AngioDynamics Inc., F3Q09 (Qtr End 02/28/09) Earnings Call Transcript

Apr. 2.09 | About: AngioDynamics, Inc. (ANGO)

AngioDynamics Inc. (NASDAQ:ANGO)

F3Q09 Earnings Call

April 2, 2009 4:30 pm ET

Executives

Jan Keltjens - President, Chief Executive Officer

D. Joseph Gersuk - Chief Financial Officer

Doug Sherk - EVC Group, Inc.

Analysts

Gregory Brash - Sidoti & Company

Jayson Bedford - Raymond James

Jason Mills - Canaccord Adams

Thomas Kouchoukos - Stifel Nicolaus & Co.

Christopher Warren - Caris & Co.

Brooks West - Craig-Hallum Capital

Elizabeth Senko - Williams Capital Group

Chris Sessing - AMI Asset Management

Larry Haimovitch - HMTC

Operator

Good afternoon. Welcome to the AngioDynamics third quarter 2009 earnings conference call. (Operator Instructions). I would now like to turn the conference over to Doug Sherk.

Doug Sherk

Good afternoon everyone. Thank you for joining us today for the AngioDynamics conference call to review the results for the third fiscal quarter of 2009 which ended February 28, 2009.

The news release announcing the third quarter earnings crossed the wire this afternoon shortly after the market closed and is available on the AngioDynamics website. We’ve arranged for a recording of this call which may be accessed by phone. The replay will become available approximately at 6:30 pm this evening Eastern Time and will be available for seven days. The operator will provide the dial-in information at the conclusion of today's call. In addition, the call is being broadcast live and on the web at www.angiodynamics.com. A replay of the call will also be archived on the AngioDynamics website.

Before we get started, during the course of this conference call, the company will make projections or forward-looking statements regarding future events, including the statements about revenue and earnings for fiscal 2009. We encourage you to review the company’s past and future filings with the SEC including without limitation the company’s Forms 10-Q and 10-K which identify specific factors that may cause actual results or events to differ materially from those described in forward-looking statements.

In addition, today’s presentation includes certain financial measures used to be better understand our business that have not been prepared in accordance with the generally accepted accounted principles, better known as GAAP. An explanation and reconciliation of these non-GAAP measures have been provided in today’s new release issues by AngioDynamics and is available on the company’s website. Management uses non-GAAP measures to establish operational goals and believes that non-GAAP measures may assist investors in analyzing the underlying trends in the company’s business over time. Investors should consider these non-GAAP measures in addition to, not as a substitute for or superior to, financial reporting measures prepared in accordance with GAAP. In today’s call, the company has reported non-GAAP EBITDA and EBITDA per share. Management uses these measures in its internal analysis and review of operational performance.

Finally, during the question-and-answer period today, we would like to request each caller to limit themselves to two questions and then encourage callers to re-queue to ask additional questions. In advance, we appreciate everyone’s cooperation with this procedure.

Now I’d like to turn the call over to Jan Keltjens, President and Chief Executive Officer of AngioDynamics.

Jan Keltjens

Good afternoon to everyone. Thank you for joining us today for my first conference call with AngioDynamics. With me today is Joe Gersuk, our CFO. I’d like to begin today’s call with a few thoughts about these challenges and opportunities that lie ahead and then Joe will go through our third fiscal quarter financial highlights. Following that, we’ll take your questions.

Today marks my one-month anniversary at AngioDynamics and has been a great month as well as a very busy month. I’ve worked closely with Eamonn to complete the CEO transition we announced last December. The process has been very smooth as demonstrated by the company’s performance during our third quarter. I’d like to thank Eamonn once more for all the support as well as his tremendous contributions over the many years in building AngioDynamics into a successful company it is today.

Since coming on board, much of my time has been spent getting to know a company, and as I gain understanding of the drivers and dynamics of our business, I have become even more excited about our potential. Yes, we do have challenges, however, we have even more opportunities and I look forward to working with our team to capitalize on those opportunities in ways that build value for our customers and patients, our employees, and our shareholders.

