Hologic Inc (HOLX) 2006 Q4 法說會逐字稿

Greetings ladies and gentlemen and welcome to the Cytyc Corporation fourth-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 presentation. (OPERATOR INSTRUCTIONS). As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Ms. Anne Rivers, Investor Relations Manager of Cytyc Corporation. Thank you, Ms. Rivers, you may begin.

Thank you. Good morning everyone and welcome to Cytyc Corporation's fourth-quarter 2006 conference call. If anyone has not received a copy of the press release issued yesterday, please call The Ruth Group at 646-536-7017 and one will be faxed to you.

The following presentation will include forward-looking statements within the meaning of the federal securities laws, including statements about the Company's expected sales performance, operating results, financial condition and business strategy. These statements are subject to a number of risks and uncertainties, including those detailed in the Company's press release issued yesterday and in its Form 10-K and other filings with the Securities and Exchange Commission that could cause actual results and outcomes to differ materially from those projected in forward-looking statements. Please remember that these statements speak only as of today's date and that you should not place undue reliance on them.

In addition, this presentation contains certain financial information determined by methods other than with Generally Accepted Accounting Principles -- GAAP. Specifically, these non-GAAP measures may exclude 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 Form 8-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 express permission, and your participation implies consent to our taping.

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

Thank you, Anne. Good morning ladies and gentlemen. I would like to welcome you to our teleconference to report on the performance of the Company for the fourth quarter and full year 2006. Joining me on the call today is Tim Adams, our Chief Financial Officer.

With our new four-division corporate structure, we're introducing a new format for our quarterly earnings conference calls. Tim and I will host these quarterly conference calls with occasional contributions from our division presidents. After over 10 years as a public company and 40 conference calls, Dan Levangie finally believes that I'm ready to take off the training wheels and fly solo on these conference calls.

During this morning's call, I will provide an overview of the business, and then I will turn the call over to Tim for more detail on our strong financial performance. Before I open up the call for questions, I will provide an overview of the performance of our three operating divisions -- Surgical, Diagnostics and International.

2006 was another tremendous year for the Company. During the year, we increased revenue by $100 million to $608.3 million, representing a 20% growth over 2005. Revenue for the fourth quarter reached a record of $163.1 million, an 18% increase over the same period last year. It is noteworthy that this impressive growth was all organic or generated by our existing product lines.

Our domestic Diagnostic Products continues to perform strongly. We shipped over 9.1 [million] (sic -- see press release) ThinPrep Pap Tests in the U.S. in Q4, demonstrating the strong foundation the ThinPrep Pap Test provides to our business. In addition, the continued adoption of the ThinPrep Imaging System provided the 34% increase in revenue, compared to Q4, 2005. In Q4, approximately 40% of all ThinPrep slides were imaged.

Our domestic Surgical Products continued to drive top-line growth with revenue growing to $58.3 million, a 36% increase compared to the same period a year ago and up 43% year-over-year. NovaSure continues to distance itself from the competition and remains the undisputed market leader for second-generation endometrial ablation products.

Our International revenue of $19.6 million grew an impressive 32% in Q4 compared to Q4 of 2005. For the full year, International revenue was up almost 30% to $68.3 million. The ThinPrep System continues to make significant gains in Europe, Asia and Canada, and Surgical Products revenues for the full year of 2006 were up 114% over 2005, with strong growth in Europe and Canada.

I would like to now turn the call over to Tim for a review of our outstanding financial performance for Q4 and 2006. Tim?

Thank you, Pat, and good morning everyone. My remarks today will compare the financial results of the fourth quarter and full year 2006 with the results of the fourth quarter and full year 2005, along with some selected comparisons to the third quarter of 2006. I will begin today by discussing our financial performance for the fourth quarter, and then I will discuss our full-year 2006 results.

Total worldwide revenue for the fourth quarter of 2006 was $163.1 million, which represents an 18% increase from the fourth quarter of 2005. Revenue from each of our divisions is as follows -- $58.3 million from the Domestic Surgical Products division, $85.2 million from the Domestic Diagnostics Products division and $19.6 million from the International division. The $58.3 million Domestic Surgical Products revenue represents 36% of total Company revenue and a 36% growth over the same period in 2005, and was comprised of $50.2 million from sales of NovaSure products and $7.4 million of revenue from MammoSite. This represents an increase of 37% and 32% for NovaSure and MammoSite, respectively, as compared to the same period last year. The $85.2 million in revenue from the Domestic Diagnostics division was comprised of $61.4 million from sales of the ThinPrep Pap Test, $17.6 million of revenue from the ThinPrep Imaging System and $6.2 million of other revenue from sales of instruments and non-GYN tests.

