quarter, with MammoSite growing by 33% versus the same quarter last year. We remain very excited by the prospects for MammoSite and believe we remain on track to achieve year-over-year growth in MammoSite sales of between 30% and 35% during 2006.

Data describing the outcome of patients, who were treated five years ago with MammoSite, is about income to maturity. And the great news we have to report is that there have been no local recurrent breast tumors in these patients -- zero recurrences. This is an outstanding result and a scientific milestone for MammoSite. And we believe that as this data is presented, published, and promoted by us, more and more physicians will offer MammoSite to their patients.

We continue to make reimbursement progress during the quarter and as of today, we have insurance coverage for MammoSite from plans that represent 143 million covered lives.

We were very pleased with the performance of our international division for the third quarter. Revenues grew 39% to $17.3 million versus the prior year period. This growth was unusually strong for the third quarter, which is typically a slower quarter, given the impact of the summer holiday period in Europe. Growth for the quarter was largely driven by continued gains in the market for the ThinPrep pap test, additional sales of ThinPrep processing equipment, and further penetration of the ThinPrep Imaging System across the world.

NovaSure also experienced significant gains from the prior-year period, growing by 129%. In Europe, our year-over-year growth was 41%. The UK was the major driver with 54% year-over-year growth due to continued conversion of laboratories to the ThinPrep Pap Test, combined with rapid growth in NovaSure sales. Substantial year-over-year gains were also made in Germany, Italy, Iberia, and the Benelux countries. In each of these geographies, gains in the ThinPrep Pap Test, ThinPrep Imaging System, and NovaSure were the leading contributors to growth.

Our Asia-Pacific region grew 29% versus the year-ago period with the biggest gains coming in Japan, China and Korea. The ThinPrep Pap Test was the biggest driver of growth across the region. Since our market launch in Japan earlier this year, growth has been consistent with our expectations and we see steady uptake of our Diagnostic Products by leading institutions across the country. In Australia, reimbursement is now in place for NovaSure and we are beginning to see very favorable adoption of NovaSure in Australia.

Finally in Canada, we achieved 9% year-over-year growth by converting a major regional laboratory to the ThinPrep system and by further penetrating the endometrial ablation market with NovaSure.

I would like to take this opportunity to describe two additional sources of revenue that will contribute to the growth of our surgical products division in the near term.

First, in a paper published in the American Journal of Neurosurgery, the results of a prospective trial of the GliaSite radiation therapy system in treating patients with single metastatic brain tumors was described. These results document outcomes with GliaSite that are equivalent to today's standard of care with whole brain radiation therapy, but are achieved in approximately half the time while preserving cognitive function in these patients that is superior to whole brain radiation therapy.

We believe this paper represents an important milestone for GliaSite that roughly doubles the market opportunity in treating patients with brain tumors and that physicians will increase their use of GliaSite for partial brain radiation therapy. We believe that GliaSite revenues will begin to grow and will begin to contribute to overall Surgical Products revenue growth in a more meaningful way.

Second, as we announced yesterday, we have purchased certain assets of Helica Instruments relating to the Helica thermal coagulator product, or HTC. Helica, a privately held company located in Edinburgh, Scotland, has developed and manufactures the HTC system for the treatment of endometriosis. Terms of the agreement were detailed in our press release last evening.

Helica's product, the HTC, is comprised of a radio frequency controller and a disposable single-use probe that employs radio frequency to generate a helium plume that provides for safe and effective ablation of tissues affected by endometriosis.

As you know, endometriosis is endometrial tissue found anywhere outside the uterus. Patients with endometriosis typically present with pelvic pain, which, if left untreated, can result in infertility. It is estimated that 16 million women worldwide stuffer from endometriosis and 7 million women within the U.S. are affected with this disorder. Partly, the gold standard for treatment of endometriosis is laparoscopic diagnosis followed by surgical ablation to remove the tissue. Annually, 1 million laparoscopic procedures are performed worldwide in the treatment of endometriosis and 500,000 procedures are performed in the U.S.

