ICAD Inc (ICAD) 2009 Q1 法說會逐字稿

Good days, ladies and gentlemen, and welcome to the first quarter iCAD financial results conference call.

My name is Josh, and I'll be your coordinator for today.

(Operator instructions.)

I'd now like to turn the presentation over to our host for today's call from Lippert/Heilshorn, Anne Marie Fields, you may proceed.

Thank you, Josh.

Good morning.

This is Anne Marie Fields with Lippert/Heilshorn & Associates.

Thank you for participating in today's call.

Joining me from iCAD are Ken Ferry, Chief Executive Officer, and Darlene Deptula-Hicks, Executive Vice President and Chief Financial Officer.

After the market closed yesterday, iCAD announced financial results for the first quarter of fiscal year 2009.

If you have not received this news release, or if you would like to be added to the company's distribution list, please call Lippert/Heilshorn in New York at (212) 838-3777, and speak with Cheryl Palazzo.

Before we begin, I would like to caution that comments made during this conference call by management will contain forward-looking statements that involve risks and uncertainties regarding the operations and future results of iCAD.

I encourage you to review the company's past and future filings with the Securities and Exchange Commission, including without limitation, the company's form 10-K and 10-Q, which identifies specific factors that may cause actual results or events to differ materially from those described in the forward-looking statements.

Furthermore, the content of this conference call contains time-sensitive information that is accurate only as of the date of the live broadcast, April 30, 2009.

iCAD undertakes no obligation to revise or update any statements to reflect events or circumstances after the date of this conference call.

With that said, I would like to turn the call over to Ken Ferry.

Ken?

Thanks, Anne Marie.

Good morning, everyone, and thanks for joining us this morning.

We're pleased to report iCAD's performance for the first quarter of 2009 as we continue to make progress on many fronts in the face of challenging market dynamics and a weak economy.

Importantly, we finished Q1 and continue on in to Q2 with a strong balance sheet, which will help us to sustain through this challenging time.

We've also made considerable progress advancing several strategic product programs in the MRI and CT imaging segments.

These new product programs will enable us to expand addressable markets and become important sources of new business over time.

We entered 2009 on the heels of a year of phenomenal revenue growth, which was largely attributable to the growth in digital mammography systems sold with CAD as a standard of care in the United States.

Our plan continues to be maximizing growth and earnings from the ongoing transition to digital mammography and to build on the investments we've made in our new business segments, particularly MRI- and CT-based solutions, where the placement of CAD in workflow solutions are less dependent on new system sales as our products can be integrated into systems already in place today.

There's no question that the global economic conditions have affected all companies, including those in the health-care industry.

Despite the challenging economic environment, we're pleased to have posted double-digit revenue growth during the first quarter versus the prior year quarter.

And although MQSA data showed the digital mammography unit growth in the quarter was down significantly versus the prior year, we continue to respond to the demand for our SecondLook Digital CAD product from our increasing number of OEM partners on a global basis and achieve respectable digital CAD sales growth in the quarter as well.

On our last conference call, we projected some near-term softness in the systems placed but expressed confidence in the long-term growth opportunities for our products.

We continue to believe in the not-to-distant future digital mammography system sales will increase in growth as they continue to be the standard of care for breast cancer screening and the transition to digital reaches an inflection point where essentially you must transition to digital technology over the next two to three years or exit the mammography screening business.

During the first quarter, we were proud to have our SecondLook CAD technology highlighted in the February issue of peer-review journal "American Journal of Roentgenology." The data showed high sensitivity in assisting radiologists to detect early-stage breast cancer and demonstrated that CAD with full-field digital mammography showed a high sensitivity in identifying cancers, SecondLook correctly marked 94% of biopsy-proven cancers, and the sensitivity of SecondLook was not dependent on the size of the tumor, it was equally accurate.

Studies in publications such as this continue to confirm that our digital CAD technology is an extremely valuable clinical tool and a standard of care with full-field digital mammography systems.

Our film-based product sales were strong during the quarter and continued to be led by the ongoing market demand for a comparative reading solution, TotalLook MammoAdvantage.

This product showed continued sales traction through direct sales and OEM partners leading the double-digit film-based product growth compared with the first quarter of 2008.

We expect TotalLook MammoAdvantage to continue to be a key driver for film-based product growth as it digitizes prior film-based exams, provides software tools that enable comparative reading with the current exam, and contributes to increased productivity with digital workflow.

Our service and supply revenues during the first quarter of 2009 showed solid growth as well.

This was largely as a result of the growing install base of digital products transitioning from warranty to service agreements.

As our install base of digital CAD systems is approaching 3,000 globally, we see continued opportunities for growth in this area.

In addition, the rapidly growing install base of TotalLook MammoAdvantage is becoming another source of service agreement revenue growth as it was launched to the market in Q1 of 2008 and early shipments are reaching the end of warranty.

International revenue for 2009's first quarter was up substantially compared with last year's first quarter, largely due to demand from existing OEM partners, as well as the European launches of SecondLook Digital CAD with Agfa HealthCare's computer radiography system and Planmed's nuance full-field digital mammography system.

Longer term, we continue to believe that the international markets offer a growing opportunity as we broaden our reach with new partnerships and with increased sales through our current OEM partners in Europe and Japan.

We remain well positioned to benefit from the ongoing transition to digital mammography on a global basis.

Shifting topics, I'd like to provide an update on our progress with our recent entry into the CAD MRI business.

In the fourth quarter of 2008, we launched SpectraLook and CADvue, two new breast MRI products, and VividLook, a new prostate MRI product.

We were delighted to report that by year-end 2008, we had an impressive sales funnel of over $3 million for MRI products and by February of 2009 this amount had nearly doubled.

We're pleased to report that during the first quarter we completed our first sales and installations of our breast and prostate MRI products.

Also, we recently received 510(k) clearance from the FDA for PrecisionPoint, our interventional planning solution for breast MRI that can make biopsies easier and faster.

PrecisionPoint will be offered as an integrative module within our CADvue breast MRI image review software.

During the past several conference calls, we focused more on breast MRI.

Today I'd like to talk a bit about MRI prostate product, VividLook, and its potential.

National Cancer Institute has estimated that in 2008 more than 180,000 men will be diagnosed with prostate cancer and that nearly 27,000 men will die of prostate cancer.

They also estimate that 1 in 6 men will be affected by this disease over their lifetime.

Current diagnostic tests have been shown to have high false-positive and false-negative rates.

While dynamic contrast enhanced MRI of the prostate has shown promise, radiologists can have difficulties extinguishing benign from malignant lesions because many portions of the prostate show large enhancement with contrast MRI alone, making it difficult to identify the real areas of concern.

VividLook, our MRI prostate analysis software, can assist clinicians in morphological and tumor physiology assessment by color-coding the images based upon the contrast enhancement profile over time, thereby providing more detailed information for interpretation, allowing the user to discern the different contrast-enhancement profiles in malignant versus benign tumors.

As part of our mission to help bring the promise of imaging technology to prostate cancer diagnosis and treatment, Stacey Stevens, iCAD Senior Vice President of Marketing and Strategy, has joined the AdMeTech Foundation as an industry representative.

The AdMeTech Foundation is a nonprofit organization dedicated to innovative solutions for improved patient care and transfer of medical research and technologies from laboratories to clinics.

AdMeTech's priority focus is to end the era of blind prostate cancer care and to create the future of image-guided, precisely targeted diagnose and treatment.

We're excited about the opportunities for growth with VividLook, and in addition to its use as an adjunct screening tool for cancer, we believe it has significant potential as a tool to assist image-guided biopsies for prostate cancer diagnosis and treatment.

We'll continue to update you with our progress on this important promising technology.