During the past 4 weeks, I’ve been able to visit our four key operating locations in Georgia, California, The United Kingdom, and of course here at our headquarters in Queensbury, New York. I’ve met many of our talented and dedicated associates, started to get to know our product lines, and I’ve spent time with some of our customers, and we have started to identify a couple of areas that will benefit from the revised approach which I will touch up on today. I’ve also found a lot of great elements that provide me with the optimism about the future of AngioDynamics. One of the strengths of our company is the strong team the company has built in multiple business areas.

As demonstrated in the third quarter, we have strong product lines with each of our three businesses. In particular, our VenaCure, EVLT laser vein ablation business, our PICCs and access ports, as well as our oncology product lines offer a tremendous potential for the future, and during the third quarter, each of the three business units reported the best year-over-year growth rates.

During the quarter, our team also completed the purchase of the assets of privately-held FlowMedica which is pioneer in the emerging field of targeted renal therapy or TRT. FlowMedica’s benefit system offers a therapeutic approach that delivers drug directly to the kidneys in order to prevent and/or treat acute kidney injury which frequently occurs as a result of interventional procedures. We believe TRT addresses a significant unmet clinical need, and as such, is a solid market opportunity for AngioDynamics.

Now let us turn to IRE, and let me start of by stating that IRE in general and our NanoKnife system in particular as a potentially life-changing technology for millions of cancer patients around the world, and as such, a tremendous opportunity for our company, but I’ve also come to the conclusion that if we are going to maximize the potential of this exciting technology, we need to significantly re-focus our clinical and commercial programs.

The most significant change being made is that we are shifting our focus towards building the safety and clinical efficacy evidence required to obtain specific regulatory indications and create strong professional education programs. With that as a foundation, we can accelerate the commercial roll-out and build a large growing, and most importantly, a sustainable leading oncology business.

Over the last 2 weeks, we have notified 18 sites that have been shipped NanoKnife systems at any clinical trial in the US which focuses on a specific indication will need IDE approval. We’ve taken this decision to pursue pre-clinical and clinical programs towards two therapeutic indications in the US, the first of these will be prostate cancer. The IDE for this has already been filed with the FDA a while ago, and was received very positively, and we are now responding to request for additional information and expect this IDE to be approved within the next several months.

Beyond the two company sponsored IDE programs, we will support US-based customers with physician sponsored IDE programs and support clinical trials in other markets outside the US.

We continue to learn about IRE every single day, and recently, based on reports from the field, we advised doctors involved in clinical work with the NanoKnife system about cardiac synchronization challenges that have occurred in some cases performed in tissue close to the heart. Our team has implemented and is currently validating a technical solution to this which so far as proven to be successful.

Our new IRE strategy brings a much needed focus to the team. It is a great and promising technology, and it will take relentless focus and long-range thinking to convert this opportunity into a great and sustainable business. We are 100% committed to creating the required capabilities and devote the resources to do this. Near-term IRE revenue growth may slow down as a result and we will most likely not meet the 1 million revenue growth for this year we had indicated before. However, the longer term rewards and significantly lower risk will more than offset that.

Before I turn the call over to Joe, I’d like to share some preliminary thoughts about my vision for AngioDynamics as we move forward. Please do keep in mind that it’s still early in the game and I’m still in the process of learning here at warpspeed.

My first impression is really what I stated in the beginning. This is a great company with a very motivated team and tremendous opportunities ahead. What we do need to add to this equation can be summarized in one word, focus; focus on those product groups with strong growth potential and healthy global markets, focus on improving and accelerating the introduction of new products, and focus on operational excellence starting at supply chain management and extending into other business processes.

We’ve started to work with the leadership team to review our businesses, identifying our biggest opportunities, narrowing down the R&D portfolio, and improve supply chain management and efficiency. The good news is that our peripheral vascular and vein business, our access business, as well as our oncology business each present plenty of opportunity for creating a healthy and prosperous long-term future for our company.