The HTC product has received FDA clearance and a CE Mark and is in use in a number European markets with annual sales of roughly $1 million. Clinical studies conducted in the UK have shown the HTC device to be safe and easy to use and at least as effective as other surgical techniques used to treat endometriosis. We believe that a product based upon the HTC technology will be easy to use and could be readily used by OB-GYN's, making surgical ablation of endometriosis more easily and widely performed.

Due to the state of the currently designed product, we have made the decision to delay full commercial launch of the HTC in the United States until we have enhanced the design of the current system. We believe we can accomplish this engineering work in a period of 18 months and anticipate the U.S. launch of the HTC sometime during 2008. We will discuss the Helica opportunity in more detail at our Analyst Day in December.

Overall, it was a great quarter for our Surgical Products and international divisions, and we are very excited by the prospects for new revenue streams coming from GliaSite and the Helica system.

With that, I would like to turn the call over to Tony Kingsley.

Thank you, Dan, and good morning. I am happy to be able to address you after my first quarter as President of Cytyc's Diagnostics division. The performance of our Diagnostics business segment continued to be very strong during the third quarter. We continue to expand our ThinPrep imaging customer base, shipping 30 imagers in Q3 and we ended the quarter with 364 revenue generating units.

Imager revenue grew to more than 16.3 million, a 47% increase over Q3 '05. The percent of slides imaged increased to 39% compared to 27% imaged in Q3 '05. The average annual revenue per imager was stable at $194,000 in the third quarter.

We continue to make great progress with LabCorp growing our imager business. At the end of the quarter, we estimate that over 60% of LabCorp ThinPrep Pap Tests were being imaged.

During the quarter, we shipped 9 million ThinPrep Pap Tests in the U.S.; large labs represented 42% of tests, down from 44% in the previous quarter, and this customer mix led to an increase in ThinPrep Pap Tests average unit price. We also placed an additional 31 ThinPrep processors in the United States.

The ThinPrep business remains strong and the imaging system continues to set a new standard of care for cervical screening. We are excited that more than 40 studies related to our ThinPrep product line have been accepted for presentation at the annual scientific meeting of the American Society of Cytophathology in Toronto in early November. Twenty-one of these studies are related to the imager. The studies show a variety of benefits, including improved disease detection compared to manual screening, evaluation of specimen adequacy, detection of glandular abnormalities that impact on overall quality and productivity.

We are encouraged that our expanding customer base continues to recognize the benefits of the ThinPrep Imaging System in real world use. And again, many have chosen to share their data at a scientific forum.

Finally, we are excited to announce that we will introduce a new product for our lab customers at the ASC meeting in Toronto. The Cellient Automated Cell Block system is a fully automated system for preparing cell blocks from cells or small tissue samples to be processed for histological examination. The traditional methods for cell block preparation are labor-intensive and extremely operator-dependent, and the quality is highly variable. Cellient's automated system, developed by Cytyc engineers, based on technology licensed from a University partner, virtually eliminates operator dependence and provides standardized, consistent preparations in less than an hour. We believe that the market potential for the Cellient system is approximately $100 million annually worldwide.

We will introduce Cellient at the ASC meeting in November and expect to launch the product in the second half of 2007. Cellient will be terrifically complementary to our well-established cytology business and will allow us to leverage our world-class laboratory and support infrastructure.

Thank you, and I will now turn the call back to Pat.

Thank you, Tony. Operator, we would like to now open the call up for Q&A.

(OPERATOR INSTRUCTIONS). Thom Gunderson, Piper Jaffray.

Just a little bit of clarification. The $205 million in cash, does that include the securities in Vision Systems? Or is there another $61 million that --?

This is Tim. The securities were purchased in the first week of October. Cash on the balance sheet was $205 and then the next week we spent US$61 million to buy the Vision shares.

And then do you have an estimate as to what your net gain will be in the fourth quarter from that?

Yes, let me give you the gross gain because that's very simple math for me. It is AUD0.50 per share times the 25 million shares, so it is AUD12.5 million, which at the exchange rate is roughly US$9.5 million before the expenses. And we have not released the expense number. But it is going to be a very nice gain for us, net-net.

