Hologic Inc (HOLX) 2007 Q1 法說會逐字稿

Greetings, ladies and gentlemen, and welcome to the Cytyc Corporation first-quarter 2007 earnings conference call. (OPERATOR INSTRUCTIONS). As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host, Ms. Anne Rivers, Investor Relations Manager of Cytyc Corporation.

Thank you. Good morning and welcome to Cytyc Corporation's first-quarter 2007 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 to today's date and that you should not place undue reliance on them.

In addition, the 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 in-process R&D in connection with recent acquisitions. 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 our 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 US 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, and good morning, everyone. I would like to welcome you to our teleconference to report on the Company's first-quarter performance. Joining me on the call today is Tim Adams, our Chief Financial Officer. I will start off with some general remarks about the performance of each of the divisions and then turn the call over to Tim to comment on the specifics of our financial performance.

2007 is off to a great start. I believe the financial performance of the Company was just outstanding. Consistent with our long-term financial objectives, we delivered topline revenue growth of 20% and adjusted earnings per share growth of approximately 30%.

In addition, during the quarter, we completed the strategic acquisitions of both Adeza and Adiana, two excellence fits with our Diagnostics and Surgical Products divisions respectively. Our Diagnostics Products division contributed $89.2 million in revenue for the first quarter of 2007, an 11% increase over Q1 of 2006. Our ThinPrep Pap Test volume remains constant at 9 million tests, and we again placed 30 ThinPrep Imaging Systems during the quarter, two metrics we believe will remain consistent throughout this year.

The big growth story in Diagnostics this quarter is the 38% year-over-year revenue growth of the ThinPrep Imaging System.

During the quarter we announced the signing of new contracts with both LabCorp and Quest that run through the end of 2010. LabCorp's contract is an extension of the existing contract. They are a great partner, and they continue to adopt the Imaging System broadly with more than 60% of their ThinPrep Pap Test imaged in the first quarter. Imaging System revenue from LapCorp nearly doubled from the same period last year.

The Quest contract is actually two contracts, one for the ThinPrep Pap Test and one for the evaluation of the ThinPrep Imaging System. The imager evaluation began in March and will run through the end of July. Undue the agreement Quest will evaluate the imager in four of their laboratory locations. We're working hard to ensure that these evaluations go well. The Imaging System is becoming the standard of care for cervical cancer screening with 46% of the ThinPrep Pap Test imaged during the quarter compared to 40% in Q4 '06 and 33% in Q1 '06.

The acquisition of Adeza Biomedical is a very nice complement to Cytyc's existing Diagnostics business and represents a significant growth opportunity for us. We believe the potential market opportunity for the FullTerm product is well in excess of $500 million worldwide.

Adeza also has a number of products in the development pipeline, including Gestiva, which we expect to be a significant growth driver for us in coming years. We believe this is a $100 million plus worldwide market opportunity.

The addition of Adeza and its fetal fibronectin products at Cytyc opens exciting new opportunities for our Diagnostics business. With the close of the acquisition of Adeza, we are in the process of fully integrating the Adeza products and capabilities into our Diagnostics and International divisions and began selling the FullTerm product under an integrated sales force in the US at the beginning of Q2. Our professional marketing representatives sales force has expanded to 120 representatives selling FullTerm, ThinPrep and NovaSure to OB/GYNs in the office setting.

In support of the PMRs, we have created an additional sales force of 10 specialists focused on maternal fetal medicine doctors and birthing centers that deliver over 5000 babies per year. Our existing laboratory sales force of nearly 50 people have taken on the responsibilities for the Adeza PLI instrument placements with our laboratory customers. We intend to leverage our strong relationship with LabCorp and Quest to unlock the growth potential in the high-risk market.

In total, we now have 220 salespeople promoting FullTerm to the OB/GYNs and laboratories, nearly tripling the effort that Adeza had behind the product. We believe this significant increase in resources and focus will allow us to accelerate growth. Early reports from the field are exciting. Not only are we able to significantly increase the marketing muscle behind this product, we are finding that we are able to build upon our 10 years of experience and credibility with the OB/GYNs to gain instant access and promote FullTerm. The addition of this product simply allows us to continue to do what we do best, sell best-in-class products to OB/GYNs that make a difference in the lives of women.

As you will note in our press release, we have increased revenue guidance for the year to incorporate 45 to $50 million in FullTerm sales for this year. Also, as we have said when we announced the acquisition, we believe this transaction will be breakeven in 2007 and approximately $0.05 accretive to full-year 2008 earnings.

Our Surgical Products division continues to be a growth driver, delivering 33% year-over-year growth and contributing $59.3 million in revenue during the quarter. Q1 was another record as NovaSure continues to be the market leader, and we're beginning to see increased use of this product in the doctor's office with over 8% of revenues coming from the physician's office compared to 5% in Q4 '06. To help in this effort, we recently launched our virtual solution center on the Web containing all the information doctors need to get started with NovaSure in the office setting.