We had a healthy balance sheet and strong positive cash flow which we view as key assets for driving our business yet at the same time are committed to maintaining as well. Also, in terms of getting you the guidance you need to assess our direction and future, we are committed to getting you as realistic an outlook as we can and are focused on meeting those expectations and driving shareholder value.

As I said in the beginning of my remarks, I’m genuinely more excited about the potential for AngioDynamics and very much look forward to working with the team to capitalize on that potential.

Now I’d like to turn the call over to Joe to review our third fiscal quarter financial highlights.

D. Joseph Gersuk

Good afternoon ladies and gentlemen. From an operating perspective, our third quarter was an eventful and productive one for AngioDynamics. We closed our second acquisition of the fiscal year in January when we purchased the assets of FlowMedica and we successfully managed the company through the transition to our new Chief Executive Officer. This followed the first half of the year in which we re-organized the company into three marked-focused business units, expanded the sales forces in the peripheral vascular and access units by 40% and completed the acquisition and integration of Diomed.

The period we are reporting today was highlighted by our highest quarterly sales growth of the year with third quarter sales growing by 21% to $49.4 million. We managed to grow operating income by 23%, net income by 26%, and EBITDA by 25% over the prior year if you exclude the effect of the two special items that were noted in the press release. We’ve accomplished this despite the very challenging macroeconomic environment. We continue to believe that AngioDynamics is well positioned to weather the financial and economic crisis, to continue to generate substantial operating and free cash flow despite considerable investment in the IRE program, and to grow our business in a strategic and profitable manner.

Peripheral vascular sales were $20.7 million in the third quarter, which is a 35% increase from the year ago, and reflects the impact of the Diomed acquisition as well as modest sales of the Benephit TRT product following its purchase in the middle of the quarter. Total laser ablation sales which include the entire VenaCure EVLT product category amounted to $8.3 million in the third quarter, a 171% increase from the $3.1 million in VenaCure sales a year ago.

Late in the quarter we began to sell our NeverTouch fiber with a Delta series laser marking the completion of the product integration process. With this, we have now completed all aspects of the Diomed integration process.

With regard to the acquisition of the Benephit TRT product line, we have hired the 10 people that FlowMedica employed at the time of the acquisition. They will continue to work from a facility in Freemont, California and we will continue to produce the benefit product from that facility for a period of time. As Jan indicated, we are excited about the potential for this product in the emerging field of targeted renal therapy, and our view is that this will be a successful product for AngioDynamics.

Third quarter sales in the access unit was $17.2 million, an increase of 8% from a year ago and an improvement from the 2% year-over-year growth reported in the second quarter. This improvement stems from resolving a component supply issue with the Morpheus PICC that effected PICC sales and diverted the sales team’s attention from port sales earlier in the year. With the supply issue resolved, we saw strong sales of PICCs and ports in the third quarter with particularly strong SmartPort sales. This offset weakness in dialysis sales where we continue to see price competition.

Oncology surgery sales of $11.5 million increased 22% over the prior year and were led by strong sales of LC Bead, our chemoembolization product. NanoKnife sales totaled $110,000 in the quarter, bringing fiscal year-to-date IRE sales to $152,000.

From a geographic perspective, 89% of third quarter sales were in the US and 11% or $5.4 million came from international markets. Of the $5.4 million in international sales, $2.1 million was denominated in sterling or euros and the balance was dollar denominated. The recent sharp decline in the sterling and euro exchange rates against the dollar caused third quarter sales to be approximately $600,000 lower than they would have been had the exchange rates been constant throughout the year. However, we also incurred significant costs in those currencies including our laser manufacturing operations in England, and therefore, the impact of the currency movement on operating income was neutral in the third quarter.

Continuing down the income statement, the gross profit margin of 61.1% was slightly below the margin reported in the second quarter and 1.1 percentage points below the third quarter margin a year ago. The margin decline from the prior year was attributable to product mix.