And then, Tony, you are launching the cell block Cellient product in the next few weeks, or introducing it. But then the launch is second half of '07. What is the time lag there?

We are introducing it at the ASC meeting because we expect to have it in the market next year. And given the timing of that, that is obviously a very important forum for our customers. So we will be introducing the product next week. Our timeline is to ship our first units, beta units, by the end of the year to customers in the U.S. and also Europe, and work through the beta process and the remaining engineering challenges. And our expectation is we would launch the product formally in the second half of the year.

And what is the pricing of this kind of product? And is there a disposal that goes along with it or is it a onetime sale?

It is a mix of capital and disposals. I think consistent with the Diagnostics businesses that we have in terms of the basic structure and margin. We have not obviously gotten to the detailed level of exact pricing and [AUB] on those things at this point. But we will have more information on that in the future. But it will be a mix of capital and consumables, yes.

And then, Dan, what percent of the market is in-office now, do you believe, and why is the shift happening? And have you made any changes or are you planning any changes to the product to better accommodate within the office?

Thom, the percentage of our sales that are in-office sales of NovaSure continue to be relatively small, in the single digit percentage of our total sales. The shift that we see is primarily related to two issues. The first is convenience. It is just a heck of a lot more convenient for doctor and patient to have the procedure performed in the office. And the second is reimbursement remains very attractive for the physician to perform in the office.

In terms of the product itself, we think that NovaSure is the ideal product for in-office use. And we don't see any significant investment in re-engineering that product to accommodate in-office use. We think it is great for that procedure today.

Single digit is a wide range. Can you narrow that down a little bit?

I would rather not. It is -- it's less than 10%.

(multiple speakers) anything less than 10%.

Glenn Reicin, Morgan Stanley.

Just a couple questions. You were able to give us the size of your new histology product opportunity, but you did not with respect to the Helica business. How big is the rollerball business in general today, if that is the right comparison?

Rollerball would not be the appropriate comparison. It would be other surgical techniques that are used to destroy endometrial tissue. The Harmonic Scalpel by J&J is one example. Our estimates are that the market is again -- approximately just over $100 million worldwide. We see that as the market opportunity for the Helica product.

And why is rollerball not the right comparison?

Rollerball is a procedure that is used inside the uterus to destroy the tissue lining. The Helica product and products like this are used to remove endometrial tissue that is outside of the uterus, within the pelvis.

So this is for open procedures?

Either open or laparoscopic procedures, yes.

When you mentioned that revenues -- I'm jumping around a little bit -- when you mentioned that revenues per imager were flat, do you anticipate the case going forward?

Glenn, I would say it probably stays in that range plus or minus. Again, it is really being driven by our continued penetration into that smaller market, which we think is very positive. 39% of all ThinPrep's were imaged this quarter. Our objective is to get that number as close to 100% as possible. You have to get into that smaller lab market. So on the surface, it brings that number down -- the 194 range. We have seen it a couple of quarters now in a row where it has been consistent. But again, we try to look at this market strategically; it's important to get all of these customers that are using ThinPrep on the imaging system. And we really take a look at the kind of margins return on investment for placing that capital at the customer's location.

Let me ask this question a different way. You have sort of converted our thought process to not looking at this as a revenue per click, but a revenue per imager. Now, because you're going into smaller labs, it is distorting the figures. So maybe you can give us some insight what is happening on a revenue per click basis?

It is much higher. Yes, the revenue per click on the smaller labs is much higher than you would have at the larger lab customers.

Do you have any sense of what that is compared to last quarter?

We probably give you enough information for all the sound bites that you could calculate that number in detail. It is just under $5 on a per slide basis across the board. Now that number -- if I look at this quarter and I look at the same quarter a year ago, plus or minus 1 or 2 percentage points, it is very consistent.

You mean it is flat year-over-year?

Yes.

Why would that be the case if LabCorp was such a larger portion a year ago?

No, LabCorp is actually a larger portion this year. Because they have ramped up.

Yes, remember the way in which the ramp up; they did not convert all at once. They ramp up over time.