We continue to remain very excited about the MammoSite market opportunity, and the focus on MammoSite remains training and educating doctors. During the quarter MammoSite revenues reached $8 million at 25% year-over-year growth. We implemented Web-based training in January, and to date 375 clinicians have completed training. We expect five-year data on MammoSite to be presented at the upcoming conference of the American Society of Breast Surgeons in May, while we reported that there were no reoccurrences in the FDA clinical trial patient population. Zero.

Now that the five-year data on MammoSite is available, we're expanding our marketing strategy beyond the breast surgeon radiation oncologists to include the breast cancer patient. Earlier this month we introduced a patient information website called Voices of MammoSite, which provides a forum for women who are seeking information about breast cancer treatment. On the website a woman can learn more about her treatment options, as well as read the stories of and interact with women who have had the MammoSite procedure. Our market research indicates that most breast cancer patients will talk with their doctor and actively seek out other breast cancer patients as they try to understand their treatment options. VoicesofMammoSite.com -- we believe this is a very exciting addition to our marketing mix.

Our second acquisition, Adiana, represents another significant growth opportunity for the Company and is a perfect fit for the Surgical Products division as it again leverages our significant sales presence with the OB/GYN. As you know Adiana has developed what we believe is a very innovative hysteroscopic permanent sterilization alternative for women. We will leverage our NovaSure sales force to market it.

If you think about the strategic fit of our NovaSure product and the Adiana product, there simply could not be a better match. Every woman who has the NovaSure procedure must go on some sort of birth control. What could be easier than having the same doctor who performs the NovaSure procedure have the same patient come back later for insertion of the Adiana device in the office. Overall we estimate the US market opportunity for Adiana to be in excess of $1 billion. We're currently in the process of completing the work to submit the two remaining PMA modules to the FDA for approval and hope to get approval for this product in early 2008.

The integration of Adiana is essentially complete.

Overall the International division had an outstanding quarter as we saw Q1 revenue increase 35% over the same quarter in 2006. This performance was led by very strong growth in Europe of over 40% and 23% growth in the rest of the world. To give you some sense of our International footprint, we have an installed base of over 1100 ThinPrep processors, 30 ThinPrep Imaging Systems, and we ship over 2 million tests per quarter. The Diagnostic highlights for the quarter include the win of our five-year contracts with the Pap Testing in Northern Ireland. With this win Cytyc has secured 100% of the Pap Test contracts in both Republic of Ireland and Northern Ireland. We have also converted a major laboratory system in Canada to the ThinPrep Imaging System during the quarter and secured major competitive takeaways in the Benelux countries during the first quarter.

Growth in the Asia Pacific region was led by large volumes of processing equipment placements largely in the Greater China regions. In Latin America several of the largest laboratories in Mexico and Brazil have begun implementing the ThinPrep system. On the Surgical Products front, we continue to see strong growth with the NovaSure device in several key markets, including the UK, Canada, the Netherlands, Germany and Australia. This represents impressive growth versus the competition since our launch just over two years ago. Year-over-year International NovaSure sales have more than doubled.

In addition, we are very excited about unlocking the opportunity for the FullTerm in International markets since Adeza had little International sales presence. Overall the first quarter of 2007 represents strong performance across all divisions, and we are very excited about the Adeza and Adiana acquisitions, which further diversify our business.

I would like to now turn the call over to Tim Adams for more details of our financial performance.

Thank you, Pat, and good morning, everyone. As Pat mentioned, we got off to a great start in 2007. Overall first-quarter 2007 revenue increased 20% to $168.9 million over the first quarter of 2006, and after excluding the charge for in-process R&D, adjusted diluted earnings per share of $0.32 was up more than 30% over the same period last year. In order to provide you with a little color, our Surgical Products divisions posted revenue of $59.3 million, a 33% increase over Q1 of 2006. Within that division, revenue from our NovaSure product grew to $50.6 million, while revenue from MammoSite grew to $8 million, representing a 35% and 25% increase respectively over the first quarter of 2006.

Our Diagnostics division had a very strong quarter, and we are very pleased with the success of the ThinPrep franchise. Revenue for the Diagnostic division posted an 11% increase over the first quarter of last year to $89.2 million. The ThinPrep Pap Test continues to be the market leader, and again this quarter we are seeing new revenue growth from the ThinPrep Imaging System.

In Q1 we shipped 9 million ThinPrep Pap Tests and generated $19.1 million in imager up-charge revenue, an increase of 38% over Q1 of last year. During the quarter 46% of all ThinPrep slides were imaged, showing an increasing trend in conversion and up from the 40% image slides in Q4. We shipped 30 new imagers in the quarter, bringing the total domestic shipment since the inception of the imager program to 447 units.