Turning our progress to the CT space, during the past year there's been considerable interest in virtual colonoscopy, or CTC, due to the positive results released and published from the Agfa-sponsored national CT colon trial.

This trial over nearly 2,600 patients largely proved that CTC is as effective as optical colonoscopy for colonic-polyp detection.

Throughout the past year we have seen greater acceptance of this procedure by the medical community and the public and believe adoption of CTC will dramatically increase colorectal cancer screenings.

CTC employs cutting-edge technology to product three-dimensional images to permit a thorough yet minimally evasive evaluation of the entire colorectal structure.

This CTC requires no sedation.

People receiving CTC exams are able to return to normal activities immediately following the exam.

By incorporating CAD with virtual colonoscopy, radiologists have the option of using an image-analysis tool that may aid them in detecting early-stage polyps as they are provided a list of CAD marks with potential polyp locations clearly marked for their inspection.

As you know, in the first quarter we completed our multireader clinical study with our colon CAD product, which demonstrated its performance on polyp detection.

I'm pleased to report that we recently completed the data compilation analysis from the study and anticipate submitting a 510(k) to the FDA in the coming weeks.

Our goal for this CTC submission is the week of May 18th.

During the first quarter we showcased VeraLook at the European Society of Radiology's annual meeting and received much positive feedback and interest.

VeraLook, the brand name for our colon CAD solution for CTC, is a technology that uses advanced algorithms to highlight suspicious polyps, warranting closer review by the radiologist.

In addition, VeraLook has the potential to reduce oversight errors that can occur during a virtual colonoscopy study review due to the large number of images generated by the CT system, often exceeding 1,000 images for a single patient.

During our last call we discussed the possibility that CMS may not initially provide coverage for screening of CTC when it communicates its decision in May.

CMS cited a lack of sufficient evidence to conclude CTC improves net health benefits in asymptomatic Medicare beneficiaries, despite it being a promising technology.

We acknowledge our disappointment in the early assessment of CTC for Medicare patients, which have an average age of 75 years, pointing out our belief that the net health benefit of CTC screening is for patients in a critical-age category of 50 to 65 years old and that ultimately this will result eventually in favorable reimbursement.

We continue to hold this view as supported by the fact that several major insurance payers are already covering CTC for colorectal cancer screening.

Just this month UnitedHealthcare announced coverage for CTC for colorectal cancer screening, joining Kaiser Permanente, Cigna, and numerous Blue Cross Blue Shield affiliates, as a Blue Cross Blue Shield technology assessment committee concluded the CTC meet its technical criteria for coverage.

In addition, the American Cancer Society, the American College of Radiology and Multisociety Task Force for Colorectal Cancer all have added guidelines for CTC versus optical colonoscopy and are in strong support of its reimbursement.

Clearly, we recognize the reimbursement continues to be a key driver for the widespread adoption of CTC as screening method for colorectal cancer.

We're encouraged by the early positive reimbursement from the private payers, and by the support of the medical groups I mentioned and believe that over time CTC will gain pervasive favorable reimbursement.

We will keep a close eye on these proceedings and decisions and keep you posted as we see progress.

So with this portion of the update concluded, I'll now turn things over to Darlene, who will give you much more detail on our financial performance.

Thank you, Ken, and good morning, everyone.

We achieved respectable growth during the first quarter in spite of the challenging economic conditions.

We are pleased to report double-digit comparative revenue growth, and, importantly, we continue to maintain a healthy balance sheet.

Some of the highlights for the fourth -- first quarter include total revenue of $7.2 million, up 11%; digital CAD and MRI revenue of $4.8 million, up 12%; film-based revenue of $1.6 million, up 14%; service and supply revenue of $825,000, up 6%; international revenue of $1.2 million, up 63%; gross margins of 82.5%, up from 82.3%; and net loss of $999,000, or $0.02 per share, which compares with a net loss of $446,000, or $0.01 per share, in the first quarter of 2008.

Let me now drill down and provide some additional detail on our quarterly performance.

The 11% increase in total revenue to $7.2 million from $6.4 million in the first quarter of 2008 reflects comparative growth in our core digital mammography business for our SecondLook Digital product, ongoing strong market acceptance of our TotalLook MammoAdvantage product, increased service contract revenue growth in early MRI sales.

Digital CAD and MRI revenue in the first quarter grew 12% to $4.8 million from $4.3 million in the prior year first quarter.

This is a respectable achievement when you consider the MQSA data showed that the number of digital mammography unit placements in the first quarter of 2009 decreased significantly from the first quarter of 2008.

Our film-based products showed nice revenue growth of 14% with total revenues of $1.6 million, as compared to $1.4 million in the first quarter of 2008.

This increase is largely due to the continued positive market demand for our TotalLook MammoAdvantage product.

First quarter service and supply revenue of $825,000 increased 6%.

This was primarily due to increases in service agreements, which continue to grow as our customers transition from warranty to service contracts, and an install base that saw dynamic growth in 2007 and 2008.

Service agreements were up nicely, increasing 11% quarter over quarter and in Q1 represented 94% of our total service and supply revenue.

We are also pleased to report some initial sales of our MRI CAD product.

As Ken discussed, we are very excited by the future potential of these products and are encouraged by the strong sales pipeline our team has developed and is working to convert to revenue in the coming quarters.

International sales for the first quarter were up by 63% to $1.2 million from $728,000 in the first quarter -- in the first year first quarter -- prior year first quarter.

The increase was a result of sales from our new global partnerships -- such as Sectra, Agfa, and Planmed -- that were launched in recent quarters, as well as some of our other ongoing OEM partners.

We continue to believe the international markets offer a growing opportunity and expect to continue to leverage new opportunities with additional global partners and additional products.

First quarter 2009 gross margins were a solid 82.5%, up slightly when compared with gross margins of 82.3% in the prior year first quarter.

Operating expenses in the first quarter of 2009 increased by $1.3 million, or 23%, to $6.9 million.

This increase is due in a large part to our investment in new businesses to address long-term sustainable growth, specifically investments in our new MRI CAD product and the clinical reader study for our colon CAD product, which, as Ken mentioned, we expect to file our 510(k) with the FDA in the coming weeks, as well as an increase in stock-based compensation expense.

Excluding these expenses, operating expenses for the quarter would have increased only about $251,000, representing about a 4.5% expense growth quarter over quarter, primarily in sales and marketing for our core mammography business.

For the first quarter of 2009, we reported a net loss of $999,000, or $0.02 per share, including stock-based compensation expense of $500,000.

This compares with a net loss of $446,000, or $0.01 per share, including stock-based compensation expense of $392,000 for the first quarter of 2008.

Importantly, during the quarter we were essentially cash flow neutral.

Adjusted EBITDA, a non-GAAP measure which includes stock-based compensation expense, was essentially breakeven for the first quarter of 2009, as compared to $459,000 for the first quarter of 2008.

We ended the first quarter of 2009 with product backlog, excluding service and supplies, of $714,000, as compared to $1.1 million at December 31, 2008.

Let me again remind you that backlog really should not be considered indicative of the company's future revenues as a significant amount of our products are booked and shipped within the same quarter.

Now turning to the balance sheet, we continue to maintain a healthy balance sheet through disciplined cash management, tightened expenses, and strong inventory controls.

In addition to essentially a cash flow neutral quarter, we reduced our accounts payable and accrued expenses by $1.2 million and our inventory by $171,000, both versus year-end 2008.

We continue to have no debt and ended the quarter with $12.9 million in cash, as compared to $13.1 million at December 31, 2008.

As a result, we believe we are in a strong position to see our way through these challenging external economic times.

Now, before we take questions I'd like to discuss financial guidance for fiscal 2009.

Again, due to the continued challenging economic environment and the associated uncertainty in the health-care market, the company has made a decision to defer providing guidance on the first half of 2009.