And now that the smaller labs are going to grow faster than larger -- I assume that is still the case -- that revenue click will move up?

That is correct.

Just a couple other small questions here. Tax rate going forward -- has this been permanently adjusted downward?

No. I don't want to call it a onetime item because we have several tax audits that are ongoing. We are doing business in all of the states with all the different U.S. entities. And we do expect to close out tax audits in future periods -- could be this quarter, Q4, could be again in Q1. So you would see -- depending on how successful we are in the audit, whether the reserve gets released or if it is fully utilized to solve any tax issues that may come up. But for this quarter, the rate is 32.5 roughly, and on a go-forward basis, we anticipate that it is back in that 36.5% range, pending any closure of audits in future periods.

And then another quick question. How many single-use disposables on NovaSure did you sell this quarter domestically?

Just over 44,000.

44,000 -- and pricing is relatively flat?

Up a little bit.

Sara Michelmore, Cowen and Company.

Just a follow-up on the Helica. I know that the current generation product is approved in the U.S., so it sounds like you guys are really waiting for the second generation product. How much work do you have to do in terms of getting that product to the market? I assume that you guys are now taking over all of the regulatory issues. And I'm just wondering, what kind of work needs to be done prior to you guys launching? Is there any clinical data that needs to be generated, etc?

There is no requirement that we do any additional clinical work from the regulatory standpoint. The product is approved. It has not been introduced in the United States. It is used in Western Europe, primarily in the UK.

The work that we need to do is engineering work to bring the product up to standards that we think the United States market would require.

If you think about the product in Europe today, we would characterize it more on a prototype/beta stage of development.

Are you guys anticipating doing the manufacturing for that product?

Yes.

Yes.

In terms of the cell block system, clearly when you guys made the bid for Vision, it suggested that you had a strong interest in this anatomic pathology area. And I guess the part that the Street did not realize at the time was that you also had some internal development efforts focused on that market too.

Can you just talk about what the plans are in that anatomic pathology market? Do you have an internal program that is broader than that cell block system? Or is there an opportunity here to be acquisitive and add to that product line in the future?

We obviously had an interest with Vision Systems because of our interest with the Cellient system that was just introduced or discussed in a press release yesterday.

I'd rather not give any indications of what we have in our pipeline regarding histology. It is safe to say that we have development efforts underway both in Marlborough, Mass., as well as Mountainview to expand our product line and increase the pipeline.

I guess, Pat, you guys have talked a lot about acquiring growth, not necessarily highlighted a lot of the internal growth that you guys could generate on an organic basis. Is that a big part of the strategy going forward? Is that something we should think about, you guys rolling out new products from internally developed programs in the future?

I think that's fair. Yes, this represents -- the Cellient is the first that we're talking about an internal development pipeline, but we have other products in earlier stages of development that we think are very exciting.

And I guess a follow-up for Dan Levangie. On the Mammotome, you did mention that the five-year data for Mammotome was there. When will we expect to see that presented in a public forum?

We are just accumulating the final results of the five-year follow-up from MammoSite. We have submitted that data for presentation at the American Society of Breast Surgery meeting that is in May of 2007. We have not yet heard back as to whether or not it has been accepted. We would expect that it would be. But that would be the first public review of the data.

Fantastic. Thank you.

Wade King, Montgomery & Co.

Thanks for the detail. Given the imaging business is becoming a larger part of your overall business, could you just give us any updates that exist on the timeline associated with your dispute with Tri-Path on intellectual property? Is that something that you expect to have any significant events in 2007?

The litigation with Tri-Path -- there was a subject of a hearing in earlier -- late summer, early fall that we expect to have some written response from the court. But beyond that, we expect to have the -- if there is a trial to be next year sometime.

But nothing earlier?

Nothing really new in the litigation other than the normal process, Wade.

And the written response from the court, you expect could be later this year?

It's hard to say.

And your international figures, did that include any international imager placements?

Yes, it did. We are seeing actually great -- significant interest in the imaging system across the -- on a worldwide basis -- both in Europe, Asia as well as Australia. So we see that product opportunity significantly outside the United States.