In addition, sales of the FullTerm test contributed approximately $3.6 million, which represents the two weeks that Cytyc owned over 50% of Adeza during the first quarter.

Overall revenue from our International division was $20.4 million, representing a 35% increase over the first quarter of 2006. And, as Pat mentioned, we saw continued growth in all of the International markets. During the quarter we shipped a total of 74 ThinPrep processors outside the US. These new systems were shipped largely into Canada and to China and broadly across Europe, bringing our total International installed base to over 1100 systems. Historically we have reported the non-cash amortization of intangibles from acquired companies in R&D costs. With the closing of the Adeza acquisition and the discontinuance of two early stage R&D projects, we will now record the majority of this amortization in cost of sales.

As a result of this change, total Company gross margin for the quarter was 75%. Gross margin prior to the Q1 '07 change would have been 77% for the quarter as compared to 79% gross margin reported in Q1 of 2006. The gross margin this quarter reflects the product mix due to the strong International sales, which generally carry a lower margin than our US sales and the costs associated with the closing of our Mountain View facility, which we discussed on the Q4 earnings call.

The reported net loss of $51.2 million, or a loss of $0.45 per share, includes the $89.5 million in-process R&D write-off associated with the acquisitions of Adeza and Adiana. First-quarter 2007 adjusted net income, excluding this in-process R&D write-off, was $38.3 million or $0.32 per diluted share as compared to $29.4 million or $0.24 per diluted share in the same period last year.

During the quarter we successfully completed various state and local income tax audits, which resulted in a reported income tax rate of 33.4% for the quarter. We continue to expect the effective tax for the full year of 2007 to be in the range of 35 to 36%.

As you are aware, we recently filed a report with the Securities and Exchange Commission concerning the need to adjust the form of accounting for the exercising of certain employee stock options that were outstanding during 1996 through 2002 and to restate our financial statement.

As noted in our 8-K, this restatement has no impact on our P&L for the past three fiscal years. This restatement is expected to be completed this quarter, and we will file a 10-KA with a full set of financial statements, including the balance sheet and statement of cash flows.

In light of the successful completion of the Adeza and Adiana acquisitions, we are updating our full year 2007 revenue guidance to include the expected sales of the FullTerm product. We expect full-year 2007 revenue to be in the range of 735 to $760 million, which is an increase from the 690 to $710 million range we provided last December. We're reconfirming our full-year 2007 diluted earnings per share guidance, excluding the in-process R&D write-off to be in the range of $1.30 to $1.35.

For the second quarter of this year, we expect total Company revenue to be in the range of 185 to $190 million and our diluted earnings per share to be in the range of $0.29 to $0.32. This Q2 diluted earnings per share guidance includes the financing and integration costs associated with the two acquisitions.

Once again, we have another strong quarter of cash generation as our cash flow from operations was over $55 million during Q1. Our cash balance at the end of the first quarter was $196 million, down from the $298 million at the end of 2006, as a result of the payments made for the two acquisitions. During the quarter we also repurchased another $17 million of our common stock, bringing total stock repurchases to $125 million out of the $200 million authorization we received from the board. Days sales outstanding of 58 days at the end of Q1 increased from the 52 days at the end of Q4, primarily due to be historically higher DSOs for the FullTerm product. Inventory turnover was five times at the end of Q1 and consistent with Q4 of 2006. We are very pleased with our results for the first quarter, and we are on track to continue the strong growth in all of our divisions.

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

Thank you very much. Operator, we would like to now open the call up for questions.

(OPERATOR INSTRUCTIONS). David Lewis, Morgan Stanley.

A few quick questions here, Pat. Just, first of all, you gave us some nice detail on fFN as it relates to Adeza sales force changes. But, as we look kind at what has happened to the sales force this year and heading into next year, you have the imager contract building at Quest, which theoretically should relieve some pressure on your US sales force as you try to maintain share against competitors. In the rationalization of Adeza, you have got multiple new products coming online. So, as you start thinking about your obstetrical detailing force going forward '07, '08, has the sales message changed at all? Are there other structural changes? Obviously the order of products they are probably pushing the OB is changing. So I wonder if you could just give us a little more detail there in terms of a multitude of changes that may be happening in the order of products that you expect them to push given all these changes?

David, there were not really any structural changes in the organization. I think we brought over about 40 salespeople from the Adeza side, which we believe to be the best and brightest of the sales force that they had. And what that allowed us to do was expand into some territories in some of our open territories to end up with 120 OB/GYN sales force size. I think, as we looked forward, we now have the three products that are marketing to the OB/GYN. We're very comfortable with our marketing mix and the training associated with each of those products for the sales force, and this is kind of where we wanted to be. We wanted to have additional products layered into the sales channel of the OB/GYNs.