The growth in our Domestic Diagnostics Products division was driven by a 34% year-over-year increase from the ThinPrep Imaging System. In Q4, approximately 40% of all ThinPrep Pap Tests were image, as compared to 30% in Q4 of last year. During the quarter, we shipped 28 Imagers in the U.S. market, bringing the total domestic shipment since the inception of the Imager program to 417 units. For Q4 of 2006, the average annual revenue per Imager was approximately $194,000, which is consistent with the amount reported last quarter.

Revenue from our International division was $19.6 million for the fourth quarter, which increased by $4.8 million, or approximately 32%, compared to Q4 of 2005, and represents a 14% sequential growth over Q3 of this year. This was a great quarter for our International business as we saw growth in nearly every market where we do business. This growth was driven primarily by the continued success and market adoption of the ThinPrep Pap Test.

Our results for Q4 of 2006 include the non-cash stock-based compensation expense associated with FAS 123 of approximately $4.1 million. This resulted in a $0.02 decrease to Q4 2006 diluted earnings per share. In order to aid in comparing the true operating results on a year-over-year basis, I will break out the results associated with FAS 123 for 2006 when discussing gross margin percentage, operating expenses and earnings-per-share amounts.

The overall Company gross margin percentage for Q4 was approximately 78% compared to the approximate 79% reported for the fourth quarter of 2005. Along with the impact of FAS 123, this change in margin percentage is primarily attributed to product mix which was driven by the growth in our International and Imager businesses. Total Company operating expenses during the fourth quarter were $74.8 million as compared to $56.2 million in the fourth quarter of 2005. This increase of $18.6 million included FAS 123 expenses of $4.1 million, $3.4 million of expenses related to division systems transaction and $2.9 million of expenses associated with the decision to relocate the Mountain View, California operations to our other facilities in Massachusetts and Costa Rica. Therefore, if you exclude these three items, the comparable increase in operating expenses on a year-over-year basis is approximately $8.3 million. The majority of this increase was due to the growth in our 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 our information systems infrastructure to support Cytyc's revenue growth. Our reported income from operations was $52 million, and if you exclude the previously mentioned expenses, income from operations was 38% of revenue, which is consistent with Q4 of last year.

Reported fourth quarter 2006 net income was $42.4 million, or $0.35 per diluted share, compared to net income of $33.4 million, or $0.27 per diluted share for Q4 of 2005. This represents an increase of 29% in diluted earnings per share. During the quarter, we completed various state tax audits and recorded an additional R&D tax credit, which together resulted in a reported income tax rate of 35% for the quarter, compared to 36.5% for the fourth quarter of 2005.

Next, I would like to take a few minutes to discuss our results for the full year 2006. Total Company revenue for 2006 was $608.3 million, which represents a $100 million, or 20%, increase compared to reported revenue for 2005. Revenue from each of our divisions is as follows -- $206 million from the Domestic Surgical Products division, $334 million from the Domestic Diagnostics Products division and $68.3 million from the International division. Revenue from our Surgical Products division represented 34% of total Company revenue and increased 43% over 2005. The Surgical Products revenue was comprised of $175 million from sales of NovaSure products, representing a 60% increase over last year, and $28 million of revenue from sales of MammoSite, representing a 32% increase over last year. Total revenue from the Diagnostic Products division was $334 million, which is comprised of $244.5 million from sales of the ThinPrep Pap Test, $62.9 million of revenue from the ThinPrep Imaging System and $26.5 million of other revenue, primarily from the sales of instruments and non-GYN test.

Revenue from our ThinPrep Imaging System grew 51% over 2005. Revenue from the International division for 2006 was $68.3 million, or 11% of total Company revenue, which represents a 29% increase over 2005. As you can see, our three growth drivers -- Cytyc Surgical Products, the ThinPrep Imaging System and our International business -- performed very well during 2006 and continued to contribute to our revenue growth and diversification strategy which positions us for continued growth into 2007.

Reported 2006 net income was $139.5 million, or $1.16 per diluted share, compared to $113.5 million, or $0.94, for 2005, representing a 24% increase and diluted earnings per share. The effective tax rate for 2006 was 35%, which reflects the positive results from the completion of various tax audits during the year.

Next, I would like to take a minute to discuss Q1 2007 guidance. For the first quarter of this year, we expect revenue to be in the range of $163 million to $166 million and diluted earnings per share to be in the range of $0.30 to $0.32. We expect operating margin to be approximately 34%. This diluted earnings per share and operating margin guidance include additional costs related to the relocation of our Mountain View operations of approximately $0.02 during the quarter. For the full year 2007, we reconfirmed the guidance we shared with you in December. We expect total Company revenue for 2007 to be in the range of $690 million to $710 million and diluted earnings per share diluted to be in the range of $1.30 to $1.37. We expect our effective tax rate for 2007 to be in the range of 35% to 36%.