And so the 30 imagers shipped -- I believe you said that was in the U.S. So if that is the case would you provide the same number internationally or no?

Wade, you're correct, the 30 is U.S. only. We don't break out the international number but we did have some in the third quarter.

And would you characterize the interest internationally as primarily from smaller labs consistent with your recent efforts in the U.S. to expand beyond LabCorp, etc.?

I would say it's actually both. Both large labs in our Asia market as well as smaller labs in Europe as well as large labs in Europe. So we are seeing great interest of the product across a diverse group of customers.

I know that you may not wish to comment on this, but it would seem with Quest's recent issue with United HealthCare and being removed as a preferred provider there and with 7% of their test volume/revenue going away in that regard, that may create a better opportunity for Cytyc to do a deal with Quest on imaging.

Is that a reasonable assessment, folks? And is there any angle to it that you could present for the investment community that would have us assume anything as relates to whether an imaging contract with Quest might be more likely following that recent event?

This is Tim. It is really probably a better question for Quest in terms of their interest. Not much has changed from the last time we talked about Quest in terms of -- where their position on the imager really has not changed. We know their volumes have been very stable for the past five quarters, we continue with the pricing agreement that is in place. From a day-to-day operational perspective, it is certainly business as usual with them. So it is probably a better question for them related to the imager.

To add to that, Wade, I think if you look at the abstracts that are being presented at the American Society of Cytology meeting here in early November, I am just delighted with the number of abstracts that show increased detection of glandular disease, increased detection of high grade lesions. There are 12 abstracts being presented, two platform presentations, and as Tony mentioned, 40 total abstracts subject to the ThinPrep business. So we are delighted with the performance of the product in the field.

And just lastly, given the number of moving pieces associated with the imaging business now, large customers, small customers, a variety of metrics that you discussed previously, certainly for the Analyst Day, I think breaking that out in significantly more detail or as much detail as competitively you are comfortable with would be a useful thing for all.

Duly noted.

Peter Lawson, Thomas Weisel Partners.

For organic growth, what was that in the quarter?

Organic growth? It was completely organic growth. It was $150 million last quarter, $154.3 million this quarter.

So no effect from currency?

This quarter, it was immaterial -- small.

I missed it. What was the growth in Europe? What did you say that was?

We said it was -- we did not say Europe. We said international in total -- 39% on a year-over-year basis.

I did give Europe at 41% growth -- year-over-year growth rate.

And then for the stock buyback, how much is left in that?

The Board authorized $200 million last November and we have invested half of that, $100 million. So there is $100 million remaining.

Any used during this quarter?

It was $21.5 million this quarter. That brought us up to $100 million year to date.

And then just finally on overseas expansion, how is that going and how many sales force do you have?

We've got about 120 people on the international side that are quota carrying salespeople.

And where is the expansion mostly going?

I would say we are expanding across the globe. Europe is -- the UK, as Tim mentioned, has made great conversion progress in the nice committee change of the National Health Service. We see great opportunities in Germany, and France, as we discussed last quarter -- reimbursement in France we expect to happen in the first half of next year. But we see great opportunities for the ThinPrep business outside the U.S.

Bruce Cranna, Leerink Swann.

Dan, can you just talk a little bit about NovaSure and remind us in terms of DTC -- is it still two markets? Or have we expanded the number of markets you are in DTC wise?

Yes, we talked about this on the last call. Essentially, we are very active in all markets with what we describe as DTC, which is a combination of very active public relations program combined with very heavy advertising on the Internet. We've got a number of websites that are extremely active with lots of women coming in for additional information and finding a physician.

The direct to consumer television advertising that we conducted back last year concluded and we have not resumed that. That took place in two markets. Frankly, we have not seen the ROI that we were hoping to see from that effort.

But overall, our consumer efforts are -- we are spending a significant amount of our resources on consumer advertising related to public relations and to an Internet strategy.

But no plan to sort of ramp up the TV part of that?

No, we just didn't see the ROI that we expect to see and would need to see in order to make a more significant investment in that area.