The only thing we really did different during the quarter was we created a maternal fetal medicine specialist group of about 10 people, and that's about two -- we have got five regions. That is about two sales specialists per region that are calling on the maternal fetal medicine specialists, as well as high-volume birthing centers that do over 5000 births per year. So we are pretty comfortable with where we are and think we've got the right infrastructure and the sales experience and sales expertise to take us into '08 and '09.

Is it safe to assume that the detailing reps to the OB and the office are going to be compensated differently as it relates to how they sell fFN versus ThinPrep on a go-forward basis?

Not really. They are pretty evenly split at the moment. We did give them a little bit goose up there incentive a little bit when we brought on the Adeza product, but the split is pretty much a third, a third, a third.

That is helpful. And then just staying with the sales force idea, International becomes much more interesting over the next two to three years, and though it has become an increasing focus of the Company, we don't spend as much as talking about it. Right now it has principally been ThinPrep, but now we have a situation where three or four products are going to be added both to the EU, as well as the Asian markets in the next one to two years. So what is the point win other products could be larger than ThinPrep? Is that six months away, or are we still 12 to 15 months away from these other products being more substantial than ThinPrep?

I think I think the latter is probably more appropriate. I think it is probably 12 to 18 months away. When we look at the International businesses, large preponderance of the sales thus far are obviously the ThinPrep Pap Test, and we are capitalizing across the globe on that product.

And then secondly, selectively looking at various other products, NovaSure, MammoSite, as well as now the Adeza products in selected markets where the market opportunity is good, we are investing resources to capitalize on those opportunities. And so, for example, UK is a very good market for us for NovaSure Canada. And then we are looking and doing evaluation of the FullTerm product to determine which of the International markets has the highest opportunity for us with that product. So we are being more selective rather -- we're taking the rightful approach as opposed to the shotgun approach.

Okay. And then one quick questions and I will get back in queue. You mentioned last quarter I think 5% NovaSure in-office penetration, potentially 10% by year-end 2007. With 8% in the first quarter, is it safe to assume that 10% is likely to prove conservative?

You could come to that conclusion probably, but I am sticking with my 10% right now.

Okay. Nice quarter. Thank you.

Thom Gunderson, Piper Jaffray.

Just first a clarification. Tim, I thought I heard you say that you are sticking with your earnings guidance of $1.30 to $1.35, including the IPR&D? That would be excluding that I think; isn't it? Did I hear it wrong?

It is excluding the IPR&D, correct.

Okay. I just wanted to make sure on that. Otherwise, here would be kind of a big upside here, wouldn't there?

That would be a material upside.

And then if I compare the midpoint of your guidance change due to FullTerm and compare that to last year's Q2 through Q4, it is slightly more than a 15% increase, which fits with your overall sort of 14 to 16% guidance. But with triple the sales force and International opportunities and just an ordinary growth that you would have expected, plus a pretty strong Q4 and Q1 run-rate, is 15% on the low-end of what we might expect as we are looking at this in next January?

You know, we're not really breaking out a low-end or a high-end as it relates to Adeza. This is the first quarter that we have the product. There's always a little bit of time to ramp up the sales force. I think your numbers are directionally correct. Again, we remain very enthusiastic about what we can do with this product in the hands of our sales force. But this is the first quarter getting out of the gate.

Okay. Is there any update on Gestiva timing, and can you tell us if you have submitted the data that they have requested on the NDA?

There really is not any new information on Adeza. They have been requested to do an animal study that we are in the process of conducting, but that data has not been submitted.

Okay. And is there a timeline that you would expect or can give us on that?

Yes, our expectation would be the second half of next year. That is our assumption.

That you would have final approval?

Correct.

Okay. And then lastly, I think you saw the lab news letter that polled the 190 labs, and they said that maybe Pap Test smears would be up 10% in 2007. Nobody has more pap smear data than Cytyc. What are your thoughts on new increases in pap smears may be due to the media attention that the vaccine has gotten?

My personnel belief is that I think there is upside to the number of paps that are being performed potentially due to the increased awareness of the amount of promotion of either HPV or the HPV vaccine, as well as the tremendous amount of public relations that is being done by Merck or GARDASIL. I think there could be upside on pap testing volume.

Bruce Cranna, Leerink Swann.

Tim, you went kind of quick on the Diagnostic business, the breakout there. Did you say -- so the imager I know is 19.1 and FullTerm was 3.6. Did you give us sort of the non-GYN piece or not?

I did not, but I will go ahead and give that to you. So the other revenue, which includes instruments non-GYN, was $6.3 million. So that will leave you with about $60.2 million for the ThinPrep Pap Test for the quarter.