Now moving to the balance sheet. Our cash balance as of December 31, 2006 was $298 million, and we again experienced another strong year as we generated $174 million in cash from operations during 2006. Additionally during the year, we made two significant investments. The first was the $21 million earnout payment for Proxima Therapeutics and the second was the $108 million repurchase of our common stock. Additionally, during January of 2007, we repurchased an additional $17 million of our common stock. After these significant investments in 2006, we ended the year with a very strong cash position. Days sales outstanding of 52 days at the end of the fourth quarter was an improvement over the 53 days reported at the end of the third quarter. Inventory turnover was five times as of the end of Q4 2006, which was consistent with Q3 2006. As you can see, our balance sheet 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 back over to Pat.

Thanks, Tim. I would like to now provide highlights of our three operating divisions.

First of all, the Surgical Products division had an outstanding quarter and a great year. NovaSure performance was particularly strong during the quarter with just under 50,000 NovaSure disposable devices sold and 211 NovaSure RF controllers placed in the field. For the total year 2006, more than 174,000 women were treated with NovaSure and nearly 700 RF controllers were placed. We continue to see growth in the in-office use of NovaSure and believe that the convenience of this approach, combined with attractive reimbursement, will continue to cause more and more physicians to perform NovaSure in their office. We are encouraged that CMS has recently decided to provide adequate reimbursement for NovaSure in ambulatory surgical centers with an increase of over $700 to a reimbursement rate of about $1340. We believe that this will lead to increased use of NovaSure in these centers across the country.

MammoSite sales were also strong for the quarter, up 32% versus Q4 of last year. Nearly 10,000 women were treated with MammoSite during 2006, so we're just beginning to gain traction in this market, which we estimate to be 125,000 eligible patients per year. We believe that the increased evidence and effectiveness of MammoSite procedure in the form of long-term follow-up data is essential to build the market for partial breast radiation and MammoSite. I'm pleased to report that all patients that were enrolled in the pivotal MammoSite FDA trial have now been followed for five years and the results are fantastic. In these patients, there have been no recurring tumors, zero. The five-year data will be presented this spring at the annual clinical meeting of the American Society of Breast Surgeons and will be likely published shortly thereafter. We believe that this will add momentum to our efforts to establish MammoSite as the standard of care in treating early-stage breast cancer.

GliaSite revenue for the quarter and the year were essentially the same as a year ago. As you know, we have put very little commercial effort into promoting the use of GliaSite in treating brain tumors. However, there's a core group of GliaSite users who really believe in this technology and recently published data describing the use of GliaSite in treating patients with metastatic brain tumors and the support of a loyal group of GliaSite physicians has convinced us to increase our commercial efforts in this area. We're adding sales resources in key locations across the United States and believe that [GliaSite] will become more meaningful to our overall results by the second half of 2007. All costs is as they with this buildup are included in our current guidance.

Overall, we're very pleased with Cytyc's Surgical Products results for 2006 and believe that we are well poised for another outstanding year of growth in 2007. NovaSure continues to increase its market share lead in this rapidly-growing market and we continue to raise awareness of the this desirable treatment option among the silent sufferers. The MammoSite sales team is fully operational and will be aggressively marketing the results of our five-year follow-up data, and GliaSite will begin to play a role in our growth as revenue begins to build during the second half of this year.

The Diagnostics division had a very strong fourth quarter and ended the full year with solid growth. In Q4, we shipped over 9.1 million ThinPrep Pap Tests, up from 9 million in Q3. We shipped a total of 36 million tests for the full year, showing an increase of more than 300,000 tests over 2005. Large labs represent 43% of the tests in 2006, the same level as 2005. We view the ThinPrep Pap Test as our Energizer bunny. It just keeps going and going, providing profits and cash flow to fuel our growth.

Our Imager business continues on its upward trajectory. We shipped 127 Imagers for the full-year 2006, or over 30 per quarter on average and we ended the year with 395 revenue-generating units, up from 269 at the end of 2005. The percent of slides imaged continues to increase quarter-over-quarter as we imaged 40% of slides in Q4 2006 compared to 30% in Q4 of 2005.

During the quarter, we continued to make great progress with LabCorp. LabCorp imaged close to 60% of ThinPrep slides in Q4 and grew Imager revenue each quarter throughout 2006. LabCorp continues to see the ThinPrep Imaging System as one of its key growth initiatives, and given the rate of conversion, it's clear that more and more LabCorp physicians realize the recognize the clinical benefits of our Pap screening technology advancement.

We remain on track for the commercial launch of the new Cellient Automated Cell Block system in 2007. Cellient, as you know, is a fully automated system for preparing cell blocks from cells or tissue samples to be processed for histological examination and will be sold to our existing lab customers by our existing laboratory sales force. We introduced this instrument to our lab customers at the Annual Scientific Meeting of the American Society of Cytopathology in Toronto this past November, and we generated a high level of interest. We currently have a number of beta units under evaluation at customers in the U.S. and Europe. We began our marketing activities with customers and continue to expect the commercial launch in the second half of 2007.