And I missed it -- would you or would you not give us some sense as to an ASP on the Helica instrument?

The current pricing in the European market is in the roughly $500 per procedure range for the disposal device. I think the instrument platform itself is to be determined by us. We don't have our arms around the total cost related to that product yet.

Any chance that you would be using the same RF controller as the NovaSure instrument?

Unlikely, I would say, at this point.

And then Tony, just on Cellient -- I'm a little bit unclear exactly what we have here. Is this just for cytology samples, so for spin-downs or are you actually getting into tissue?

It is primarily cytology. It is cytology samples as opposed to biopsies and large tissue.

So today the labs would take the leftover sample from either a gynecological sample in the case of the ThinPrep Pap Test, or a non gynecological sample, flow of fluid, etc., and would spin that down and create a cell pellet that would be then used in the Cellient system to create a histology cell block product, that then would be cut with a microtome.

So you are sticking to cytology?

Correct.

And then, I guess this question is for Tim. But I just -- I am doing the math, I was doing the math on the image -- TIS, imaging per slide, which I had it up a little bit sequentially, which I think you indicated was the case. So I'm wondering just for modeling purposes as maybe the small lab number goes up, is that sort of -- let's say I am at 450 or whatever this quarter. Should we be thinking about that being a stable way to model that revenue stream going forward? Or might it continue to improve next quarter sequentially?

Bruce, I think I would probably keep it flat. Again, it is offset by continued ramp-up of LabCorp.

So maybe those two are in balance now or the effect is in balance?

Yes, I think that is fair.

And last question for Tony. I missed the ThinPrep instrument. I think you said -- 40 or something in the U.S. Was that the number? And what was the O-U.S. number?

They had 31 ThinPrep processing instruments in the U.S. in the third quarter.

31 U.S. And O-U.S. was what?

(multiple speakers) 55 in the quarter.

Ed Shenkan, Needham & Co.

As far as how many NovaSure controllers in the United States you placed, could you give us a number please?

There was 207 placed during the quarter.

And that is a significant increase. Do you expect it to continue? Was it driven by doctor offices or was it hospitals? That is more than we had expected.

Yes, I guess I would not expect that rate to continue. I think it would probably -- the rate is probably going to fall back to our historical rate, which was more in the 150 range per quarter. We basically took some effort this quarter to clean up some evaluation units that we had out there.

So can you tell us what cleanup of evaluation units means?

Converting those to sales.

If they had to purchase it, they might have been previously borrowing it?

Evaluating.

Evaluating it. And the gross margin was a little lower than I had expected. And it was down the second quarter in a row. Could you give us expectations going forward?

Ed, we said approximately 78% for Q4. And in the prepared comments, we talked about a couple of reasons. In large part, about a third of the change from prior year is really related to product mix. More international revenue, great quarter in revenue. It does carry a lower margin. We had stronger instrument sales in international this quarter; that drives the margin down a little bit. Again, we think that is good news because you get the platform out there, sell more disposables in a future period. The imager continues to do very well. It does have a lower margin than our high gross margin disposable business.

Production volumes this quarter in our surgical products were down. That just means a little more of the overhead gets absorbed into the P&L in the current period. And then FAS 123 hits you a little bit compared to last year. But the 78% is --.

Last question -- for future thoughts on acquisitions, should we think of you as more constraining it to the OB-GYN and lab space? Or should we think about future acquisitions broader? And maybe you could give us some thoughts on what areas would be of most interest to you if you go broader.

Well, I think as you look at our P&L, obviously we have a significant investment in an OB-GYN sales force, both in the office and in the surgical center. So products that would leverage that. Sales force as well as the laboratory sales force is the second opportunity for us. And then we have a significant resource in breast sales with our MammoSite product. So I would say any one of those three different sales forces would make sense.

So we should be surprised if you were to do something in cardiac, orthopedics or anything outside of the ones you mentioned.

Well, those two in particular, I would be surprised.

Ryan Rauch, Jefferies & Co.