So, if I back into sort of a $6.75 or $6.70 ASP, am I kind of close there?

Yes, you are in the ballpark.

I know I bring this up every quarter, but I am always curious. If I back into the imager click piece per slide, it seems to be kind of drifts down a little bit every quarter. I'm curious I know we're going through a ramp at LabCorp, etc. Ahead of Quest and what happens there, just with respect to LabCorp now at 40% or something, when does -- in your mind do you have a sense as to when we kind of reach the bottom, if you will, in terms of when LabCorp converts to at some point that on average the click charge stabilizes across your whole business?

You know, it really is a function of customer mix. As you can imagine, larger labs because of volume do have a better price. LabCorp, as you know, has been ramping very nicely. So that drives that number a little bit. We will see where we end up with Quest. Hopefully that changes that number as well for us over time.

Hopefully it changes it which way?

Well, total revenue going up, of course.

Okay. And then I guess the other number -- if I missed it, I am sorry -- but did you or did anyone mention on the NovaSure side the number of generator placements in the quarter and with the total bases in?

We did not mention the number of controllers for the quarter. Let me dig that number out for you, though. Do you have another question while I am --

A little over 300, Tim.

300. Thanks, Pat.

I am sorry, 300; was that the number?

A little bit over that.

Okay. Last question and I will drop. Just anything -- should we be aware of you looking for anything at ACOG this year specific to imager data?

Not specifically on imager data. We're going to have a very large presence at ACOG as we usually do. We're going to be there in full dress whites with all of our products being prominently promoted to the OB/GYNs, imager Adeza, fetal fibronectin, NovaSure, etc. So we will have a major presence.

Peter Lawson, Thomas Weisel Partners.

I wonder if you could run through the International growth again? I missed the numbers on instruments placed.

We said we placed 74 instruments during the quarter, most of those going to China and then broadly across Europe. That brings the total installed base of instruments outside the US to just north of 1100. The revenue growth year-over-year was about 35% for International, so a another great quarter for International.

Okay. So did you see most of the growth coming from Asia as opposed to Europe? What was the split between that International growth?

It was 40% in Europe and 23% in the rest of the world year over year growth.

Okay. And then on the sales synergies, the sales force, are they currently selling all their products, apart from outside that 10 specialists you see?

Yes, the PMRs, the professional medical representatives, of the office-based OB/GYN salesforce, is selling all products -- the ThinPrep Pap Test, the ThinPrep Imaging System, as well as NovaSure and now the FullTerm fetal fibronectin test. So they are marketing all products.

The NovaSure sales force or the folks that are in the surgical center are still principally focused on NovaSure in either the office or the hospital setting.

Okay. Thank you. That was very helpful. And then on the reclassification of the expenses to cost of goods sales, could you talk to that again, and is that a permanent effect?

Yes, it is a permanent effect. So, as you look at the face of the P&L we disclose in the footnotes down below, it was about $3 million that was charged to cost of goods. There was another $40,000 that stays in R&D. Historically we have tried to track this amortization as it relates to various projects and cost of goods. The amount was never material in the past, and you will see that number, $2.5 million, roughly disclosed for Q1 of a year ago. So we put it all into R&D. And what it relates to is the amortization of intangibles from acquired companies.

So historically that was Novacept, Proxima and Pro-Duct. So the product piece will continue to stay down in R&D because we have an ongoing Pro-Duct clinical trial.

During the year -- so what has changed here really was two things. At the beginning of the year, with the closing of the Mountain View facility, we took the decision really to no longer continue pursuing a couple of smaller early stage R&D projects that related to the Novacept and the Proxima technology. That is why it was in R&D historically. Once we decided to discontinue those projects, if you will, it then made sense that this belongs 100% with the exception of the product piece up into cost of goods. And then you layer in on top the Adeza acquisition, which has an amortization of an intangible. The amount becomes a little more material, and we decided to move all of that up into cost of goods.

So that did bring down the gross margin by about two percentage points this quarter, and we expect that to be the same roughly for the rest of the year.

Okay. Thank you so much. That was very helpful.

Caroline Corner, Montgomery Company.

I was wondering if you could comment on the Cellient launch that is expected in the second half of, I believe, this year? Is that fully automated at this point?

You maybe -- there's some static on the line here at the moment. But the Cellient product we currently have in beta site testing, we are in several sites across the United States and in Europe. And we're going through the beta site testing process. We're learning things about things as the instrument design that we need to tweak, but we still feel very good about the Cellient product and expect to bring it out here in the latter part of this year.

Okay. Thanks for that. The initial efforts with Quest in imaging, is there anything you can comment on there regarding the four locations? Are you getting any feedback, and is there anything you can say to that right now?