We were especially pleased with the tremendous performance of our International division this quarter. We achieved this record performance through strong diagnostics growth around the world and rapid growth of our surgical products in Europe and Canada. For the quarter and the year, gross margins were impacted by very strong instrument placements across the world that will support and accelerate our growing disposable business.

Growth in our International Diagnostics business was led by continued adoption of ThinPrep System in the UK, the Benelux countries, Spain, Portugal, Germany, Canada and other countries and Asia. In the UK, we're seeing steady adoption of liquid-based cytology across the national health services that will continue to contribute significantly to our volume increase.

In other parts of Europe, we see growth in equipment sales and test volumes, and in Canada, we secured the cervical cancer screening business of a major province. We also had great success in placing ThinPrep Systems -- Imaging Systems throughout the world as during the year, we shipped 17 Imagers, many of which were the first in their markets. Our International Surgical Products business grew by over 100% for the full year versus 2005, led by very strong growth in our NovaSure product line in several countries.

The UK and Canada drove the biggest overall NovaSure volumes, but we also saw robust growth in the Benelux countries, Australia and Germany. Doctors around the world are recognizing the simplicity and effectiveness of NovaSure procedure, and with improved reimbursement for example in Australia where adoption has been increasing rapidly.

Overall, we had a very strong quarter and the year in the International division and will continue to grow rapidly while investing to build the capabilities that will support and sustain growth into the future.

As we look forward into 2007, we have four key growth objectives. First, we will grow sales of our existing products or organic products by over $100 million year-over-year; two, maintaining our base ThinPrep business and make the ThinPrep Imaging System the standard of care in the United States with over 50% of tests imaged and 120 ThinPrep Imager Systems shipped; three, we spectacle to grow our Surgical Products business by 30% year-over-year; and four, to truly become a global company and deliver a 30% year-over-year international growth. I'm very pleased by our performance for 2006 and believe that we are well positioned with our people and our products to deliver spectacular results in 2007.

With that, operator, I would like to now open the call up for questions.

(OPERATOR INSTRUCTIONS). Thom Gunderson, Piper Jaffray.

Can you -- I'm a little out of sorts here and a little lost on the call because Dan's not on, but I will try and make sense of my notes here. I did miss one number. LabCorp was at what percent of imaged at the end of Q4?

60%.

6-0. And they expect to go to, or you expect them to go to what in '07?

I'm not sure what their expectations are, Thom, but I would expect all ThinPrep slides in the future to be imaged.

Okay. And then second, Tim, can you remind us what your current open ability to buy shares is, what has the Board authorized?

Yes, Tom. The board gave us authorization a year ago in November to $200 million, and we have invested $125 million, so there's another $75 million that is available to us.

Okay, great. And then, can we get an update on Japan and how that is going?

Sure, with our lab partner Olympus, we've placed ThinPrep processors in a number of leading laboratories throughout Japan and are working with key gynecologists to drive adoption of the ThinPrep Pap Test. We believe that Japan will grow really over time and we are working to change the fairly old practices that are currently in place in Japan to convince physicians to use the ThinPrep technology. So we're pretty excited about it. I think we need to take a long view in Japan.

And with that long view, Pat, the 30% International is probably ex-Japan, or not much contribution from Japan, is that fair?

It does include Japan, but a small proportion.

Okay, and then finally, just so we can get a sense of what might happen with GliaSite, can you remind us of what Q4, or tell us what Q4 numbers were in '06 numbers?

Yes, Tom. Q4 was approximately $700,000 in revenue and was about $3 million for 2006.

And how many salespeople did you have in Q4?

We had five and we're adding five more.

Five by the end of the quarter?

We had five onboard at the end of Q4 and we're going to add another five going forward.

No, I know, I'm sorry, I didn't make it clear. You're adding another five over the course of the year, or right away?

As soon as we can.

As soon as we can.

That's it, I'll get back in queue, thanks guys.

David Lewis, Morgan Stanley.

Pat, maybe I missed it, but now that your training wheels are coming off, are those being auctioned next quarter, or are you bronzing those and putting them (indiscernible)?

They'll be gold plated and they will be in Dan's office.

Lovely, we will look forward to that in the next tour. A couple of quick ones here this morning. Pat, first of all, just NovaSure growth, this is obviously strong in the quarter. Where did in-office penetration finish at the end of the year? I think you were approaching 5% of procedures being in-office, so where do we end the year, and what's a reasonable expectation for in-office penetration throughout 2007?

It ended a little over 5% at the end of 2006, and I would expect perhaps that to potentially double by the end of this year to perhaps 10%.

Okay, that's very helpful. And then, just looking at ThinPrep, obviously this is one of the stronger quarters we've seen over the last four to six quarters. So that 9.1 million, does that represent sort of quarterly fluctuations, or are we starting to see some sustained ability to kind of maintain at that level for 2007? And I guess, Pat, what I'm driving at is, are you seeing any benefit from either competitive disruptions, either at one of your principal competitors, TriPath; are you seeing any increased activity in the physician's office as a result of HPV campaigns?