Congratulations on a good quarter. Just two quick questions. One, have you seen anything change on the competitive landscape with respect to ThinPrep as far as -- is Monogyn doing anything to speak of? And then do you think Becton's acquisition of Tri-Path will change the landscape at all? And then I just have a quick follow-up.

I haven't really seen much if anything, on Monogyn at all during the quarter. So no change in status there. And with respect to Becton, Dickinson's acquisition of Tri-Path, it's really not an unexpected development since B.D. had been working with Tri-Path since 2001 on cancer markers. But we see the dynamics in the cervical cancer screen side of the business basically staying as is.

And then can you just walk through your respective sales forces? And I'm sorry if I missed that earlier.

Ryan, on the PMR side, these are professional medical reps that call on the OB-GYN historically selling ThinPrep now also selling NovaSure, that is about 100. Territory managers -- these are all U.S. numbers. Territory managers which call on the OB-GYN in the surgical center, selling NovaSure, it's about 100.

And on the MammoSite side, the folks calling on the breast surgeons, the oncologists, that is about 50. And then on the account executive side -- and these are the folks that are calling on the laboratories, selling the imager, that number is approximately 40. Again, all U.S. numbers.

Thanks, and congratulations once again.

Jayson Bedford, Raymond James.

Just a few questions. Tim, just getting back to the gross margin, looking out at quarter-on-quarter here sequentially, it was down x options, about 70 basis points. It looked like NovaSure pricing was higher, imager pricing was higher. Is it just primarily kind of weighting O-U.S.?

Compared to last quarter, it really is two things. If you remember last quarter, we talked about a license deal that we put in place that had enormous gross margins. So that was in Q2, not in Q3. So that explains for a little bit of the difference. And then the rest of it really is the product mix -- the imager in international compared to what we had last quarter.

And so there was no license revenue this quarter?

Correct.

No.

Okay. And then just on the sales and marketing line, you achieved a tremendous amount of leverage there, it appears, under 24% of total sales, which is the lowest I think in many years. Just wondering -- did you decrease the size of the sales force? Or what's happening there? And is that a sustainable metric going forward?

We are fully ramped with our domestic sales force right now. And the numbers were down from Q2. Q2 is generally a stronger investment period, if you will, with events like ACOG and a better time for various marketing campaigns. So historically we see spending a little more money on the marketing side in Q2 as compared to Q3. So that really accounts for the difference.

Can we expect it going forward under 24% of sales?

We really don't break out that level of detail in our guidance. We are comfortable with the operating margin guidance that we have given.

And then lastly, I guess for Dan, just looking at MammoSite, can you give us any metrics in terms of the number of physicians using the product? Any type of same store sales metrics? I'm just trying to figure out if the growth in MammoSite is coming from existing users or new additions.

We haven't given any of those metrics in the past; I am not prepared to on this call. It is a mix between newly trained physicians and existing users. That's really kind of all the granularity I can give.

I guess just lastly, on Helica, is there established reimbursement or is there an existing code you can fall under?

Yes, there is. There is existing reimbursement for surgical -- for laparoscopic surgery as well as for open surgical procedures to destroy tissue in patients with endometriosis. Reimbursement is available. And has been for quite some time.

Bruce Jackson, Miller Johnson.

You mentioned the number of controllers that were placed in the quarter. What was the revenue associated with those controllers?

We generally don't break that out. But historically, most recently, it has been about a 95% to 5% split; 95% of the revenue for NovaSure comes from the disposable, 5% from the controllers. So that tends to hold true.

And then with the ThinPrep disposable, what was the price change year-over-year?

It was down roughly about a percent. And the large lab mix was higher this quarter as compared to a year ago.

And then with Helica, are you still going to sell that product internationally?

Yes.

Yes.

And I know it was $1 million annualized revenue -- is that for like 2005?

That is their run rate in '06. It will be at about $1 million.

In '06. And theoretically you could increase that?

Well, we hope so.

Tom Kouchoukos, A.G. Edwards.

Just a quick question on Helica also. Looking kind of at your past acquisition criteria, you guys have always focused on best-in-class devices. And I was wondering if you could maybe put in context what you see in this platform that makes it a better device than what is out there on the market today?