Yes, I would say we have done a large number of installations across the US in many other laboratories. And this is, as we mentioned in the prepared comments, in four locations. We have started the installation process, and we feel very confident about our abilities to ensure that these imager evaluations are successful. We are working very closely with Quest to ensure that happens.

And then this is for Tim Adams. I missed the DSO number for the quarter. I think you said 52 in the fourth quarter of '06?

Yes, Caroline, it was 58 this quarter as compared to the 52 from the end of the quarter last year. That increase primarily is attributed to the historical run-rate that we saw with Adeza, and getting just under $4 million of Adeza revenue in the last couple of weeks of the quarter drives the overall DSO calculation up. But it is something we pay a lot of attention to. We're not -- there is no concern of any write-offs or reserve levels. So we are fine with all of that.

Amit Hazan, CIBC.

So the first question, I'm actually curious -- maybe I misunderstood -- what was your penetration, imager penetration at LabOne -- I'm sorry LabCorp?

We said over 60% coming out of the quarter.

So I guess the question intuitively is, you were at 59% in Q2 of '06 and then 61% and 60% in Q3 and Q4 of '06. I'm guessing this is more of a percentage gain, and your actual volume of image test has actually gone up. Is that fair?

Yes, I think the way to think about LabCorp is, as the contracts are shifting with some of the insurers moving volume to LabCorp, our denominator is growing. So it's a little bit of a challenge to continue to show increased penetration at LabCorp because the denominator just keeps moving up on us.

And would that mean then that your Pap Test sold to Quest has probably gone down in the recent quarters?

It has been relatively consistent. We have seen some perhaps shift, but it is hard to quantify that.

Okay. Just a couple of questions on Adiana. You obviously talked a little bit about what sounds like now a delay in when you expect the approval to happen. Can you give us more color on exactly what is happening with these modules? What the modules are that you need to submit? What still needs to be done? Because it certainly was our expectation that most of the data had been aggregated at this point?

Yes, there are -- in fact, our estimation of the approval timeline has not changed. We have always said we expect for this to be approved early next year. We have submitted two modules -- there are four modules that will be submitted with Adiana product, which two more will be submitted this quarter. And then we would -- it is six-month process to go through the FDA process for approval. We still don't know with certainty whether or not there will or won't be a panel. If there is, it would probably be in the October timeframe. Late October timeframe is where one is currently scheduled. But we still believe we are on track to have this product approved early next year.

What are the two modules that will be submitted this quarter?

There are actually module one, which as a device description is already in. Module two is already in; that is the design module. The manufacturing and clinical studies modules have yet to be submitted. That is just finalizing the data, wrapping up the audits at the clinical trial sites, etc., etc.

Okay. And then since your acquisition, we've kind of had a chance to hear what Conceptus had to say about all this. Their comments are essentially that they have got -- in all the devices they have placed, they don't have one device failure that they know of. And it seems to us that you guys have at least one, if not more, device failures with the Adiana device. Can you at least speak to how you plan on marketing that if that is the case in terms of device failure in particular?

Well, there have been device failures in the case of the Conceptus product in the field. They had a number -- I think it is over 60 pregnancies have been reported as a result of infield use. Our marketing approach is going to be to assert that the Adiana device was essentially the same as tubal ligation, and that is the standard at OB/GYNs. That is the bar that you need to meet.

And then secondly, if you think about, as I commented earlier, all women who have a NovaSure procedure need to go on some sort of permanent sterilization. What could be easier than having the same doctor bring the same patient back into his or her office and perform the Adiana procedure two or three weeks later. I just think it is a great fit, and you think of the number procedures we're going to do this year and potentially next year, it is a large number. And we have got the salesforce, the relationships to be able to capitalize on that.

So is it your expectation that most of the procedures will be done in the hospital setting?

No, not -- I believe most of the procedures will likely be done in the physician's office. And that is one of the reasons we are starting to focus on NovaSure in the physician's office to make -- when the Adiana product is approved, we are essentially ready to go.

David Chung, Lehman Brothers.

Thanks for taking my question. I just have two. Did you mention what your estimate was for the number of imagers you wanted to place in the ex US market? And then also were there -- if you could give us an update on the NovaSure elective use trial? Are you still planning a launch in 2010?

Let's do the last question first. The NovaSure elective use, we expect to start a clinical trial later this year. We need to approach the FDA and get their approval and start patient enrollment in Q3 or Q4 of this year.

The question on the Imaging System, domestically we expect to do 30 imagers per quarter. Internationally that is a real wild-card. Right now we have 30 imagers in International markets, but it really is a wide-open market. It is just difficult to give you a prediction with great certainty as to what the run-rate would be there. But we have imagers in most countries across the globe, and as we get more experience, I think we can give you more granularity on that metric.

Jayson Bedford, Raymond James.