This decision will be reviewed again midyear, and we will provide a further update at that time.

With that financial update, let me open up the call to questions.

Operator?

(Operator instructions)

And our first question comes from Jonathan Block from Suntrust Robinson Humphrey.

Jonathan, you may proceed?

Thank you, and good morning, guys.

Hi, Jonathan.

Hi, Jonathan.

Just first question, Ken, I realize that it seems the visibility is still limited and you guys are deferring guidance, but maybe if you can just give us a big-picture feel on any trends out there?

Has there been an improvement from the beginning of the year, or is it still really choppy?

Any thoughts would be great.

Well, I guess the way I would describe it, Jonathan, is choppy to somewhat of a -- I don't know -- more clear path going forward.

And what I mean by that is that hospitals, imaging centers have now basically had a couple of quarters to look at this dynamic instead of having either one or less.

So I think in each situation you get a little bit of a different response.

And so what I would say is that we're still seeing a lot of customers delaying purchases, and clearly what they're saying is they intend to buy but they have been put off due to either a capital budget constraint or some sort of a slower pace in which they're going to spend the original budget, and that's, ultimately, what we hear very consistently.

At the same time, we are seeing a fair number of large deals in some of the bigger health-care systems out there, and that would indicate to me that some of the large systems that have a very good handle on their data from a census and cash flow standpoint have decided to go forward into purchase.

So, when I say that things have been choppy and they might show some modest clarity, I do think that more customers today have a sense of their financial status than they did a quarter or two ago.

That has enabled some to go forward with purchasing plans, and it has had others face the reality that they need to continue to defer.

So, as I look at the current environment versus the beginning of the first quarter, I would say it's pretty consistent and there may be, as a result of more time and more comfort with what you're dealing with, a modest number of customers that are going forward to purchase that might not have at the beginning of the year.

Whether that translates into an uptick in business this quarter is still to be determined.

I still think the dynamic around unemployment and then the general lack of confidence in whether we've bottomed at a kind of more macro economic level is still really weighing on hospital systems in terms of understanding census trends for either screening or mandatory or elective procedures.

So I guess I'd say it's marginally better than it was at the beginning of the year, but I couldn't say that we have clearly come off the bottom and would see something significant in terms of an uptick in business in this quarter.

Okay.

Maybe just one more in terms of closing deals, Ken, we've heard stuff about more signatures being needed.

Is that something that your sales guys are running into just from the time of when they begin the pitch to the time where they close the deal maybe that time frame is lengthened?

Yes, it definitely has, and customers that have appropriated the funding and it's clearly not a debate of whether they're going to get it, their -- the sales cycle is about the same as it always has been.

In the environment where, let's say, there's money for two projects and then there's three or four that are being considered, sure, that's where you see a lot of procrastination and a lot of time going by.

And I think, as a result, all the companies are aggressively trying to pursue the business, but the challenge is not selecting a vendor.

The challenge is when the customer actually gets the green light from, let's say, the CFO or from finance to actually go spend the monies.

And so we are seeing a mixture of transactions that are happening on a traditional cycle, and we're seeing a number of transactions that have been delayed because whether the money's going to be appropriated for mammography kind of comes down to the wire, whether it's the end of a quarter or end of some sort of a capital process within the hospital systems.

What I would say, though, is that, as I look out to this imaging landscape, all you need to do is look at some of the comments that GE and Philips made around their first quarter earnings, and what they both noted was that the diagnostic imaging market is very, very tough right now.

They made it very clear.

So what I would say -- my assessment would be is that the markets for new digital X ray and PET scanners and CT scanners and MRI machines is probably a tougher space to be than we're in today.

And our compares, obviously, as you go back to last year in the first quarter -- if you use MQSA as a benchmark -- are very tough for us to compare in a positive sense with some sort of growth because the first quarter of 2008 versus the first quarter of 2007 was something like 50% unit growth.

You didn't see that in the MRI, CT, and PET spaces.

They've been challenged, I think, from a demand standpoint for several years.

So I would argue that the mammography market, based on the need to go digital over the next year or two or three, the price point to go digital, which is probably now as low as $100,000 -- $125,000, if you go the CR space versus the DR space, is a market that will do reasonably well in an overall market that is down.

And so I would say we will fair better than the big-ticket imaging equipment.

And then further, of course, with our newer products, we're not as dependent on new-system placements, and so we're hopeful that we'll start to see meaningful new revenues in some of these new spaces that we've invested in in MRI, really trying to feed off an install base that has decided to provide, say, breast MRI or prostate MRI service as a new service to generate more procedure volume.

Okay.

Great.

Maybe just two or three more.

On the international side you had very good numbers there.

What, in your opinion, do you think was going -- maybe it's just backlog of Sectra, Agfa, etc.?

And then has there been any change, sort of, just international overall?

In other words, the attachments here in the US have always been so high.

OUS they've been a fraction.

There's been a lot of clinical data.

OUS had talked to all the advantages of CAD even with a double-reading protocol.

So do you see any seismic shift internationally which may change the attach rates going forward?

We don't at this point see an attachment rate change.

What I would say is that in Britain and the UK there's a major initiative ongoing to challenge the double-reader protocol and to be able to prove that single-reader with CAD is as and more effective.

If that process initiative becomes reality, that could be a big catalyst for the adoption of CAD rate going up significantly.

What I think really drove our business in the first quarter is that our largest OEM partner in Europe, GE, had a very solid quarter.

And then what we had is these new partners -- Planmed, Sectra, Agfa -- and in those cases, what happens often is that they've been selling either CR in Agfa's case, or DR solutions if it's Planmed or Sectra, for some time, and they actually have some pent-up demand for CAD because the CAD products came well after they were releasing and shipping their digital mammography systems.

So we saw kind of a burst of activity because in some cases, maybe with Planmed or with Agfa or Sectra, they had a number of customers that had been waiting maybe a year or two, actually, to purchase approved CAD.

So it's a combination of existing partners, new partners, and the ability, then, to support more companies on an international basis, which really did help to drive the first quarter internationally.

Okay.

Great.

And then just in terms of CTC, how are you going to handle that?

If we don't get a change out of CMS in the coming weeks, are you, sort of, happy with the status quo?

In other words, if most of the private payers are on board and reimbursing, do you think over time they'll do the heavy lifting for you?

Are there any initiatives underway at iCAD where maybe you run a trial and you look at the specific age groups?

I would love to get your thoughts there.

Yes, well, one thing that I'm -- on the trial side I'm aware of is that the Akron trial, as I understand it from speaking to one of the authors, is now being resegmented to pull out of those 2,600 patients the Medicare population, something in hindsight that would have been great to have had when they initially released the results.

So in a 2,600-patient trial, if it's a statistically significant number of Medicare beneficiaries, that could have a significant impact on CMS, whether it's this May or maybe next May or somewhere in between since there's no defined timeline to reapply for reimbursement.

But what we are seeing is a significant uptick in payers.

As an example, we just talked about UnitedHealthcare's paying for this.

Cigna is paying for this.

Basically, right now you have 26 states in the United States of which 23 of the 26 are now mandating that, if you provide insurance -- if a patient wants CTC, they must provide the insurance and reimbursement for that.

That number, Jonathan, has gone up significantly from where it was.

Twenty-three states mandatory, and three are doing it voluntarily so almost half of the states in the United States on a private-payer standpoint are actually paying for CTC.

So, now, you combine that with the big ones -- I'll give you an example -- Blue Cross.

In the Blue Cross arena, nine chapters in the United States covering basically 26 states are now under Blue Cross covering CTC.

So we're seeing, I want to call it, kind of from the bottoms up a groundswell of support, and the good news there is that, those private payers are more targeting the non-Medicare beneficiary.