Yes. We actually think it performs as well in terms of efficacy but has significant advantages over other products in terms of its ease of use. So I think a much easier to use product.

We also are very impressed with its safety. It is a very accurate way to destroy tissue. And in fact, the tissue surrounding vital organs like the bowel and the bladder are not often treatable by other coagulation and cautery methods. We believe that this product can treat those patients in a safe way. So I think it is a combination of its ease of use as well as its safety in destroying tissue that has adhered to vital organs that make it the best-in-class product.

Could you describe a little bit about maybe what the mechanism of action is behind it?

Yes. It uses radio frequency energy to charge helium gas that creates a helium plume. And that plume is used to destroy the tissue. And we actually are very much in control of the depth of ablation. So that when you're in areas that are particularly tricky, when the endometriosis tissue is, as I said, on bowel or bladder, you have got the ability to control the depth of ablation very precisely.

And then on GliaSite, that's a product you guys really haven't mentioned a lot in the past and kind of thought it was on its way out the door at some point. Given the data that you have and that you seem enthusiastic about -- are you going to pursue this with a little more vigor going forward?

Yes, we are. In our plans for next year, we have some added sales force to support this use. We think this indication is very interesting in that the product not only performs equivalent to today's standard of care, but these patients have their cognitive function preserved for the remainder of their life essentially with GliaSite. So we think there's going to be some increased use. And we are going to support that -- with some minor investments, not a significant step-up but more than we have done in the past.

And who is going to be primarily selling that?

We have a network of distributors and agents throughout the United States as well as a small direct sales force that works with those agents. That is the plan going forward.

And then one last question on the MammoSite product. With the five-year data now out and looking very good, are you going to do any -- I know this probably isn't a direct-to-consumer marketing type product, but do you have any maybe awareness-raising campaigns that are in the works? Or what are you doing to support that data?

We actually think this is a product that will respond to a consumer education and advocacy in a very strong way. We've done a lot of research with patients that have been treated with whole breast and were not given the option of partial breast. And I could tell you, I think there is a great deal of momentum that we can build by educating women, and we will do that next year.

Caroline Corner, Montgomery & Co.

First of all, just to follow up the GliaSite question, have you have any estimates for the size of the market there that you could approach?

Yes, we size the market for single metastatic brain tumors as roughly a $40 million opportunity for GliaSite. And if we add to that the primary brain tumors that GliaSite is already being used for, that adds another $40 to $50 million of opportunity. So essentially this new use in metastatic tumors virtually doubles the opportunity, and that is what has us excited.

And then my other follow-up question, what is the latest metric you have released regarding the cost of the imager -- the cost of the lab? Did you find anything out?

Carolyn, when the imager was first introduced, it was around $200,000. And we have taken about 30% of the cost out. So just under $150,000 now. And again, that is why we can penetrate into the smaller lab market.

And that would be the ASP overall -- just under $150 including the large labs and the small labs?

That is our cost of the imager. And then again, it is on a per usage fee is how we ultimately generate the revenue.

Operator, we would like to take one more question, please.

Ed Shenkan, Needham & Co.

Just wanted to follow up on the cleanup on the NovaSure controllers. When you clean them up, does it include some disposables in the purchase price so you could charge more than usual on the controller? Or was there anything special there? Just trying to get the model to work here.

First of all, I would like to take back the words clean up and not have that become a brand of some kind.

Well, we are in a World Series mode here. So I expected that.

We will, on a regular basis, evaluate systems that we have on an evaluation and try to turn those into sold instruments. And that's what we did during the quarter. There is typically no disposable revenue associated with that.

There are no further questions at this time.

Thank you, operator. I am extremely pleased with our very strong financial performance for the third quarter. These third-quarter results as well as the solid performance across our divisions, the introduction of new products, and the pursuit of selected acquisition opportunities, position us well to meet our growth objectives.

We look forward to growth and expansion as Cytyc continues to offer a diverse mix of best-in-class medical technology focused on cancer and women's health. Thank you for your participation in today's call. Hope to see you at the Investor Day.

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