Just a few quick questions for you. Did I hear correctly that you placed or sold 300 NovaSure instruments in the quarter?

Controllers, that is correct.

Controllers. Is that all domestic and then what accounts? Because that seems like a pretty sharp acceleration from what you have done in the past.

If you look at the numbers, we said 8% of the sales into the physician's office this quarter versus 5%. We had a focus on in-office use this quarter, and that is why the number is as large as it is.

Okay. And then I guess just looking at your guidance to piggyback on an earlier question, this quarter it looked like in your 18% organic revenue growth, your guidance implies it looks like a deceleration into the midteens. I'm just wondering is there any new competitive changes out there, or what are you seeing out there that could pressure your growth rates?

You know, we're not -- we are really not seeing anything different on the ThinPrep side. As Pat mentioned earlier in the call, the expectation is 9 million tests a quarter. The same on the imaging front. We plan on shipping about 30 imagers a quarter. We have seen that historically for the past couple of years.

NovaSure, MammoSite both had a very nice quarter. We expect that growth to continue as we go into Q2. International did well again this quarter. We expect that to continue. So the core business, before you layer in the two acquisitions, is just fine.

Okay. And then three straight quarters International of 30% plus growth here. What is really driving that? Has it been structural changes within the salesforce, new territories opening? Have you seen your competitors out there lose a little focus?

I would say it is a couple of things. As you probably recall, we have talked about the UK market adoption. They are now in the third year of a five-year rollout. So the UK grew very nicely for us year-over-year and sequentially from the Diagnostic side of the business. We continue to see growth in France. The Benelux countries, as Pat had mentioned, performed very well this quarter. When you look at Greater China compared to a year ago, it performed very well. And that is on the Diagnostics side. And then when we get over to NovaSure, we saw some very exciting growth in NovaSure again. So we're really getting some nice traction with NovaSure in the UK market and in Canada as well, and Benelux this quarter also did very well for us from a NovaSure perspective.

Okay. And then just lastly, a couple of housekeeping. What was stock option expense in the quarter?

I did not break that out separately, and I may not have that at my fingertips for you. I will have to follow up with you off-line if I could.

It was a little over $4 million in the quarter.

Do you have any idea in terms of for '07, you have given us the EPS guidance. I'm just wondering what amortization and stock options will be for the full year.

It should be approximately -- are you talking just stock options alone here?

Well, I'm just trying to parse out the non-cash expenses. So I'm just looking at what do you anticipate all of the amortization as well as stock options for the year?

Okay. So the stock options are going to be roughly 16, $17 million for the year, and the amortization of all of the intangibles that I spoke to earlier will be approximately $20 million for the year. So you are approaching $40 million of those two non-cash items.

I would say $40 million is a good number.

Tom Kouchukos, A.G. Edwards.

Just real quick on the follow-up here with the model. Looking at the gross margin line and the amortization expense that was tied into that, if you exclude that, are you still comfortable with that 78% margin for the year?

Yes, I would say it is probably 77 to 78 for the year would be a good range if you exclude it. If you add it back in, I would call it 75 to 76%.

Okay. Do we expect to see that increase as Adeza becomes more prominent in the mix?

Yes, it does increase throughout the back end of the year.

Okay. Thanks. I wanted to ask -- I know you had talked about a couple of early projects you had discontinued. Are you still going to pursue some of the products that Adeza was working on before they became yours?

Yes, we are. We have gone through a number of the R&D projects that they were working on, and we are going to continue selected projects.

Okay. So the prediction of delivery is still a priority there?

I would rather not go into the specific detail, but we made a priority selection.

Okay. And then I wanted to ask just more conceptually on the M&A front, in the past you have talked and you have kind of given areas you would like to go into. Sterilization was always at the top of the list. And now that you have that, what would you rank up there at the top now that looks interesting out there or would be an interesting area to get into down the road?

Well, I think principally women's health above and below the belt as I would describe it. We have a very large breast salesforce with our MammoSite product to leverage that. Then when you look at the gynecological side, fibroids and urinary stress incontinence is our two areas that are of interest to us.

Great. And then one last more. I'm not sure if you gave these numbers, but on the International numbers, could you give absolute dollars for Diagnostics, NovaSure and MammoSite sales?

The Surgical revenue roughly is about 10% of that total.

And MammoSite is a relatively small number.

Okay. Then GliaSite contribute much in the quarter -- domestically?

It was a smaller number.

A little greater than $0.5 million.

About $700,000 roughly.

Okay. And then the last one, just on ACOG, you had talked a little bit about what you're going to do marketing-wise there. In terms of presentations aside from ThinPrep, we have seen a lot of articles come out on Gestiva and the cost savings that could arise from people adopting that. Is there going to be anything specific on the podium for Gestiva or FullTerm that we should look out for?