This is the age 50 to 65 that I commented in my opening comments.

So I think you're going to see a significant continued uptick in coverage.

That will create more awareness.

I think there's a lot of cases today, unfortunately, where the patient and the doctor -- the referring physician --doesn't even know that the health plan people are on cover this.

So I think that that's momentum that's very substantial compared to where this was six to nine months ago.

And since I'm on the topic and it's probably something people would like to hear about, I would like to make a few comments on where we are with CTC from a regulatory standpoint.

First of all, we did complete our reader study in the first quarter, and what I would say in a kind of general sense is we were extremely pleased with the performance results.

When we set a protocol in place with a lot of coaching from the FDA, we also set metrics around performance -- around sensitivity and specificity and false-positives -- and I'm pleased to say that we have beaten all of our internal metrics relative to the performance of the product in the reader study.

So we're very, very enthused about the quality of the first release of this product, and as I mentioned earlier, we're targeting the week of May 18th, I believe it is, for submission to the FDA.

The other thing which I thought was very insightful was that, while you would expect us to do a better job of finding polyps larger than ten millimeters, we did a very good job finding polyps in the six-to-ten category as well.

So that's encouraging.

The other thing that really surprised me was that we had 19 radiologists reading in the study, and I was surprised how many polyps greater than ten millimeters were missed by the radiologists and we found.

So you can say, well, you should find the bigger polyps.

Well, you know what?

The bigger polyps are the most critical for patients' health, not the smaller polyps which are growing over time.

So if a radiologist missing polyps greater than ten millimeters, even more reason why CAD is so important to those patients that would have a very negative health benefit if those greater-than-ten-millimeter polyps would go unnoticed and then the next screening interval would be five years down the road.

So I'll just say this: We were very encouraged by the reader study performance.

We think that in the number of different categories that you measure your performance in the study, we can clearly demonstrate to the FDA a significant increase in detection with CAD versus radiologists reading without and a very, very workable number of false-positives.

So, as we submit this, it's always difficult to predict the timing and how this whole submission will go, but I will say that, based on our study design and protocol and all the work the statisticians did, we exceeded our own expectations in what we could accomplish in the study.

So we're going to go in to the FDA filing with great confidence that we have a really, really good product here.

Okay.

Great.

And last one, and then I'll just jump back in the queue.

You guys have a lot of products teed up for -- well, actually 2009, but, more meaningfully, 2010 and beyond looking at MRI, CTC software, and was just wondering directionally if you could give us some feedback on, out of the three -- everything outside of breast mammography, if you would -- what you think would be -- have the biggest impact in 2010 from a revenue basis?

Well, 2010 is kind of hard to predict because we're having our challenges in 2009.

But assuming that the economy is stronger in 2010, I think that the CTC product has the greatest potential.

But the question would be is it 2010 or is it 2011?

It's very hard with this being a very fluid process and technically not having a product in the market today to gain experience.

But I just think, in general, it has the highest potential for us as it gets adopted for screening and reimbursement is covered pervasively in the United States.

With that said, we see a significant opportunity in breast MRI CAD, and that's a more established market that we can count potential clients or customers in our funnel, and we've seen a nice uptick in our funnel growth there for breast MRI as that as a procedure is growing.

So I think that that certainly has the opportunity.

And there's a lot of dynamics in the market too.

One of the major companies that's in the breast MRI CAD space has really downsized their business over the last six months and essentially eliminated the direct-sales force.

And when you've got over 20 people touching customers directly out there in the marketplace and you've got a large direct-service organization with the reputation ours has established, per some of the data you've seen at MD Byline, we think we have a great opportunity to take share from the existing companies that are there in the breast MRI space.

And we really think prostate MRI, while it's kind of a early-stage development, based on this AdMeTech initiative that I spoke about that Stacey is involved with, this could be a real big opportunity because clearly it's being shown that the PSA test as a screening-only test for prostate cancer is just not accurate and effective.

And at some point there will probably be some other type of general screening test, but it will be followed up with imaging, and imaging contrast-enhanced MRI study with CAD is really going to help in detecting prostate cancer.

And we think, with the numbers being as significant as they are in that category -- today they're using pretty primitive capabilities, we think, to do the screening.

So we think that that's a growth opportunity as well.

So you look out to 2010 or 2011, that's how we see it.

And the other big revenue generator, which is probably 2011, is our next generation mammography algorithm.

That is in a clinical trial environment today.

It will require a reader study before we submit to the FDA, and it being a PMA supplement, it could be some time before we have that product.

But I commented on my opening remarks that our install base at digital CAD is now approaching 3,000 installations.

So we think a material recurring revenue opportunity exists when we bring a new version of the algorithm to the market.

So we've got some exciting products.

Some are dependent on some larger imaging equipment sales, some are able to feed nicely off the install base that's expanding their procedure volumes, and some will be able to feed off our existing mammography CAD install base at a later date as we bring new innovation and performance into the market.

So we feel really well positioned from a product pipeline.

And, obviously, the biggest challenge that everybody faces is what the economy's going to do over the next year or two relative to influencing demand.

Thank you so much.

Thanks, Jon.

And our next question comes from the line of Matthew Scalo from Canaccord Adams.

Matthew, you may proceed.

Hi, guys.

Thanks.

Good morning, Matt.

Could you just break out of the growth that you saw this quarter how much was coming from price versus unit volumes?

Our average selling prices were pretty consistent with the fourth quarter.

If they were up ever so slightly, it really did not have a real material impact on the business.

Uh-huh.

We hope to begin to see better price increases over the course of the next year or two or three because we have finalized or are near finalizing new contracts with our major OEM's.

And in that process, we have, at a minimum, agreed to pricing with our three largest OEM's, and each provides us a price increase over the old contracts, which were now three years old when they expired.

Right.

So we're hoping that we will start to see some nice, modest increases in pricing.

The bigger challenge, Matt, is really what the demand side is going to be in the unit volumes, and clearly the MQSA data demonstrated a pretty sharp drop in Q4, followed by yet another negative drop.

I mean, you can troth that to the incredible growth in 2007 and the first half of 2008.

We're obviously seeing a very different environment, and that's probably where the biggest wildcard is relative to our numbers.

It's not as much an average selling price issue, it's really a demand.

Right.

And, as far as the percentage of sales going direct versus OEM partnerships, has that changed dramatically from fourth quarter?

Not really.

We have embarked on slightly different agreements with several of our partners, where we will now have a coexclusive agreement.

Uh-huh.

And, obviously, that means that they can sell direct and we can sell direct, and that will move us away from an exclusive OEM agreement.

It could increase OEM versus direct sales more towards the direct-sales model, but I wouldn't see it as a significant uptick.

The competitive landscape out there still really values a bundle, and a bundle coming from the major mammography equipment manufacturer, and we're not trying to disrupt that.

What we're trying to do is be more nimble and to sell direct when a direct sale will make the price point more competitive to the customer versus the competition and then allow us to at least get something beyond our transfer price to our OEM partner to cover our obligation now to do installation and support of the customer versus the OEM doing it.

Uh-huh.

I mean, I guess -- I was impressed with gross margins staying essentially flat year over year and slight decrease sequentially.

Is that stable?

Is that a stable level that we can expect throughout these tough times?

Well, we certainly hope so, and part of the reason we would say that is we have contracts with these companies that now will go out two and three years, and so we would say that they should be very stable.

What probably -- if you look at the comparative to Q4 -- hurt us a little bit is the fact that the film-based products did so well in the quarter, and the digital volumes are down.

And so the film-based products are probably -- what?

-- mid-to-high 70%'s gross margin.

So, when you then contrast that as a higher percentage of your total sales, it's going to bring down the overall blended margin, but it doesn't mean our digital margins are down.

It's just the mix, really, that affected it a little bit.

