ICAD Inc (ICAD) 2010 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the third-quarter 2010 iCAD, Inc.

earnings conference call.

At this time, all participants are in listen-only mode.

We will conduct a question-and-answer session towards the end of this conference.

(Operator Instructions).

I would now like to turn the call over to Ms.

Anne Marie Fields, Senior Vice President.

Please proceed, ma'am.

Thank you, Lisa.

Good morning.

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

Thank you all 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 yesterday's market close, iCAD announced financial results for the third quarter of 2010.

If you have not received this news release or 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 Alexis Naletko.

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 filings at the Securities and Exchange Commission including, without limitation, its Forms 10-K and 10-Q, which identify 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, November 4, 2010.

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

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

Ken?

Thanks, Anne Marie.

Good morning, everyone, and thank you for joining us today.

Among third-quarter highlights was the FDA clearance of VeraLook, our CAD product for the use with CT colonography or virtual colonoscopy, as well as the release of our enhanced MRI products suite.

Still, the summer months proved challenging due to a variety of factors I will discuss in a moment.

We are pleased to report that against the backdrop of a continuing volatile environment to healthcare capital spending, we continued to sustain strong operational discipline.

This is reflected in our sustained high gross margin, modest growth in operating expenses, and nearly $1 million in increased cash flow from operations that we generated during the quarter.

Looking at our core digital mammo business, third-quarter revenues were soft comparatively with the third quarter of 2009.

There were a couple of factors that negatively impacted our third-quarter results in this category.

First, Siemens, one of our larger OEM partners for digital mammography CAD continues to struggle in the United States market as they are waiting on FDA clearance of their new digital mammography system.

As the clearance was initially anticipated to occur in 2009, they have essentially been out of stock with the older system since the beginning of the year.

As a result of this holding pattern, iCAD's business with Siemens is down considerably.

Year to date, our business with Siemens is down greater than 50% versus 2009.

We are hopeful that an FDA clearance is imminent as Siemens is optimistic that it may occur in time for the Radiology Society Meeting in Chicago at the end of the month.

If so, we should see an immediate boost in business as Siemens has pent-up demand for the product.

Notably, Siemens has been shipping this new product outside of the United States for some time.

It continues to receive excellent customer feedback on its performance.

Third-quarter digital mammo revenues also were impacted negatively by softer sales from another OEM partner, Fuji, as they experienced weaker demand during the third quarter versus the consistent business levels that they achieved in Q1 and Q2 of this year.

We are not aware of any particular event that caused the weakness in Fuji's business and anticipate a much stronger Q4 as was the case in Q4 of 2009.

That said, we had a particularly strong third quarter with GE, our largest OEM partner.

Programs we put in place with them at the beginning of the quarter that repositioned the product line and emphasized the differential pricing strategies, particularly in the US markets, have shown to be effective as evidenced by the increases in our international business this quarter.

GE, including the US, has had strong year-to-date performance with solid growth over last year, and we anticipate this momentum will continue through year end as well.

Those who follow this industry track the MQSA data as posted on the FDA website.

We monitor these numbers as well, and although they aren't always perfect from a timing standpoint, they do give an ongoing picture of the demand for digital mammography placements in the US on a monthly basis.

When looked at year-to-date, the MQSA data showed an 18% decline in digital mammo placements compared with the first nine months of 2009.

ICAD's total digital mammography business for the first nine months of 2009 was off 10% for the same year period, as international growth of 13% year-to-date helped somewhat to offset the weaker performance in the US market.

Obviously Siemens' inability to ship their new system has negatively impacted a number of new MQSA system placements year-to-date and iCAD's performance as well.

If Siemens were in a normal shipping position, we believe our Digital CAD business would be much closer to flat versus 2009 nine months' year-to-date.

While the current market is challenging, we are pleased to have performed better than the MQSA data and are optimistic the market will improve over time.

As of the end of Q3, there are approximately 4,000 film-based mammography systems in the United States installed base.

An analyst report from one of the financial firms that covers our industry did a survey of the sites that are still film-based, and found that approximately 80% plan to go digital in the next two years.

If this were to occur, it could translate into roughly 1,500 to 1,600 systems per year, a solid increase in the demand versus the current run rate in the MQSA database.

MRI product sales continued to grow in the quarter versus last year and ahead of 2009 year-to-date as well.

We began shipping a new version of our MRI product suite late in the quarter and will be highlighting the enhanced system through radiologists at the upcoming Radiology Society Meeting in Chicago.

We expect the conference will help us to gain additional traction for stronger MRI product sales in the fourth quarter and into 2011.

Film-based revenues declined significantly in the quarter versus 2009, largely due to softer sales of TotalLook MammoAdvantage, a digitizing comparative reading solution used in conjunction with the transition to digital mammography and a digital workflow.