I think there is an increased awareness of the need for Pap testing with the HPV vaccine noise that's in the marketplace. I would say that it was over 9.1 billion tests this quarter, and I actually believe that, as I've indicated, I think that we will see potentially increased volumes on the ThinPrep side of the business because of the noise out there with HPV, as well as the Imager being the key differentiator in the marketplace with just a better technology.

Pat, just another question on ThinPrep. As we look forward, HPV can only be processed in the U.S. market obviously with your vial. Gonorrhea and chlamydia testing going from non-amplified to amplified with the changes in molecular approvals last year, we're seeing increased reliance on the ThinPrep vial. Is there a time in the next 12 to 15 months where Cytyc can actually think about pricing increases tied to the ThinPrep vial, given the [trend's] value? If you look over the last three years, the average revenue for a hospital on the ThinPrep vial, or going from old Pap to ThinPrep, has gone from $14 over $70-$75 in just a three- to four-year window. Is pricing increases a possibility looking forward?

Certainly, the value of the vial has increased year-over-year and continues to increase. We do not have any price increases contemplated, but it's something I think about all the time.

Okay. Lastly, just looking at Proxima, it was a little lower than we were expecting here in the fourth quarter. Obviously, we have five-year data which we published in the early part of the year. What sort of expectations do you have for reacceleration in that business due to the five-year data in sort of the back half of the year? And I guess the second question to that would be, are there other obstacles to this market, most notably sort of first-generation device or other things besides data that are constraining growth to a level -- obviously, we were expecting slightly higher expectations for the quarter, as well as for next year.

I think in total, we expect the Surgical Products business to grow at 30% year-over-year, and I think MammoSite will be key component of that. I don't expect there to be a step function in terms of volume at MammoSite. I continue to see a strong growth throughout the year. We have just scratched the surface of this market. We have about 10% of the eligible patients currently using MammoSite, and I can tell you, at our national sales meeting that we had just about a week ago, we had numerous women come describe the benefits of MammoSite, one that had a mastectomy on one breast and then later had MammoSite on her remaining breast, was just enthusiastic about what this technology means for women. And I think we will continue to see strong growth in the MammoSite throughout the year.

Do you think you can trust that growth, Pat, by maintaining the sales force around those 50 or so reps?

I think 50 is good for now.

Okay, thank you very much.

Doug Schenkel, Cowen & Company.

I'm just wondering if you could talk a little bit about what proportion of NovaSure growth is attributable to capturing market share from competitors versus some of the market expansion efforts that you guys have been taking on?

You know, Doug, I think it's hard for us to slice the data in terms of the market share growth versus taking share from competitors. When we acquired Novacept almost four years ago now, it really was more of, the market is growing about 50,000 procedures per year.

If I had to guess, I would probably say somewhere between 50/50 and 70/30.

Okay, thank you. Are some of the developments with [Microcillius], are they factoring into the equation at all?

No, we have not seen any competitive activity at all. In fact, none of them have been used in live patients.

And then regarding Cellient, how is the second half launch of that instrument factored into your '07 guidance?

It's in the Diagnostics division guidance, and it's roughly -- it's a very conservative launch.

And there won't be any additional sales hires required to roll that out?

No, and one of the beautiful things about this product is it's our existing customers and it's existing laboratory sales force, so there's no incremental sales expense.

And jumping around at bit, the transition to liquid-based Paps with the NHS in the UK, where does that stand? Are we in the closing moments of that, and should we see some sort of acceleration there in the first half of '07?

We continue to see adoption across the various regions of the national health service, and I think as you know, all regions in England are required to transition to the LPC by 2008. At the end of 2006, we believe we had converted about 25% of the total UK market and believe we have a total available to us, about 65% to 70%, based upon our current contract. So we're about a quarter converted, and there's about -- and we believe we will ultimately be a 70% market share.

Great, thanks a lot.

Peter Lawson, Thomas Weisel Partners.

This is actually Eric [Criscolo] filling in for Peter Lawson. I just have a couple of questions regarding your expecting stock options in 2007. Did you break out what you think the effect will be, the stock option effect, for 2007?

We have not. It was roughly, and I think if you look in the back of the press release for 2006, it was approximately $0.10 for 2006. We have not broken that out for 2007, but it is included in our guidance for '07.

And, do you also have an expected number of shares outstanding for '07?

We ended December at just over -- the month at December, the weighted for the month was about $124.3 million. We have always guided that that would increase roughly about 500,000-600,000 shares per quarter, which is effectively option exercises. And then as you know, over the past year, we have been active in repurchasing our stock to the tune of $125 million. And we will continue -- part of our perspective on cash is to find the next Novacept that's out there, but also to neutralize the dilution from stock option exercises.

Okay, great. Thank you very much.