So we're holding firm in terms of pricing.

We do certainly see at the digital mammography equipment level people are getting a lot more aggressive on pricing.

So the -- if you look at where -- you're probably seeing some price erosion due to this more competitive environment pursuing less demand.

It's probably more at the imaging equipment level, with all the manufacturers going after one another for less business.

Uh-huh.

Okay.

I guess my last question on the CTC side and those payers that have, I guess, a history of paying for it irrespective of what CMS says.

Have you seen in your discussions with them kind of what is the rate of transition from, I guess, the legacy scoping to CTC?

Has it been a rapid adoption once reimbursement was established with the likes of a Cigna or a Kaiser Permanente or Blue Cross Blue Shield?

I think what we've seen is that what had been probably a very modest demand, maybe, say, five or six exams a week in some examples, has gone up fairly significantly, but then it has somewhat leveled off.

It's not like it's going up and to the right and through the roof.

But I'll give you one example, which I thought was an interesting one.

There's a facility in Delaware called the Colon Health Center of Delaware, and they basically have been in the colon health business since September of 2008.

In their first year they screened something on the order of 600 patients via CTC.

What I thought was quite interesting is, when they surveyed these 600 patients, 50% said they would not have sought screening unless CTC was an option.

So you really can see that people are starting to get it, and they're starting to say that, if they were very uncomfortable for whatever reason getting an optical colonoscopy screening, half of the patients came directly because they were aware and said they wouldn't have got one unless it was available.

So I think over time, as we get more clear where the reimbursement's going to go with CMS, as you continue to see the private payers really continue to step up, and as public awareness becomes more clear that this is reimbursed -- I mean, as an example, our Blue Cross chapter that supports our company reimburses for it, and we've had employees that didn't even know this.

So I think you're in a position where there's a learning curve that still has to happen out there, and people are going to start moving in the direction of CTC.

Just the fact that 26 states have either voluntarily or mandated that all providers pay for it is a big, big step compared to where we would have been 6 to 12 months ago.

So we're pretty enthused about this and really think that it has the chance to grow significantly over the next several years as the front-line screening tool for the proper patient.

If you've had any prior polyps in a prior screening, or if you've had family history with polyps, you shouldn't get a CTC as your first-line defense.

But if you're healthy, and you're getting your first one, and there's no family history, and you've not had any prior problems, the data would show that probably north of 90% of those people are polyp-free, and the notion that you may have to go back an invasive procedure or you may have to be screened at a shorter interval than optical just may not be all that appropriate for those individuals in that low-risk category.

So we're pretty excited about it, and we're working closely with our OEM partners, the mostly advanced-visualization companies, and what we're really hoping for is there'll be some additional upside with the major imaging companies because, as the big imaging companies, like GE and Siemens and Philips and others, all have had their own designs, if you will, to provide their own CAD products, with all the budget squeezes and headcount reductions they have had, what I would just simply say is they're much more open to dialogue with us.

And once we submit our filing to the FDA in May, we will then be in a more comfortable position to go back to these large companies and express to them what our performance was in the reader study and the stand-alone testing study that we did.

And we think it's good enough that we may have the opportunity to build out a much stronger portfolio of partners with our CTC product than we might not have either because they had designs to do their own or because now they're realizing the cost and the time it takes in a tough environment while we got excellent results from our study.

Ken, just to -- I guess final question as far as the preparation process prior to scope versus CTC.

Is it the same, or are there any nuances -- differences there?

It's basically the same today.

There's a lot of interest in trying to reduce through different dietary habits prior to the cleansing process.

There is a strong interest in having the ability to do the exam without the prep.

I think there's a lot of interest and some research ongoing.

But technically today, if you were going in for the virtual, you would have the same prep, for the most part, that you'd have if you had the optical.

Okay.

Thank you, guys.

Sure.

Thanks.

And our next question comes from the line of Martin Yokosawa from Torrey Assets Management.

Martin, you may proceed.

Thanks for taking my question.

Could you discuss the competitive landscape for your -- for the MRI product?

The MRI product -- basically, at this point in time there are three companies, including ourselves, in the space that we're aware of.

One would be a private company, Confirma, based in Seattle, and that's the company I spoke of earlier, as we understand it, has downsized significantly.

Particularly in the field, it is relying on a new go-to-market strategy focused on their OEM partners, people like GE, to sell their product.

The other one would be a division of Philips, Invivo, has a CAD product out there and has been in the market as well selling both CAD for breast MRI, as well as the coil -- the breast coil that you would lie on for the procedure.

And so those two companies really have, today, the lion's share of the market.

And the technology we acquired, which was last summer, is excellent technology but really did not have a really strong go-to-market strategy.

And the strength that we bring to this today is that we have 22 total sales people out there in the United States, including managers, that are in front of customers every day with both our mammography CAD product, as well as now our MRI product.

So the call point being very synergistic.

And with the size of our sales force, we have had the opportunity to build a pretty significant funnel.

Now, with that said, we're still trying to build a brand, if you will, because what we acquired was great technology but really was not a company or a product that a lot of our customers knew was in the market.

And so we were at the Society for Breast Imaging conference, which is ongoing this week, and it was surprising how many customers still did not know that we were in the CAD business for breast MR.

So we still have to continue to do all the marketing work to build the brand.

I think we have a very solid product with a very robust roadmap to add new capabilities over time.

One of the things we can distinguish ourselves with is that we can complement what is used in the MRI space today, which is a pharmacokinetics-based CAD, with our core competence and morphology-based CAD, which is what we use for mammography, as well as for colon.

So, basically, if you combine these two technologies in some future release, we think in some fashion we could have a product that has the best accuracy from a detection and workflow standpoint in the market.

So we're working very ambitiously on improving the competitiveness of the product, taking advantage of the significant investment we've made in a sales force and getting in front of customers, and we saw good, solid progress in the first quarter in terms of business volume versus the fourth quarter, when we just really jumped in to this business, and we see increasing funnel and increasing volume sequentially each quarter this year.

With that said, we still have a lot of work to do to really have a meaningful market share position, but I'm confident over time that we'll achieve it.

Okay.

And, when your sales people are dealing with the customers -- the customer's CFO is -- or they're claiming that the CFO is holding the purse strings back, are you getting a feeling of what those CFO's -- what trigger they're looking for of when they're going to be letting loose the money?

I think one of the biggest drivers is census and reimbursement.

So, obviously, their cash flow, I think, has a lot to do with it.

I think, secondly, what they're worried about too is have we bottomed out in unemployment, and would this potential census and cash flow get worse or will it get kind of stagnant over time or get better?

So I think it's kind of that old-fashioned issue of cash flow.

And if you're not seeing growth in census and growth in reimbursement, obviously, you look for places to cut, and I think that not wanting to cut staff is certainly an important priority if they can help it, and so one of the places they go to, certainly, is the capital budgets.

And so I think that, in a general sense, it really is that old-fashioned cash flow metric and some projections as to whether that's going to increase or decrease based on the census direction and then, ultimately, the concern of have we bottomed out in unemployment, and are we going to move forward based on a stimulus package that's going to create a lot of jobs, which, obviously, create health-insurance benefits for those covered lives that they provide health-care services to?

So I think that's probably, to net it out, the most important metric that is still not one that a lot of CFO's have confidence on as to really what direction it's headed.

Thank you.

And our next question comes from the line of Adrian Dawes from Hartwell.

Adrian, you may proceed.

Thank you.

I wonder if you could talk a little bit about backlog and some of the other areas of the business and the visibility or some of the metrics you're seeing?

Obviously, the aggregate industry data is difficult -- clearly, gaining market share -- but if you give some sense about how the funnel is beginning to look there and -- that would be very helpful.

I would say, Adrian, that our MRI product funnel has continued to grow significantly.