Here we have seen a combination of softer demand and pricing pressure.

As we reported during our last call, we recently launched aggressive programs with our OEM partners and direct sales teams in order to increase sales and, as a result, saw modest progress in the quarter.

We anticipate that these programs will benefit us further in the fourth quarter as well.

Service revenues continue to show significant growth in the quarter and year-to-date.

This growth was driven by the ongoing increase in service agreements for SecondLook Digital Mammography CAD and TotalLook MammoAdvantage, as our installed base of these combined systems exceeds 4,000 worldwide today.

This is very important as the opportunity for iCAD to introduce new product upgrades both near and long term will certainly be impacted by the size of this growing installed base.

Lastly, international revenue showed a strong increase over the prior quarter.

As I mentioned, our business with GE in Europe continues to gain traction, driven by a recently implemented marketing program.

Historically, due to the double reading protocol, meaning that two radiologists read every mammogram in Europe, Digital CAD attachment rates have been only in the 25% range, whereas in the US it is nearly one-to-one.

The goal of the recently launched program with GE is to double the attachment rate for CAD with these mammography systems to the 50% range and we're seeing good progress with these efforts.

Now I would like to discuss our new product pipeline in greater detail, starting with VeraLook, our recently approved CAD product for virtual colonography or CTC.

We were very pleased to receive FDA clearance for VeraLook in August.

We are making good progress with our OEM partners to develop and market advanced visualization software for virtual colonoscopy.

The work ahead includes technical integration and testing in conjunction with finalizing or updating commercial agreements to be able to go to market with our advanced visualization partners.

The addition of CAD technology may enhance the adoption rate of virtual colonoscopy as extensive testing with radiologists has demonstrated that the use of VeraLook improved reader sensitivity to all colonic polyps in a statistically significant manner, particularly for smaller, more easily missed polyps in precancerous polyps which can develop into malignancies over time.

Consequently, we are confident in moving forward, we will see increasing demand.

We are not expecting significant revenue from this product in the fourth quarter, but are hopeful as we enter 2009 we will see good sales traction.

We remain enthusiastic about the prospects for the growth of virtual colonoscopy as a screening tool for colon cancer.

Colorectal cancer is the second leading cause of cancer death and approximately 95% of colon cancer deaths are preventable with early detection being the key.

Unfortunately, only 50% or so of those eligible for screening do so today.

We believe that the ongoing adoption of virtual colonoscopy or CT colonography with CAD, these percentages will increase significantly over time.

Further, there have been some very encouraging news about our virtual colonoscopy recently.

According to a new study published online in the journal Radiology, virtual colonoscopy offers several advantages for the surveillance of patients after colon surgery.

In this study of more than 700 patients, VC detected 100% of the [medical chronos] or recurrent cancers, along with several unsuspected extra colonic cancers.

The study noted that the many advantages of contrast enhanced CT [colonography] including excellent diagnostic performance, dual colonic, extra colonic assessment, less invasive nature, higher safety profile, all supporting the use in surveillance of colorectal cancer patients.

In addition, the study was presented last week at the 2010 American College of Gastroenterology Annual Meeting in San Antonio.

Over several years this retrospective analysis followed the Medicare records of more than 350,000 patients, 65 and older, half of whom underwent conventional colonoscopy and half of whom did not.

Cardiac events were nearly three times as likely and complications more than twice as likely in the colonoscopy group.

This high rate of events indicates the need for less risky colon exams for the Medicare population and virtual colonoscopy should be considered as a safer option for many seniors.

The outcomes of these studies support both expanded use of virtual colonoscopy and strengthens the case for reimbursement as we believe Medicare reimbursement to be an important driver for significant procedure growth.

So to provide an update on reimbursement, you will recall that CMS denied reimbursement in May of 2009 for CTC.

That move has prompted the VC community to swing into action with the American College of Radiology Colon Cancer committee in the lead.

The committee made up of the VC luminaries has been working with several organizations including CMS, the US Preventative Services Task Force and the US Department of Health and Human Services, which oversees CMS.

The outcome of the meeting in June with Health and Human Services was a request for additional evidence as to the performance of CTC on the Medicare population.

This effort is underway with anticipated findings being published in early 2011.

Today, 19 states and the District of Columbia follow the American Cancer Society guidelines and require reimbursement for CTC.

It is covered nationally by United Healthcare, CIGNA, a number of Blue Cross chapters and other regional payers.

On the legislative front, a bill was introduced to Congress in May of this year which would amend the Social Security Act so as to cover CTC screening under Medicare.

This potential legislation is on hold for now, but has gained several additional cosponsors recently and will be reintroduced in early 2011.

We are confident that some of these initiatives will have a favorable outcome for increased colon cancer screening by an CTC and reimbursement as well in the not-too-distant future.