There is nothing that was in the works when we acquired Adeza that was in the works at the time for the upcoming ACOG meeting. Obviously under our oversight we would expect next year to be in a position to have much more information available.

Ed Shenkan, Needham.

I was wondering if you could tell us what the Adeza revenues were for the first quarter, and should we expect any integration expenses in the second quarter?

Tim, I think you are probably in a better position to handle that one.

Yes, Adeza revenue was $3.6 million that we reported for the first quarter, and yes, we will have some continued integration expenses in the second quarter. It was really the first week of the quarter of Q2 that we had our national sales meeting where we bring their sales reps and all of our sales reps together to start crosstraining and educating on the various products.

What were total Adeza revenues, not just your part for the quarter. Do you have that?

I don't have it handy. I can get back to you.

And share count going forward, what should we model on a quarterly basis do you expect?

Yes, we ended the average checkout for Q1 was about 125 million shares. We are anticipating the average for Q2 to go up to about 127 million. So it does take a little bit of a jump up. And what is happening there is the stock price has performed very nicely. And when you run through the calculations of the treasury method, you are effectively buying back fewer shares. So it gives you a greater shares outstanding. So we see Q2 roughly in the 127 million range. It goes up a little bit in Q3, about 128, and probably 129 million for the fourth quarter.

And R&D, what would be the expectations going forward? It sort of bounced around here a little bit.

Let me see what we're doing here. I think we show some modest increases in R&D through the balance of the year, and that includes some of the new things coming out of Adeza and Adiana.

Bruce Jackson, RBC Capital Markets.

Could we get the number of NovaSure disposables sold in the quarter?

Bruce, that would be just under 50,000.

Okay. And then with the International sales of NovaSure, was that somewhere around like 2.3, 2.5 million?

It is roughly 10% of the total International fees, but you're in the right ballpark.

And then going back to the gross margins again, as the International sales go up, should we expect that that might have some impact on gross margins going forward?

It certainly can because we generally carry lower margins over on the International market. The instruments carry a lower margin. And, as you saw from this quarter, we had a very strong quarter of shipping the instruments out the door on an International basis. Again, we think that is a very good thing because you are getting the platform out to many customers, and then they start buying disposables.

Okay. And finally with the tax rate guidance, do you foresee that tax rate continuing to 2008, or will there be any changes?

The 35 to 36% that I mentioned for full-year '07 does include the benefit that we saw in Q1. So if there were no benefits in 2008, and it is really hard to predict some of these things, it is probably back up in that 36 range plus or minus.

Operator, we will probably take one more question.

Matthew Scalo, Canaccord Adams.

Good quarter, guys. I just wanted to understand a little bit as far as will you know if a panel is required at the submission of the fourth module, or is there a certain times slot that goes off that you will hear within, say, 30 to 90 days?

Typically the FDA, after you submit all of the modules, there is a discussion as you get closer to the -- as you go through the approval process. They don't make that decision upfront.

And the reason I say it is unknown is, if you go to the ThinPrep Pap Test, in '93 we had an open panel hearing in Washington, and when the TriPath product went through in '99, they did not. So they were the second one through.

In this case the FDA is pretty much up to speed with the issues surrounding permanent sterilization with the Conceptus panel. And my view is they have already had one go through. They may or may not convene a panel to take a look at this one.

Okay. And did you guys quantify the number of incremental imagers placed at Quest due to the formal evaluation signing versus prior, which was kind of an informal process?

We have provided incremental imaging systems to Quest to account for their volumes that they are going to need during the evaluation period.

Okay. And then just the last question, the percentage breakout of the 1100 or so ThinPrep processes between Europe and rest of world?

Do you have that?

Yes, I do, Pat. Europe is close to 700, a little bit under 700. Rest of the world, call it around 400, a little bit over 400.

Thank you, operator. I will now have to provide my concluding remarks. The Company made solid progress during the first four months of 2007. In the first quarter, each of our key organic growth drivers -- the Surgical Products, ThinPrep Imaging System revenue, and our International business -- grew by more than 30% over the same quarter last year. We signed multiyear contracts with our two largest customers and look forward to continuing those large term relationships.

Finally, we completed two strategic acquisitions, Adeza and Adiana, that will enhance the growth opportunities of our Diagnostic, Surgical and International divisions in the years ahead.

We're very excited about the future as we continue to grow and diversify our business to maintain our leadership position in providing innovative products that improve women's lives around the world.

Before we sign off the Q1 conference call, I would like to say that Q1 was a very eventful and successful quarter for the Company. In true Cytyc tradition, our employees stepped up to the challenge and delivered spectacular results. I would just like to thank the more than 1500 employees around the globe that just made it happen.

Thank you and thank you for your participation in today's call.

This concludes today's teleconference. Thank you for your participation.