I think I commented that it was in the $3 million range at the end of '08 and that in the February time frame it may have come close to doubling.

That has probably grown somewhat.

The challenge with that, of course, is to get the customer to go from a prospect to a funded purchase, and I think that number -- I don't want to mislead people, it's a great number, but at the same time, customers are sitting on their wallets more so than they ever have.

So we see a very large funnel in the MRI space, but we also see some caution, particularly in the prostate area, because that's a new area, and a lot of the radiologists we talk to would love to have a prostate MRI CAD product, but they're realistic that, until their procedure volumes really are significant, it's a tough sell to administration.

So that's a good-and-bad-news kind of scenario as it relates to MRI products.

In mammography what I would say is that our funnels are showing an uptick after they really bottomed out in January, and that uptick is fairly significant.

But with that said, that's a natural thing because, with customers putting off purchases, your funnel's going to get bigger because less is getting done each month.

And since no one has come to us and said we have terminated our plan to buy digital mammography, everyone has said we've delayed it, you're seeing a bigger funnel every month, but you're not necessarily seeing a higher percentage of deals falling through to the purchase cycle.

So it's still difficult to create metrics that would say does a larger funnel create a larger business?

And in a healthy market environment, that typically is the case.

In this environment, it's more like now pent-up demand is bigger but they can't pull the trigger because they don't have the green light from the financial end of the hospital.

So that's a little bit of what we're seeing in mammography.

So it's, again, difficult to then look out and make some sort of forward-looking prediction as to where the business is headed.

Yes, I understand it at this point it's somewhat tricky and, therefore, your reluctance to give guidance for the first half of the year.

What will it take to provide the guidance as we get to midyear?

What are the key pieces that you're focused on?

I can make a guess, but I'd love to hear it from you.

Well, I think that we clearly believe that the current macro economic environment is affecting these budgets in a significant way even if the individual institution has not proportionately been affected.

There is just that -- I want to call it -- this cautious mood -- this somewhat negative sentiment -- that I still think has caused a lot of institutions with healthy balance sheets that have not seen significant impact from the downturn in terms of census to still take a slower, more cautious approach.

So I think part of it is at a macro level.

The second part of it is that our OEM partners -- since about 75% of our total business comes from our OEM partners, we need them to give us their forward-looking forecasts and those forecasts to be stronger than what they have been up until this point.

And what we're hearing from our OEM partners is hard for them to predict forward-looking production and demand as it for us.

And so what has helped us, I think, Adrian, in 2007 and 2008 to achieve our guidance was that we had pretty reliable forecasts from our partners.

And our partners are feeling like they're in the same boat we are.

They're hearing a lot of good intention from customers, but customers pulling the trigger on a purchase has been a very unpredictable event.

And so I think that you've got the macro level and you've got the OEM partner level, and if we can get better certainty on both sides of that, then we will definitely come back in to the market with guidance.

It's probably not worth much at this stage, but what I would tell you is that we exceeded our internal projection modestly for the first quarter than what we thought we would accomplish in terms of top line.

So that, I guess, to a certain extent is encouraging, but it's not enough for us to have the confidence that we should start putting guidance on the street.

I really hope that we would be able to for the second half, but we'll just have to measure it at the end of Q2 and make that decision.

Okay.

Great.

Thank you.

All right.

Thank you.

And our next question comes from the line of Jeb Terry from AIM.

Jeb, you may proceed.

Good morning, Ken.

Good morning, Jeb.

Actually, most of my questions have already been answered.

I guess one question might be, if all this business, both for you and your OEM's, is more delayed, as opposed to currently avoided, that suggests then at some point, if employment kicks up and, therefore, the budgets are released, that there would be a relatively strong pickup.

And so, if we're looking at macro factors that suggest that maybe be troth out third quarter -- something like that -- does that suggest then 2010 would be the catch up -- or would you have any view as to would the catch up occur in a year or spread out over two years or-- ?

Well, it's a good question.

I think it will, obviously, depend on the degree of the uptick from a macro standpoint.

What I do think, though, is that, as we sit with about 50% of the US sites and units digital today, we do have somewhat of a favorable phenomenon for our business in that at least another 30% of that total install base would have probably gone digital by the end of 2010.

And I think that this will be in a modest or somewhat improving economy a priority because digital mammography has become such a prevalent standard of care.

It's not the same, necessarily, as upgrading other imaging equipment.

And as I said in my opening comments, if you don't have a plan to go digital in the next two to three years, it's going to be hard pressed to find patients that are going to want to come in and get a film-based mammogram.

It's like dinosaur technology.

So I think that, as we see some uptick, I do believe mammography equipment will be a high priority.

That's also part because it doesn't have the cost associated with some of the other big-ticket items that may be underutilized from a capacity standpoint today, such as CT and MR.

And, ultimately, we think we will benefit early versus later from increased demand associated with a better economic environment.

So we certainly are counting that 30% of that install base is about 4,000 units.

Four-thousand units going digital over a -- let's say an 18- or 20-month -- 24-month window is a very substantial amount of business.

I mean, we had a great year last year, had about something in the order of $26 million -- $27 million in digital CAD revenues, and about 2,200 units last year went digital.

So if you were to come back and have similar kind of volumes as we had in '08 in 2010 -- 2011, and then you combined that with our CT products or MRI products, with the digital business being, at worst, about what it was in 2008, we think that our total revenues could be much stronger than they were in 2008 because of the CT and MR product traction and at least getting back to 2008 volumes for digital mammography CAD.

So should that play out, we're well positioned to grow beyond our 2008 performance in, say, 2010 - 2011, and that would be a favorable scenario that we would certainly hope plays out.

On the point of the CTC, is there any sense of how many sites are actually today performing CTC?

Well, it's a surprising high number because everybody's got a CT scanner, for the most part, that has a full suite of imaging equipment, and it doesn't take any specialty technology beyond the sufflation devices that are out there from companies like E-Z-EM and so forth.

So pretty much most if not all hospitals and imaging centers do provide them.

It's really a function of how much volume they're doing.

So there is -- I'll call it -- pervasive availability.

What you'd like to see, given the growing reimbursement, is more public awareness and more of a shift to that procedure, because for so many individuals without any family history or without personal history, the optical colonoscopy is a pretty serious procedure for someone who has no symptoms and has no history in a healthy-screening situation.

So kind of CTC -- almost similar to, say, mammography screening -- makes a lot of sense.

It has a lot of similarities from a noninvasive or nearly noninvasive procedure standpoint.

And we're confident that over time, with the growing awareness and reimbursement, that procedure volumes are going to grow significantly because more than half of the 80 million Americans over age 50 haven't had any sort of colon cancer screening relative to either optical or CTC.

So, when I look at the data that came from our reader study, we were very encouraged -- very encouraged by how much better the detection overall was with CAD than with radiologists reading without it.

And so we think that, as the procedure volume increases, very similar to mammography, CAD will become more of a standard of care in CTC screening.

And with -- what's in the market today is very limited in terms of competition, and if our performance continues to look as strong as it is, we think we're going to have an extremely competitive product in the market as well.

So it's more accurate.

What about the time factor?

If people are doing CTC's now without CAD and there's massive amount of imaging, how long does it take a radiologist in -- today without CAD versus with CAD?

Yes, some of the raw data -- and this is just an estimate -- is that on average it would take a radiologist about 18 or 20 minutes to read an exam without it and maybe another 5 minutes to read with.

And this is also radiologists that probably have very little experience with both CTC as well as CAD.

So you'd hope over time that CAD as a workflow tool would not add time but, ultimately, would be neutral in terms of time or add productivity and, most importantly, you'd find a significant number of polyps -- or potential polyps that might have been overlooked.