This should create a significant business opportunity for iCAD as we target the 8,000 to 9,000 advanced visualization workstations that have a colon application running today in the US alone.

Moving forward, we have completed work on an enhanced version of our colon CAD product that features performance improvements, including increase of more than 5% in sensitivity of polyp detection and 20% reduction in false positives.

The product was introduced into the European market and we expect to file a 510(k) with the FDA by year end.

Because this is a new version of a recently approved product, it will not likely require a reader study.

We are hopeful it will be available in mid-2011.

We are very excited about the growth opportunities for VeraLook, as the market expands and wider reimbursement is established.

Now a few comments on our MRI products.

As I mentioned earlier, we released our enhanced product suite for MRI which includes SpectraLook for breast, VividLook for prostate, OmniLook for other organs and VersaVue Enterprise.

These solutions offer the radiologist powerful new image analysis and workflow tools with an enhanced user interface and thin client architecture.

The potential benefits of this expanded offering include consistent quantitative analysis for cancer detection, staging, localization, treatment planning, and serial monitoring.

In addition, we continue to invest in education initiatives and advocacy efforts that support the use of prostate MRI and prostate cancer screening diagnosis, treatment staging, and monitoring as well.

Moving on to the new MRI -- I'm sorry, the new mammography products in the pipeline.

We are making great progress with SecondLook Premier Digital, our next generation 2-D digital algorithm for mammography screening.

SecondLook Premier's capabilities should provide radiology with superior clinical decision support tools and workflow enhancements that has improved detection accuracy combined with lower false positive rates.

In addition, it will provide an expanded quantification toolset as well.

We are in the process of finalizing the criteria for our US reader study, which we will initiate late this quarter or early in the first quarter of 2011.

We have based our plan on extensive and positive dialogue with the FDA and expect to submit a PMA supplement application some time next summer.

This upgrade should offer a significant opportunity for us as we can offer this to a growing installed base of over 3,800 digital systems in place today.

I would now like to turn to Tomosynthesis that has -- it has been front and center in the digital mammography field as a result of a recent positive FDA panel review because we have often asked questions about it.

First, we were delighted by the positive FDA panel review for Tomosynthesis as it is a meaningful technology that we believe can ultimately be a disruptive technology for breast cancer screening and diagnostics.

We have been in ongoing discussions with several of our OEM partners for some time while working in this area, and look forward to providing CAD or our partners in this space.

Tomosynthesis, like MRI and CT and 3-D imaging, creates substantial image sets and stands to significantly benefit from CAD as a means to both augment radiologist read and to provide productivity and workflow enhancements.

That said, it is not clear whether the first generation Tomosynthesis versions will be indicated for screening mammography versus being limited to diagnostic use.

One of the potential major screening hurdles may be radiation dose which is believed to be two to three times that of 2-D digital mammography today.

Our OEM partners are working to bring versions of Tomosynthesis to the press market that will deliver a comparable dose to today's improved 2-D technology.

This accomplishment may be the key to Tomosynthesis adoption for screening mammography.

We are very excited for the long-term opportunities for CAD with Tomosynthesis technology.

We see this as a natural evolution of the diagnostic imaging market, like the transformation from film to digital, the transformation from 2-D digital to 3-D will provide significant opportunities in the next three- to five-year time frame.

Finally, I want to review some of the products we will be highlighting at the upcoming Radiology Society Meeting in Chicago at the end of this month.

This is the largest annual medical meeting held worldwide with more than 60,000 medical and scientific professionals in attendance and over 700 technical exhibitors.

The RSNA offers us a great opportunity to showcase new products as we introduce and gain feedback on works in progress and to have direct interface with our customers and partners.

This year at the iCAD booth, we will be highlighting the latest version of MRI suite of products for breast, prostate cancer and diagnostics, but -- which I spoke earlier -- we'll be showcasing a new version of VeraLook colon product which we can expect to file with the FDA early in the 2011 timeframe.

We'll be showing the introduction of our next generation algorithm and mammography which is planned to be introduced [OUS] late this year and also be showing CAD with Tomo images as -- images as a works in progress with our OEM partner, Siemens.

Finally, I would like to remind you that we are hosting an investor luncheon on November 30 at 12 noon in Hyatt McCormick Place Center which is connected to the Convention Center.

We hope that any of you who are planning on attending the RSNA will join us.

If you would like to attend the luncheon or have any questions related to this function, please contact Anne Marie Fields at Lippert/Heilshorn at 212-838-3777.

In closing of my opening remarks, as we conclude the balance of 2010, we are pleased with our progress with our new product program for mammography, MRI and CT.

This progress enables iCAD to have the broadest portfolio of innovative products in its history in the marketplace.

While the current economic and legislative environment is providing some fairly significant near-term challenges, we are extremely confident as ever of our prospects for long-term success.