Bruce Cranna, Leerink Swann & Company.

A lot of my questions have been answered, so just some odds and ends. First of all, Tim, I missed your comment, I think you made a comment, about G&A in the quarter. Was that -- did you say there was an earnout in there?

There was and earnout that was paid to Proxima Therapeutics of about $21 million, roughly about a year ago, and that goes through purchase accounting. There is one more payment that is due March of this year, and again, that will go through purchase accounting. As it relates to G&A, when you look at the increase, either sequentially or on a year-over-year basis, the biggest piece that is in there is about $3.4 million of expenses associated with the Vision Systems transaction. The gain on those shares shows up down below in the P&L as a separate line -- gain on strategic investments -- but the costs associated with that whole transaction do flow through G&A, and it's included in that $19.2 million of G&A for the quarter.

So, $3.4 million associated with Vision -- is that what you said?

Yes. And what it was, you have to remember, when we started the path with Vision, we were looking to acquire the company. We had engaged lawyers, bankers, accountants to work with us in the course of the M&A process. At the end of the day, we were not successful, and those costs all flow through the P&L in the G&A category.

Okay.

We did have a gain on the sale of the stock, however.

Yes. On a net-net basis, it's approximately a $10 million pre-tax gain. After we sold the stock, paid all the expenses, we came out very positively on the transaction.

No, I understand. I didn't realize you had made so many lawyers so happy.

Well, there's lawyers, bankers, accountants. You have to remember, this was truly a global transaction, much more complicated than just a pure domestic play, and there was a tender offer involved, so a competitive bidding process.

Alright. And then, I'm sorry. Also, on Surgical revenues, I think I must have missed the breakout on the 58.3. Could you run that by me again?

I sure can. NovaSure was $50.2 million for the quarter, MammoSite $7.4 million, and GliaSite, approximately $700,000.

Thanks. And then Pat, just so I'm clear on Cellient in the second half, it sounds like there really aren't any incremental costs associated with that rollout. So we should be thinking of that as really being immediately accretive in the second half?

Pretty close, yes. We have low-single digits, millions of dollars in revenue in the back half of the year, and there are some marketing materials and launch costs. But I think it's going to be basically breakeven to accretive.

And last one for me. Can either one of you just give us shipments in the quarter, U.S., O-U.S., for processors; that is, T2000 and 3000?

Bruce, I can. Give me one minute. For the quarter, T2s, T3s, combined, it was about 50 (indiscernible).

What was the split, if you could?

A couple of T3s, the rest were all T2s.

I'm sorry, between U.S. and O-U.S.?

Those were U.S. numbers, and I do not have the O-U.S. numbers at my fingertips. The numbers I gave you were U.S. only.

Big number, isn't it?

It is a nice number.

Thanks for the detail.

Wade King, Montgomery & Co.

Good morning, congratulations on the quarter. Just two quick questions. First, Tim, the clarification on the shares, the $17 million of shares repurchased, I thought you said in January '07. Is that in fact correct?

Wade, that is correct. What I wanted to do there was just give everyone an update. We put a plan in place for $25 million back in December '06. $8 million was repurchased in December, the rest of it, $17 million, repurchased in January, and so that --.

Is that included in the $125 million purchased to date of the $200 million allowed?

Yes, it is.

Thank you. Lastly, obviously with the closing of the Mountain View facility and some incremental increased operations in Costa Rica associated with that, the tax rate guidance, 35% to 36% for '07, does that take into account the full potential tax benefit associated with your Costa Rica operations, especially with the renewal of the federal tax credits late last year?

Wade, yes it does. The primary driver in the rate coming down in '07 to that 35% to 36% range that I gave is really planning that we have put in place on the state side, and that is where we're seeing probably one of the larger improvements year-over-year. But we do factor in R&D credits, U.S. manufacturing deductions, volume of business in Costa Rica -- that is all part of the tax provision.

So is it impossible, Tim, going forward, given most of the benefit to date has been state-related, that in fact the federal-related tax credits -- so once again, I should clarify -- that was obviously passed early this year, that you will have incremental tax benefits of note based on your Costa Rica operations?

Wade, what's important to remember about the Costa Rica operation, the IP for Novacept was created in the U.S., so it really is taxed in the U.S. at standard federal rates. We have a cost plus relationship with Costa Rica, so a portion of the income is in Costa Rica, but it's a smaller portion of the overall NovaSure component. So, even having a larger presence in Costa Rica will not significantly drive that rate. It really comes down to where the IP has been created, ultimately, is where the taxes follow.

Okay, thank you for the clarification. Thank you very much, folks.

Amit Hazan, CIBC World Markets.

Just a few questions. First of all, I'm wondering, can you give us a comment, any progress on Imager discussions at Quest?

There's really no change in the discussions with Quest.

Has there been progress in discussions?

There has been no discussions related -- no change in Quest relationship at this point.