And, as I said earlier, one of the things that surprised me was -- and, again, it's -- this is 19 radiologists and it's 100 study so it's maybe not statistically relevant, but there were a fair number of greater-than-ten-millimeter polyps that were missed and we found.

And that's something you say, well, you should.

It's a large polyp.

But those are the most dangerous, and if we can even find those -- not to say the six-to-tens aren't important to find, but the ones that are life threatening, obviously, you want to be able to make a meaningful contribution and then, to those that may want to watch and increase the screening interval to maybe three years or five years to ensure that the smaller ones' growth are not dangerous to the patient.

So we're encouraged so far, and we certainly expect to continue to improve the performance of the product with future releases, but we're very confident of its competitiveness as we hope to have a release sometime this year in the United States based on the FDA process.

So would it be fair to characterize this data -- the CTC market -- as being a rather large pool but very shallow?

In other words, there's lots of sites doing very few screens but, I guess, gaining some critical knowledge.

So, therefore, if it does pick up -- if the awareness picks up, then, theoretically, the infrastructure and -- is in place to ramp up the number of screens and, therefore --

Yes.

Absolutely.

I definitely think the capacity is easily and readily available to patients.

And I think what'll be interesting is this is the month that CMS is going to publicly communicate their decision.

They have got a tremendous amount of feedback.

My understanding is, in Congress, 40 or 50 congressmen and senators have all written letters to CMS encouraging them to cover it -- the CTC.

So, basically, what a lot of the legislators noted in their letters was the National Naval Medical Center in Bethesda, which is a leading institution for CTC research, increased colorectal screening rates by 70% when they added CTC as an option to their patients.

Well --

So I think that --

Okay.

And one of the things I'm struggling with -- I mean, I buy all that.

But when you went in to mammography, you already had -- thousands of places were already doing mammography and then CAD was -- helped them do their job better.

And so my question is is it -- are there hundreds of sites doing CTC or are there thousands doing CTC where your CAD could be introduced to help them do their job better?

Yes, I think that's right.

But what I would also say is where are you going to get the most benefit from CAD is where you're doing a volume of exams.

If you're doing 5 a week, which is what a lot of these sites are doing today, it's probably not as important to that particular site as when they start to do 10 or 15 or 20 or 30 a day.

And I think that -- what you also need, Jeb, is you need studies, which is something we're certainly working through, that demonstrate the improved sensitivity and specificity with the use of CAD such that they don't miss the polyps.

Right.

Right.

And I don't know that that information, since we're so early, obviously, is in the market, and when it does get in the market, similar to mammography -- when you start to prove, as we did in the study I talked about in my opening comments, that you can find 94% of biopsy-proven cancers in the breast -- and in this case it didn't matter about tumor size -- that gets the clinician's attention to say, regardless of my workflow and my volume, I have to have this tool so that I can maximize my ability to accurately diagnose my patient.

And that's the kind of studies that will come in time.

But we're just initially trying to get through studies to get the FDA to agree with us that this has a meaningful contribution and get it in the market.

Those studies will come in time, and that will have a lot to do, I think, along with reimbursement, to increase public awareness and, ultimately, build a much bigger demand for CTC.

So I guess then the implication -- and I presume you can't disclose but -- by your -- the data that you have suggested, your outcomes would be some meaningful percentage improvement in polyp discovery.

Yes.

I think it's no different than mammography.

In mammography there was a time when accuracy in the initial products wasn't as good as it is today, there was an increase in false-positives.

So the -- I mean, even as early as when I got here in '06, mammography CAD to some extent was still controversial, and look at how much it has been accepted as a standard of care in 2009.

So from my standpoint, these things evolve with clinical evidence of the benefits and performance, and I think we're early in the CTC space.

But, again, reimbursement, public awareness, and studies that show the clinical benefits all, I think, just like mammography, will evolve over time.

Well, looks like a big market for you.

Thanks, Ken.

All right.

Thanks, Jeb.

We certainly hope so.

And our next question comes from the line of Stan [Manny] from [Manny] Family Investments.

Stan, you may proceed.

Yes.

Ken, I have two questions.

One, what's the comparative cost between the CTC and a straight colonoscopy?

Have you got any numbers on that?

Yes, it really varies, but what I would say is that --

Approximately.

Yes, if you look at a CTC, they're basically charging anywhere from, say, $500 to maybe as high as -- maybe a $900 to $1,000.

For the optical, it's probably somewhere between $1,500 to $2,500, and it does vary significantly.

But I would say, on average, you probably will -- there's a lot of talk about reimbursement for CTC being maybe $300 to $500 from the payers.

And at the same time, when you think about the optical procedure, you've got prep time with the nurse, you have the anesthesiologist that has to administer anesthesia, you've got the gastroenterologist that has to do the procedure in a dedicated procedure room, and then you've got the recovery time.

So that's why there's some variance on the optical, but I would say a minimum of $1,500 and can be as high as $3,500 for that particular procedure.

And CTC is noninvasive also; right?

It's -- I mean, basically, what they do is they put a tube that contains CO2 into the rectum to sufflate the colon, and then you just lie on a CT scanner, and six or seven minutes later the scan is done, you get up, and you get dressed, and you go about your business.

But you do take the same imaging solutions, Ken?

I'm sorry?

You take the same imaging solutions?

You have to take some stuff to -- for the --

Yes.

The preparation -- yes.

The prep is the same.

(Inaudible.)

But you don't have the invasiveness of the colonoscopy?

That's right.

When you have the optical, obviously, your whole day is gone, not to mention all the parties involved in your procedure --

Right.

Plus the danger of puncture, by the way.

That's right.

Exactly.

Yes.

And so this is really more traditional, I'll call, a CT scan with some additional prep so that they can maximize their view of the colon.

Okay.

I have a second.

The second question is do you -- you haven't put a frame around any potential market size for iCAD on any of the four up-and-coming areas that you feel are going to develop top-line growth.

Do you have any numbers at all?

CTC, you have the MRI breast, you have the prostate cancer screen -- the MRI -- and then the next-gen -- do you have any framing potential US and worldwide on these -- ballparks that you've internally used?

Yes, it's a very good question.

What we have basically been able to determine is the number of, let's say, MRI and CT scanners on a global basis that have the capacity to offer this imaging service.

It's been very difficult for us based on the early stage of the adoption for these technologies to put numbers to the size of the market.

So I have to say that, at a macro level, the number of patients that would be candidates for these different procedures is significant and growing.

The procedure volumes, in some cases, such as breast MRI, we have very good numbers on.

It can map back to a specific market.

But as it relates to, say, CTC or prostate, it's just too early a stage.

What we're able to do, though, in our case is say what are the biggest, most prevalent cancers, and of the biggest, most prevalent cancers -- which are breast, lung, colorectal, and prostate -- where is there a trend towards increased number of incidences, and, hence, where would this technology, based on procedure volume growth, make a lot of clinical sense?

And that's something that we have used to guide us.

And we continue to model this, but it's been very, very difficult to do.

Right.

But, Ken, let's take CTC --

Sure.

-- and where you -- you must have some internal numbers in order to kind of -- where you're going to focus.

But on CTC, a noninvasive scan, US at, say, $1,000 a procedure, what could it -- I mean, you're a barely $50 million operation.

What -- is this big -- I mean, can it quadruple the size -- what is the potential -- the raw potential in time?

I mean, if you take CTC, are there 1 million patients that are possible per year, 500,000?

You multiply that times whatever you would get out of the procedure.

But certainly you've put some frames on these that you can share with us?

Yes, I would say, yes, we have --

Ballpark.

Yes, we have.

I'm not comfortable sharing them today on a conference call.

I don't have them readily in front of me, and I would say that -- does CTC have the ability to give us a $10 million or $20 million or $30 million business over time annually?

Yes.