And with that I'll turn things over to Darlene who will give you more detail on our financials.

While the third quarter of 2010 proved challenging, we were able to further strengthen our cash position while continuing to invest in the development of new products.

As a result, we believe iCAD remains in a solid financial position to capitalize on the stabilizing economy and improvement in demand for our products.

Looking at our third-quarter financial results in more detail, total revenue for the third quarter of 2010 was $5.6 million.

This is down 21% from $7.1 million in the third quarter of 2009, primarily due to softness in our film base and Digital CAD revenue.

These declines are offset by a solid increase in our service and supply revenue.

Digital CAD MRI revenue was $3.3 million, a 31% decrease from $4.8 million in the third quarter of 2009.

As Ken mentioned, this was largely the result of having a combination -- result of a combination of having a key OEM customer out of the market, awaiting approval of their new digital mammography system and to the weakened economy, as well as budget constraints and healthcare capital spending.

Sales of film-based products were off 41% to $740,000 from $1.3 million in the same quarter last year.

This could be attributed to softer demand for digital mammography systems, which affects sales of the TotalLook MammoAdvantage, our comparative reading product, which is used in conjunction with the transition to an all-digital workflow as well as to the expected continued decline in demand for [film-based] products, as the marketplace continues to transition to digital technology.

Service and supply revenue further strengthened, increasing 50% to $1.5 million from $1 million in the third quarter of 2009.

This is a result of our growing installed base that continues to transition from warranties to service contract agreements and to renewals of expiring service contract agreements.

International sales of $776,000 for the third quarter of 2010 more than doubled from $371,000 last year, largely the result of programs we put in place with our OEM partner, GE.

We continue to believe that the international markets will offer significant growth opportunity for our CAD products, mostly as a result of our OEM partner's recently implemented marketing program and as the European market upgrades their imaging technology from film to digital.

As we reported in the past, we believe less than one half of the installed systems in Europe have transitioned to digital technologies, and an even smaller percentage have transitioned in other parts of the world.

In fact, just recently, the French Ministry of Health announced plans to bring that country's radiology centers into the digital age.

We also seemed to benefit from recent and future product introductions in these markets such as our recent launch of VeraLook in the EU for CTC and our planned international release of SecondLook Premier Digital, our next generation 2-D digital technology for mammography.

For the quarter, we significantly improved gross margin to 87.3% from 84.8% in the prior year, largely due to reduced product costs and optimized pricing.

Operating expense (sic) for this year's third quarter were $6.3 million compared with $5.9 million last year.

The modest increase was primarily due to higher personnel and related expenses and professional and consulting costs, offset by reductions in stock-based compensation expense and various other expenses.

For the third quarter of 2010, we reported a net loss of $1.4 million or $0.03 per share including stock-based compensation expense of $280,000.

This compares with net income for the third quarter of 2009 of $113,000 or $0.00 per diluted share, including stock-based compensation expense of $492,000.

Now turning to our nine-month results, total revenue for the nine months ended September 30, 2010 was $18.2 million, down 9% from $20 million for the first nine months of 2009.

The gross margin for the first nine months of 2010 expanded to 87.5% from 83% in the prior year period.

The net loss for the nine months ended September 30, 2010, was $3.3 million or $0.07 per share including stock-based compensation expense of $1.3 million.

This compares with a net loss for the nine months ended September 30, 2009 of $2.3 million or $0.05 per share including stock-based compensation expense of $1.5 million.

Private backlog at the close of the 2010 third quarter excluding service and supply backlog was $483,000 as compared with $958,000 at December 31, 2009, and $653,000 at September 30, 2009.

As a significant amount of our products are booked and shipped within the same quarter, backlog should not be considered as an indicator of revenue for any future period.

Now looking at our balance sheet, as a result of our commitment to operational excellence and fiscal discipline, we are pleased to report that, in addition to achieving a strong gross margin, we further reduced inventories and accounts receivable.

As a result, we generated nearly $1 million in cash during the quarter and had $18.1 million in cash and equivalents at quarter end.

This compares with $17.2 million in cash at the end of the second quarter of 2010 and $16.2 million in cash at year-end 2009.

We continue to invest in the development of enhanced and new products that, over time, should offset the maturation of the digital CAD Mammography business as we build a substantial recurring revenue stream from our installed base as well as from growth associated with new CAD radiology workflow opportunities.

In addition, we will continue to seek acquisitions that are accretive and synergistic with our strategy to increase our footprint in radiology.

As you may be aware, in early October we filed a new shelf registration in order to ensure that iCAD is in a position to take advantage of any such opportunities.

We have no intention of selling equity in order to fund operations as we are self-sustaining and continue to generate positive cash flow.

This shelf registration should really be viewed as an extension of the shelf registration that we have had in place for the past three years, which expires the middle of this month.