Okay. And then just with regard to Quest, with United Health having signed the contract with LabCorp back in October I guess it was, did you see any inventory changes at Quest towards the end of the quarter that, even though you had a very good ThinPrep number, were you impacted negatively at all by inventory changes at Quest?

No, no change.

Okay. And then just one question on HPV testing. Internationally, in particular, we saw just a couple of months ago, the Spanish Medical Society has put out a national consensus pertaining to cervical cancer guidelines, and they recommend HPV as the primary screen. I know it's early out there, but can you give us your thoughts on what happens, or -- in Spain in particular, but also other countries that have not yet adopted liquid-based cytology and how you think that might play out?

Yes. I think the press release was from Digene related to Spain. I think if you look at what's going on in Spain, that that is not completely accurate. There has been no change from our understanding of the use of HPV as a primary screen in Spain. We have that from the thought leaders and the pathologists directly in Spain. So we believe it's not true.

Okay, alright. And on NovaSure internationally, I just wonder if you could give us a little bit more color, it seems like it's going strong and could be a very nice potential for you on what you're doing to build infrastructure, a little bit more specifics on which countries you're focusing on and how you're going about whether it's increasing sales force or just driving the opportunity?

Yes. I think the big opportunities for NovaSure are principally in the UK where the National Health Service where there is reimbursement provided for, and we have a relatively large number, about 10 sales people, in the UK focusing on NovaSure. We think it's also a great opportunity in Germany, the Benelux countries, as well as Canada where we have a fairly rapidly growing business in those additional three countries. I would also say, Australia is a great market for us with reimbursement becoming -- was provided in the middle of last year, and our country manager in Australia was one of our -- the leading district manager in the United States for NovaSure, so he is making great progress in the Australia market.

Anything specifically from your side on what you're doing to build out, whether it's a sales force or anything like that?

Well, I think on a country-by-country basis, if we're seeing the opportunity, we are building sales force. The infrastructure itself has not changed, we're just adding additional sales resources in those select countries.

Okay, thanks very much, guys.

Jonathan Block, SunTrust.

Just a couple of real quick ones. I guess first in terms of MammoSite, can you remind us where we are with the American Society of Breast Surgery data? I believe obviously that's a much larger [in]. Has that now matured to three-year data, and if there's an update to the recurrence rate, and if you will be presenting that data?

Currently, there's about 1400 patients in that registry and I think we have about two years of data on that at this point, and that will continue to age, obviously.

Okay, and I guess, the question is, are we going to get an update on a three-year, or is that going to wait until a five-year period?

I would expect that we would get updates on an annual basis as the data continues to mature.

Okay. And in terms of Quest, I'm not going to ask you what's going on there, but just so I understand, hypothetically if Quest were to be brought onboard, is that a situation where we're going to see the penetration rate quickly, or is it a LabCorp; in other words, where the docs need to sign off and it's going to be a little bit more of a step-by-step process?

I think we'll cross that bridge when we come to it.

Okay, so that's to be decided in the negotiation process, is that it?

I think I think it's premature to talk about how Quest may or may not adopt the Imager.

I'm sorry, lastly, you've talked about reimbursement overseas. Can you give us a flavor for the actual profitability there; for example, Australia, which just came on board?

In terms of NovaSure profitability, it's slightly less than the United States. Like the rest of our International businesses, the gross margins run about 80% of our margins in the United States.

Okay, great. Thank you very much.

Jayson Bedford, Raymond James.

I just have a couple of quick questions. Tim, on the Imager revenue, did the number of slides per Imager go down and was offset by a slight increase in ASP if you look at it sequentially?

Jayson, no, the actual number of slides did go up. In Q3, we imaged about 39% of all ThinPreps, and that went up 1 percentage point to the 40% for this quarter. But the actual volume did go up. The AUP went up a little bit as well.

I guess I'm just looking at it on a slides per Imager. Obviously, installed base went up sequentially. Was it just more of a function of getting into smaller labs, and that's what increased the ASP in the quarter?

You would have a higher AUP with the smaller labs, that is correct.

Okay. And then I guess broadly, anything new from a marketing standpoint going forward in '07, so both NovaSure and MammoSite, it seems like you have two promising drivers in in-office in MammoSite, positive -- or in-office use of NovaSure, positive MammoSite clinical data this spring. Just wondering, are there any new initiatives planned for '07?

There's a number of new initiatives planned for '07 on both MammoSite and on NovaSure to capitalize on, in the case of NovaSure, the silent sufferers and trying to get women more aware of the various treatment options. And on MammoSite, we are launching a program that we're calling Voices of MammoSite that is a dedicated group of patients that will be -- can be used -- can be online to talk with patients that would be considering MammoSite as a treatment option. So we have a number of very exciting marketing programs underway on both of those products.

Okay. And where do we stand with -- any thoughts of reigniting the DTC campaign on the NovaSure side?