Yes, we think it does.

But could I actually model that sort of information basically into a -- kind of, let's call it an earnings call?

Very difficult -- very, very difficult to do.

So I would simply say that as the addressable market becomes more clear, we will try to provide that information.

I think it's a very legitimate question.

I don't have today in front of me the confidence of the data to put information out that could be construed as kind of forward-looking in our --

Right.

But in MRI breast, you said there are companies selling.

Yes.

Okay.

Are those companies $10 million -- $20 million -- $30 million?

Is the potential market that you see $100 million?

That's all we're looking for.

I mean --

Sure.

Okay.

-- vision -- kind of ballpark visions going down -- kind of ascertain are we going to be a $100 million company, a $200 million company in five or ten years?

I think it's important.

Right.

Well, first of all -- let me just start at the highest level.

We have set our goal for when we came as a new management team to create a $200 million business, and we think we can achieve that over a -- let's say a five to seven year total window with organic -- inorganic moves.

Some of them will be in the CAD space, and some will be complementary to the CAD space from a workflow standpoint.

So we're looking at a lot of opportunity inorganically over time that would complement what we do and not necessarily be specifically a CAD business.

So I think that's an important point --

Okay.

Now, going to your question -- and it's a good one -- around breast MRI, we believe that somewhere between 750,000 and close to 1 million procedures are being done in breast MRI today in the United States.

So how big a business is that?

We would project that this is probably a $40 million to $50 million business today.

We're getting, obviously, a very, very small percentage of that as a new player.

But with procedure growth being pretty ambitious, do we have the ability to build a $10 million or $15 million or $20 million business over the next three to five years?

Yes, we think we can.

So that's the kind of number that I think is most firm -- probably about a $40 million or $50 million addressable market opportunity in breast MRI in the States today.

Okay.

That's what we're looking for.

And prostate you have no feel for at all?

That's too new?

Right.

Exactly.

But I think the data on new incidences and deaths and the paradigm of how they do the screening today suggests that it has a lot of the similar characteristics of businesses like mammography, as an example.

So let's assume that the mammography CAD business is approximately $100 million today.

Okay.

So we think, number one, if it's one of the four prevalent cancers; secondly, if there is a screening protocol, which means lots of procedure volume; if early detection has a real meaningful impact on patient outcomes --

As it does with cancer, obviously.

-- have the potential to be as big as mammography business, and that would be prostate, breast, colorectal, and then possibly lung.

There is not an established lung screening protocol today.

There may be at some point for smokers and ex-smokers.

But three of the four more-prevalent cancer categories, we think, have all of the attributes to0 provide for a market that could be as large as the mammography CAD market.

Do you see in each of these four areas -- obviously, the fourth area of next-gen mammography software -- that's your area so we know that you have it internally.

Going to CTC, MRI breast, and prostate, do you see small acquisitions that could give you quicker market entry or technology market entry?

Certainly we're looking at both, and there's no question that there's technology out there that could accelerate what we do.

There's companies out there that may have a attractive install base, as well as complementary technology that we would have an interest in.

What I would say, though, at the moment is, given the economic environment we're dealing with, given that our stock price has been beaten down so severely in light of our very, very strong performance in 2008, we're taking a very cautious approach because we don't want to do anything that would be significantly dilutive to our investors --

We've already been diluted, yes.

-- and, also, we wouldn't want to be doing something that would be financially not accretive in a tough environment when it comes to raising cash --

Okay.

But the other side of the coin is now is the time that you could pick something up at bargain prices because there's no financing around.

Yes, I would agree, and we're not -- not to say we're not looking, but we're looking very, very selectively.

Okay.

So you're -- in summary, you see that this company can become three- or four-fold as $200 million company, and you can vision it and see it and measure it?

We absolutely believe that we've got the right strategy, we've got the right horsepower in terms of leadership, and if you look at where we start -- I'll just give you kind of a data point.

I started in May of '06.

That quarter the company did $3.8 million in revenue.

And in 2008 we did $37.5 million revenue.

I think our trajectory speaks for itself.

And the challenge, of course, is this economic thing has really put a kink in everybody's growth plans.

So I think our progress over two full years has been significant.

What makes it difficult is to really see your end point -- the $200 million -- in a very specific time frame, but we believe the strategy will get us there.

But remember that you've got a -- technologies that are noninvasive and lower cost than what exist today.

So I think -- and the patient pool worldwide is going to grow, I'm sure, double-digit with what's going on worldwide in health.

But my last question is why is our stock price so low?

I mean, that's -- you certainly have been around the country.

Are there no buyers?

Have the small funds that have always purchased us -- are they gone?

Have you got a -- kind of a view on why there's a disappearance of demand -- is what it is -- for the company considering that the future is pretty bright?

Yes, I think, if you look at micro small cap and you look at the inherent risks of trading volumes and balance sheets that don't have hundreds of millions of dollars on them, it's been a place where investors have been cautious at a minimum --

And disappeared.

Yes, and as we look at -- out there at the landscape of other companies, we've seen other companies who (inaudible - background noise) 60% -- 75% of their market cap over the last six months that have great businesses, have delivered very respectable performance.

Some of these companies have an enterprise value that's negative.

They have --

Yes.

Based on cash.

-- market caps --

Are you seeing a change in interest?

I think some of the funds clearly are saying to us now that we're kind of bottoming and it's time to make some bets based on how beaten up a lot of these stocks are.

So if you look at our volume in the last, say, two to three weeks, it would seem to me that we have started to appeal to some investors that believe $1.00 stock with the plans we have and the track record we've demonstrated is a worthy investment.

So I'm hopeful that that trend will continue.

So it's just a matter of time and confidence.

Yes.

We certainly hope so.

Let me bring one other topic in that I think it's interesting.

There was an article today in the press that talked about cancer direction over the next several decades, and what it basically said is that today in 2010 to 2013 time frame we will approach 1.6 million new cancer diagnoses in the United States -- 1.6 million by 2013.

This was in the "Journal of Oncology." This was researched at M.

D.

Anderson Cancer Center in Houston.

What they projected are 2.3 million new cancer cases will be in place by 2030.

So clearly with population growth over that period of time what they're saying is that, in the older population, this growth, if you will, to 2.3 million will be 67% fueled by older people and only 11% by young people with cancer.

Which is our market.

Yes.

Right.

And so you look at it, and they say, well, where?

Breast, prostate, colon, lung, followed by stomach, liver, myeloma, pancreas, and bladder.

So I look at where we are -- and not to say that demand is in our favor because that's a statistic that troubles all of us culturally -- but we're in the right place, providing meaningful technology so that radiologists and physicians can really intervene and get the best possible outcomes for their patients using this technology.

So we're confident of this segment and the technology we apply because the dynamics of cancer are only, unfortunately, going to get worse, not better, over time.

Yes.

I agree.

Thank you for your feedback.

Sure.

Thank you for your call.

At this time we're showing no further questions available.

Mr.

Ferry, you may proceed, sir.

Okay.

I'd like to thank all the investors for your calls and your questions.

We appreciate your interest in iCAD.

And at the same time I'd really like to thank our employees for all their hard work day-in and day-out.

It's a very challenging environment, but we have top-notch people that have tremendous dedication and passion for our business and, whether the performance really indicates, what we do does make a meaningful contribution to people's health every day.

So I really appreciate our employees for the effort they put forth in that.

I think we have a strong balance sheet, as Darlene and I have tried to communicate, we have a very strong compelling strategy, and a very strong and talented management team and employee base to see ourselves through this challenging time.

I'm confident we'll come out of it in a very, very strong position, and I hope to be able to report back to you when we get together to review our second quarter results later on in the summer.

So thank you all very much for joining us, and have a good day.

Thank you for your participation in today's conference.

This concludes the presentation.

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