The purpose, again, is so that iCAD is able to respond rapidly to opportunities should they present themselves.

And finally, with regard to 2011 financial guidance, as we wind down fiscal 2010, we are well into our planning for 2011.

We continue to defer providing financial guidance.

We will revisit this decision again at year-end and we will communicate our plans to you.

With this financial update complete, Operator, let's open up the call for questions.

(Operator Instructions).

Jonathan Block with SunTrust Robinson Humphrey.

Thanks and good morning.

Maybe just a handful of questions.

The first one, Ken, maybe on the timing of Siemens.

I know the FDA has been incredibly difficult.

But I believe you said maybe in and around or hopefully before RSNA and curious.

What gives you that type of visibility?

I actually think maybe today the FDA down-classified [FFDMs] from the category [causing it] from 3 to 2.

Is that what gets you a little bit more confident?

Are you hearing more buzz specific with Siemens?

Any clarity would be great.

Sure.

I think in general at a more macro level, we are actually seeing some good progress in the FDA across a number of fronts.

There seems to be some new fresh blood in there combined with new management that has been in place almost a year.

And what they really have done, I believe, is really made a very strong effort to get this backlog of submissions down to a more reasonable number.

So I think all the companies are seeing more responsiveness.

I think the companies are seeing more progress on approvals.

And I think that whole backdrop is positive for everybody bringing innovation to the market.

With that said, Siemens obviously has been at this game a long time and has some very, very experienced people on the regulatory side of things.

As it relates to their submission, there were two parts to it.

One was a software component and the second one was the detector.

They did recently receive, according to a conversation with Siemens, approval for the software component of this product.

But they are still waiting on the detector.

Our latest conversations with them, which we know are never a certainty based on the unpredictability, has them communicating to us in fairly good solid optimism that this could be approved by the Radiology Meeting.

So you never know, but I would say that the environment is improved.

Their confidence of getting this done fairly quickly has improved and in our recent meeting with them in Germany around the French Radiology Meeting, they communicated to us that they had something on the order of 80 or 90 systems in backlog of pent-up demand for this product in the United States.

So this could be something that we would benefit from hopefully in the fourth quarter.

It may also be something that certainly spills over into the first quarter.

But in that window of Q4, Q1, we are pretty confident that we will see this be approved and we will then benefit significantly from the pent-up demand.

Perfect.

And then maybe to just shift gears.

You talked a lot about international, the opportunity that exists over there.

What's needed, Ken?

I mean in other words, is it as simple as the attached rate going up on digital and digital's continuing to accelerate in terms of penetration?

Or, I believe a lot of the countries have the double reading protocol.

So do they keep the double reading protocol?

And then also implement CAD as well or do they have to change workflow?

Just some color, please?

I think it's a good question.

I think it's a combination of both.

I think you're still going to see, in certain environments, double reading protocol.

In those environments, I think it is still very unlikely you are going to see pervasive CAD adoption.

With that said, there have been studies that have shown the benefit of a single read plus CAD versus a double read protocol, combined with all of the studies in the United States that the European marketplace is very aware of, which is really continuing to demonstrate the importance and the relative value of CAD.

So I think it is a collection of efforts, if you will.

What we're basically doing is we are working with GE in particular, and what we've realized is that because the price point has been so sensitive, they have, along with other companies, been reluctant to really aggressively promote CAD on the front end of their solution offerings.

They've rather offered it based on customers asking for it.

So what we basically have done is we have kind of seized what we believe is good solid momentum from the clinical and scientific evidence and worked out more aggressive pricing with them such that they are much more confident now to go out and aggressively promote the benefits, demonstrate through the papers the benefits as part of the sales process.

So what we're trying to do basically is increase the attachment rate from 25% to about 50% or doubling it.

And GE feels pretty confident that, with a better price point, with stronger clinical evidence and doing this more proactively on the front end of each sale, that they will be able to do this.

So we are excited about the opportunity.

We also think that will bring more competitors into the game.

Whether it be Hologic or Siemens or you know, the European competitors like [Sector, Giatto] and so forth and force it into the sales process.

Because once one company is promoting it, differentiating it as part of the total solution, the others may have to follow course.

And so we are optimistic that this opportunity, for a variety of factors, is going to be a growth opportunity.

Now I said this in my opening remarks, that the European business was up something like 13% on Digital CAD year over year.

So clearly, we are already seeing some progress with this.

We would like to bring more of our partners to the party.

One of the major conversations we had in Europe last week was with Siemens.

As Siemens shifts probably twice as many systems in mammography OUS as they do in the US, if we could get them onto a similar program as we have with GE, it could be a really a legitimate good growth opportunity.

The other part of that, of course, is we probably have about 500 systems, plus or minus installed in Europe in order to bring out the new, next-generation digital mammo product late in this quarter.