I would say, we have DTC. It's a different format. It is not television or radio, it's very much web-based, and we've found the web to be the most cost-effective method of reaching consumers, and I would say very excited about what we're doing with -- related to the Web.

Okay, great. Thank you.

(OPERATOR INSTRUCTIONS). Tom Kouchoukos, AG Edwards.

Good morning guys. A couple of quick, most have been answered, but one on the FirstCyte. I haven't heard you guys talk about that in awhile. I'm just wondering if you could provide an update of where the project stands and maybe remind us what the potential revenue opportunity is there?

We are currently the process of a FirstCyte clinical trial. We have enrolled about 1000 patients thus far, and it's a three-year enrollment where these patients who are at high risk for developing breast cancer will have the FirstCyte breast test performed every six months, and then we will follow them for an additional two. We are very encouraged with the -- there have been a number of cancers already in this patient group, which is what -- part of the expected outcome. And FirstCyte, it's a big market opportunity for determining a woman's risk for developing breast cancer. We think it's in excess of a $1.5 billion market. So it's a function of getting through this clinical trial, getting the data and then putting the commercial effort behind it.

Okay. So I know it seems like it's a ways out, but is there any time frame you could provide?

It's probably in the 2010 time frame.

Great. One more kind of macro question on NovaSure. We have heard other companies speak of the fact that you guys don't actively market the office space or the office setting, which -- would it imply to investors that maybe that it's not the best product for the setting. But then, when we go to scientific meetings and look at the journals that are out, there's always very good data showing efficacy, and also the protocols make it look very easy to do. Can you comment on that dynamic, and then maybe talk about whether or not you're going to step up your efforts to market in that setting, or kind of just give your thoughts on how you see the whole dynamic?

I would say it's not totally accurate to say that we don't market to physicians performing this procedure in their offices. In fact, if you look at our revenue on a quarterly basis, we do -- at 5% of our revenue, we're doing more in office than any other competitor out there. So they may talk about having a better product for the office, but in fact, we're doing more in the office than they are. And on a total basis, we are clearly way ahead.

Okay. And then with the ASC, obviously that looks like a pretty attractive opportunity from a reimbursement standpoint. Is that a paradigm shift, or is this just a natural shift from a hospital OR setting, and it just makes it easier or better access for the physicians?

I would say it's the latter. It's better access for the physicians where, heretofore, they would not necessarily have the economic advantage of doing it in the ambulatory surgical centers. Now, reimbursement is not an issue, so it opens that point of service up.

Okay, great. Thanks a lot.

Ed Shenkan, Needham & Company.

Thanks. Pat, quick question on Imager unit expectations for '07. If you could tell us what those might be, and if you could break it out, if possible, U.S. versus international, and then tell us if it's more weighted towards the first half or second half of the year?

I will do U.S. first. We expect to ship another 120 units to 130 units this year. We shipped on average about 30 last year, and I think that's going to continue going forward in the U.S. market. On the international market, we did 17 last year. It's a little bit more difficult to predict, but I think we'll see on the international front perhaps a doubling of that. That's hard to predict.

And do you think it's kind of evenly weighted if you were to guess throughout the year?

Yes, on a quarterly basis, it's very evenly weighted.

And on international gross margins, as we try to model that, as well as total gross margins for the Company, can you just walk us through the moving parts, sort of how you see it, and that will give us an idea of how we could model it for the year as things change?

Yes. I think, overall, International margins really vary from market to market, and on average, are somewhat less than the U.S., primarily due to lower spending levels on health care outside of the United States. I think, on the International side, we are not as -- the mix of instruments versus disposables is more heavily weighted toward the instrumentation than disposables, so you will see I think margins as a result being less there than you're going to have when the disposables kick in with their higher-margin component.

And for overall gross company margins, what are the important moving parts that we should watch for the year?

We talked about approximately 78% gross margin at the investor day back in December. It is a function of product mix, is really the key driver. So as we continue to see growth in Imager in International, they do carry lower margins than this 78% total Company gross margin. And what Pat was also alluding to, we saw it a little bit in Q3 of this year, which is actually a good thing -- the mix of instrumentation was higher on the international side. And again, it's important to get the instrumentation out there so the customers can start buying the disposables from us. Internationally, it is really country-by-country. They're at carious stages of growth and development, and so it's just a little more complicated than what we see in the U.S. market, which is a little more mature.

Thank you.

Operator, we will take one more question.

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

Thank you very much. Overall, I am extremely pleased with our very strong financial performance for the fourth quarter and the full year 2006. These 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 aggressive growth objectives. We look forward to further growth and expansion in the future as we continue to offer a diverse mix of innovative medical technology focused on cancer and women's health.

As we close out another spectacular year of performance, I'd like to acknowledge and thank our dedicated employees around the world for their significant efforts that contributed to our outstanding results in 2006. Thank you for your participation on today's call.

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