So we are going to really see an opportunity to get some recurring revenue out of Europe with our new product, focusing on those customers that have been using our Digital CAD product for some time.

So we are more bullish about growth OUS, particularly in Europe.

And we are very, very hopeful that, in 2011, it will be meaningful.

One last comment on international growth as well is we are in the Chinese FDA, if you will, their version of the FDA.

And there is some hope we may have an approval in the first quarter of our product with GE in China.

So we are very optimistic about the overall potential of the international markets, while I think we all would say that the US market is still a pretty tough place to do business.

Maybe one last one and then I will follow up with you guys are off-line.

Just looking out to the next growth vehicle here in the US and you mentioned Tomo.

Can you give us a feel, obviously, I think you're working with both GE and Siemens, where those initiatives stand?

And then what I'm trying to get my arms around is when you get there, is it a full swap out where when they go ahead and opt for CAD, which I understand they are certainly going to need with Tomo, it is another roughly $22,000, $23,000 for you guys?

Or is it more a software upgrade and maybe that ASP is $8,000 to $10,000 to $12,000?

I think the issue for our partners is they are concerned about those.

And what we understand from some of the conversation in the marketplace is that while Hologic may have somewhat of a lead, if you will, in terms of timing, what we understand is that the dose that their product delivers is somewhere in the order of two to three times a normal mammogram.

I think the big question is going to be, given the sensitivity around dose, particularly OUS, but going as well in the United States and I know the FDA has been looking at this across a number of imaging modalities, will this product get adopted over the next several years with that sort of a dose for a screening population?

That, I think, is a really good question that needs to be answered.

Our partners have the view that they need to deliver a comparable dose to the traditional 2-D systems today.

So that could mean they may be several years before they are in the marketplace.

I think that is kind of a general timing, relative to the partners we are working with.

It will be a brand-new product on a new platform.

It will not be a software upgrade.

Largely similar to moving from a 2-D detector to 3-D.

I think that will be a major upgrade for our partners, as well.

And in terms of pricing, we really have not gone there in terms of pricing yet.

But what I would say is that we would hope to charge roughly the same pricing that we do today from an OEM standpoint as we do for our 2-D product.

I mean, it is a whole different value proposition.

The upgrades have been bantered around pricing-wise, almost at the price of a new system, since they would be major.

So I would expect the pricing would be comparable to how we price our 2-D product today.

Rick Deutsch with Ladenberg Thalmann.

Following up on your GE pricing initiative.

Is this plan just OUS or does it also include US?

And I have a follow-up question to that.

Yes.

It is primarily OUS.

I mean we dramatically dropped the entry report for new customers.

So essentially what we did is that a new customer that is buying a server if you will for the first time, we took the pricing down to get that entry point down.

What we did not reduce was prices on the licenses, which would mean either a customer is adding capability with additional mammography machines, or is making a commitment to a multisystem purchase.

We felt that really the sweet spot for growth would be that brand-new customer.

So we took the entry point down significantly on those new customers.

With that said, we also negotiated minimum quantities with GE and so we were able to look at this goal of increasing the attachment rate from 25 to 50, relative to their shipping plan and required them to commit to minimum quantities which will increase our overall volume in the second half with GE, particularly in Europe versus the first half.

That is kind of how we structured the arrangement with them.

I think that answers maybe that answered your first question.

Yes, it did.

So that is going to affect your margins a little bit?

It will have a modest effect on margins.

But I think you can already see in the third quarter that our margins were in the high 87s and maybe down by what 2/10 or 3/10 of a point versus a prior quarter.

So and that probably had something to do with volume as well.

So I would say that the impact on margins has been very, very nominal.

Okay.

And my next question refers to Siemens.

You mentioned that they had launched their new systems overseas.

Are they offering your CAD with that or are they not?

Because it doesn't look like you've made any sales from that.

Siemens, in the market today, tries to leave at their own CAD products OUS.

And so what we find is when they are in a very competitive deal, particularly with GE or Hologic that are offering CAD with the performance similar to ours, they are forced to offer our products.

So unfortunately, we don't have what I would describe as a pro active strategy with Siemens.

It is almost a reaction to customer requirements in the competitive landscape.

So they do offer it and we do sell systems each quarter, but as I mentioned earlier, there is a significant opportunity to increase that with them.

And we have opened a dialogue with them to try to do so.

And it is shipping our CAD with their new detector.

In the United States, you mentioned your expectations for Siemens to maybe have a backlog of 80 to 90 systems.

What is your expected attachment rate for that?

It should be near 100% as is the market.

So I think we are clearly feeling it's almost a 1-to-1.

I think that the big challenge of course is, will this happen by the Radiology Meeting?

I think they are seeing some positive signals, but we have been in the same boat with some of our own FDA submissions and for months at a time have been extremely optimistic, only to be disappointed.

But I do think there is growing momentum in their favor, and given that they are a very big professional organization from a regulatory standpoint, I'm sure they are putting all the proper resources on this and have substantial capacity to install systems once they get the approval.

One of the other challenges, of course, is customer readiness.

Even though customers have a pent-up demand and they are anxious as can be, it does take some coordination to do these installations.

So all I know is that the business has nearly dried up.

It has cost us a significant amount this year.

Now if you were to take last year's performance with Siemens and even discount, let's say, 15% or something because the MQSA this year is down 18% versus last year, we would be almost flat year over year in the business.

That's how much that business has heard us.

They have lost some business, I'm sure, because of the long period that they have essentially been out of the market.

But they also have some very loyal customers that they've done some things for to hold on to business.

So there's only upside from our current run rate, once they get approval.

Okay and one final question and I will get back into the queue.

I was quite interested in your efforts in the prostate cancer marketplace.

Can you speak a little bit towards your vision for that?

Thank you.

Sure.

I think what we are really still trying to do is to educate our market and what we're trying to do is get some good collaboration going with the urologists and the radiologists.

That's really what has to happen.

There's no question that radiology buys into a contrast enhanced MR study of the prostate as a very solid diagnostic step prior to biopsy.

The challenge to a great degree is the urologists are very, very, let's just say, used to doing biopsy and generating a nice income from it in their office setting.

So when an elevated PSA is present, often patients go, if it has been for a sustained period of time or there's a family history, they go right to biopsy.

And really what we have got to do is to get the urologist to look at that situation and prescribe a contrast-enhanced MR study.

We are seeing somewhere in the range of 1.5 million biopsies being done essentially blinded in the United States alone each year.

That is a huge number and when only 15% or 20% of those biopsies come back positive, it is clear that the diagnostic process is flawed.

And so our efforts are around education, such that if you have an elevated PSA, you've got a symptomatic patient, you have got someone who's got family history of prostate cancer, prior to biopsy, they should get a diagnostic MRI study.

That will clearly give both the urologist and the radiologist the indication of whether there is a likelihood for prostate cancer.

And then you would go into a targeted biopsy or you would basically say that it is already obvious in the image that it is benign.

And there would be no biopsy at all.

If we could get that interventional step in place, it would mean significant procedure volume.

Maybe 1 million procedures a year given that there's 1.5 million or so biopsies being done, increase over what is being done today.

So it's all about education.

It feels like a "no-brainer", but given the creatures of habit in healthcare, given how much like it or not physicians follow the money, it is a challenging situation.

But we are making good progress with our seminars, our Webinars, there's a lot of interest and even though our revenue in MRI today is relatively small compared to our total revenue, it is growing.

And it is growing in that category because interest is growing significantly as well.

Jeb Terry with Aberdeen Investment.

Ken, you may have mentioned it, but how many -- what is the installed number of sites that have the current advanced visualization and CT clinics where you can -- which would, I presumably, would be the low-hanging fruit for your colon [deployment]?

Yes.

We think there's roughly about 9,000 in the United States, review workstations that are running 3-D and of that roughly about 90% have some version of a colon visualization application.

So that's across GE, Philips, Siemens, TeraRecon, Vital Images, Viatronics -- all the players from large to small.

And that is really the addressable market.

If they've got a workstation running 3-D, they could obviously either have already a colon application or they could add one in addition to our CAD.

So we think that's a pretty sizable addressable market as we work towards getting greater adoption of the procedure.

And can you give us some sense of what the price point would be or a range for that addressable market?

It's a challenge to do that, but what I will tell you is that it will depend on configuration.

So what I would say is the configurations can be as simple as a single user, so you install the application.

Using really rough numbers that could be worth, at a customer level, maybe $20,000 to $25,000.

What also is very common in that space, though, is the ability to provide concurrent users use the application.

And then there's additional fees.

Pick a number, maybe $4,000 or $5,000 for each additional concurrent user.

So it could really depend.

You could have a low end configuration that could be maybe around $20,000 and you might even have a high end configuration that could be $40,000.

And I think that just really depends on how big a site, how many concurrent users need to use the application simultaneously.

You could also obviously do something of an annual license versus an outright purchase.

And so you know, we are in active conversations with our partners around an annual license model.

We are talking certainly about this [sell it outright] with a configuration model and we are also talking about a per-user, a per-click model.

And we've had some very good conversations with our Advanced Visualization partners, but what I would say is that we are making good progress.

We have not finalized these programs yet with any of the companies.

We should have these substantially completed with the pricing models in place by the end of the calendar year.

That would be our goal.

Maybe not with everybody, but when you look at the players we are talking to, obviously there's the big guys like GE, Philips, and Siemens.

There's Vital Images, TeraRecon, and Viatronics who's smaller, but a specialty player in this space.

We like to think that we could have two or three of these contracts in place by year-end and, hopefully, pursue one or two more into 2011.

So that is what the game plan is to tackle this addressable market of about 9,000 workstations.

And then we are also talking with these companies OUS.

Because while there's maybe 10,000 or so CT scanners installed in the United States, there's probably another 5,000 or 6,000, 7,000 OUS and since they have global footprints, we are trying to establish an international strategy, but it -- clearly at this point the majority of the market opportunity will initiate in the US.

And that is where most of our focus is.

So it sounds like 2011 could have pretty substantial -- or, I don't know what the right adjective would be, but some meaningful revenue impact on colon.

I hope so.

I think one of the key things in the United States is to get CMS to bless this for Medicare.

There's been some tremendous momentum in that regard.

You know just to give you an example, the American College of Radiology has established the Colon Cancer Committee and that committee has really aggressively pursued CMS, the US Preventative Services Task Force and the Department of Health and Human Services, which oversees CMS.

They met in June, had a very good productive meeting with Health and Human Services.

What they essentially asked for was that large study which was published two years ago with about 2,600 patients be segmented for the Medicare population.

What we understand is that the study results will actually be submitted in early next year to the Health and Human Services Department.

So you could see some effort next year.

Whether we get approval in 2011 or 2012 is unclear, but I think as you get CMS or Health and Human Services [overseas] CMS to really drive this for the Medicare population and get approval, we think that it's going to be a major catalyst towards procedure growth even though we have some growing coverage with United and CIGNA, the Blues and so forth.

19 states have legislation in place.

It will be a lot easier for this business to grow if it is covered by Medicare.

And we are optimistic that there is a lot of effort under way.

As I mentioned in my opening remarks, several studies have looked at both the Medicare population retrospectively, have looked at the benefits of CTC for post-colon surgery patients.

So the interest is growing.

I think, in the States, to really get this off the ground in a dramatic fashion and get meaningful revenue, we need to get Medicare to cover this.

And I hope that it will happen.

It's just a question whether it's in 2011 or 2012.

Okay.

And you mentioned, apparently, Fuji had weaker demand in the quarter than they expected.

If you could address maybe what the outlook for Fuji going forward (sic)?

And also if you could comment on the replacement market?

I think you mentioned in the past that we are starting to see some replacement of old first-generation digital mammography machines and therefore what that might mean for your replacement opportunity for next gen mammo?

Yes.

Fuji -- what I would say with Fuji is that Fuji basically delivered four very consistent strong quarters starting in the middle of 2009 through the middle of 2010.

And they just typically had a softer third quarter which I think historically has been the case, without any particular reason.

You know, there just was a softer order book and backlog was not as movable as it might have been in different quarters.

They didn't have a specific answer for us that said that there is any kind of trend.

So we are hopeful, we are optimistic that they will have a much stronger fourth quarter as a result.

They still have a very strong value proposition in the market, and as I say, even in a tough environment, over the last 18 or 21 months, they have had relatively consistent performance over the last four quarters or so.

But their volume did drop about 50% in Q3 versus what they were doing in Q1 and Q2.

So we are hopeful and optimistic, based on them having had a very strong fourth quarter last year, that their business will come back stronger and boost our revenues in Q4.

As it relates to the replacement market, to be honest with you we've not really seen very much.

I know that others like Hologic have kind of predicted something on the order of 5% to 10% of the installed base starting somewhere in the next year or so.

We have not seen similar demand yet from our OEM partners.

So we certainly do anticipate that units will start to turn.

But when you really think about it, it was 2006 when we really started to see meaningful volume in digital mammography.

That is the year that about 1,000 systems in the US went digital.

And here we are in 2010.

So realistically you would think there is a that traditional seven-year cycle for replacement.

So that would say really 2013-ish might be when you'll start to see meaningful replacement, maybe 2012.

So I'll be interested to see how Hologic communicates their view on this if they do, at their earnings call which, I think, is coming up in a few days.

But typically with a seven-year replacement cycle, I think 2012, 2013 is where we are modeling some meaningful business.

In the meantime, it's (technical difficulty) be a system here, a system there, based on some reliability issues that lead you to say it's time to replace the system.

With no further questions in the queue I would now like to turn the call back over to Mr.

Ken Ferry for any closing remarks.

Sir?

In closing, we are obviously not satisfied with our third quarter and year-to-date results.

With that said though, our balance sheet is the strongest in the history of the Company and we also have the broadest, most innovative set of products in the Company's history as well.

We anticipate stronger performance in the fourth quarter and in 2011 as well, as the market dynamics improve.

So thanks very much, everybody, for joining us today and good day.

Thank you for your participation in today's conference.

This concludes your presentation.

You may now disconnect and have a great day.