Operating expenses were $27.6 million in the third quarter, which included $2.8 million for the CEO transition. Excluding this special item, operating expenses were flat from the second quarter and increased by 19% over the third quarter a year ago, exclusive of the gain on the settlement of litigation that reduced operating expenses in last year’s third quarter. As a percentage of sales, total operating expenses excluding these two items were 50.1% in the third quarter compared to 51.2% a year ago. This 1.1 percentage point improvement in operating expense efficiency was achieved through lower sales and marketing and G&A spending as a percent of sales.

With respect to the CEO transition, as noted in the release, we have recorded all of the current and future costs associated with the January 20th employment agreement and stock option agreement with Eamonn Hobbs. This reflects the fact the CEO transition was completed in the third quarter. The final point I will note on operating expenses is that we spent a total of $2.9 million on the IRE program in the quarter.

Reported operating income was $2.6 million in the quarter inclusive of the cost of the CEO transition compared to $7.6 million in the prior year, which included the gain on the settlement of litigation. EBITDA was $5.7 million or $0.23 per share compared to the $10 million or $0.41 a year ago.

Excluding the aforementioned special items, operating income increased 23% to $5.5 million from $4.5 million and EBITDA increased 25% to $8.5 million or $0.35 per share from $6.8 million or $0.28 per share in the prior year third quarter. On this basis, the corresponding third quarter EBITDA margin was in excess of 17% of net sales, representing a half percentage point improvement over the prior year in spite of the heavy investment in IRE. Considering all factors, we view this as a strong operating result in the quarter.

After other income and taxes are taken into account, the result is $1.9 million in net income or $0.08 in diluted earnings per share compared with $0.20 in earnings per share a year ago. The cost associated with the CEO transition negatively impacted earnings in the current year third quarter by $0.07 per share. Prior year third quarter earnings included an incremental $0.08 per share resulting from the litigation settlement. Excluding these two items, earnings per share was $0.15 in the third quarter, an increase of $0.03 from the prior year. The tax rate this quarter was 30% reflecting the recent reenactment of the R&D tax credit. We expect a tax rate of 37.5% in the fourth quarter.

Turning to the balance sheet and cash flow statement, we ended the quarter with cash and liquid investments of $62.3 million compared with $57.8 million at the end of the second quarter. We generated $6.9 million in cash flow from operations in the quarter and $13 million in the first three quarters of the fiscal year. Year-to-date cash flow from operations would have been $19.8 million excluding the first quarter payment to VNUS Medical and settlement of litigation.

Our accounts receivable remain in good shape. DSOs were 48 days sales outstanding in the third quarter which is a 2-day improvement from a year ago. Our balance sheet and liquidity positions remain extremely strong and we expect to continue to generate significant free cash flow.

Finally, as indicated in the release, today we are revising our guidance for the fiscal year, and we now expect net sales in the range of $195 million to $198 million, a decrease of approximately 2% from previous guidance; gross margin in the range of 61% to 62% consistent with prior guidance; GAAP operating income in the range of $17 million to $18 million, a decrease of $2 million to $3 million from our previous guidance, which is primarily a reflection of the incremental CEO transition costs and a slight decrease in the top-line guidance; EBITDA in the range of $29 million to $30 million, also a decrease of $2 million to $3 million from previous guidance; and GAAP EPS in the range of $0.42 to $0.45 compared with our previous guidance of approximately $0.45 to $0.50. This revised EPS guidance includes an additional $0.02 in cost relating to the CEO transition.

I’ll now turn the call back to the operator to begin the Q&A session.

Question-and-Answer Session

Operator

(Operator Instructions). Our first question is from the line of Gregory Brash - Sidoti & Company.

Gregory Brash - Sidoti & Company

Hi Jan, welcome aboard. Just want to start off and I know you’re not giving guidance out here for 2010, but you guys have talked about in the past 20% revenue growth and starting to see a lot of operating leverages as spending levels down on the NanoKnife, is that still the thought here or are we thinking more along the lines of some of the growth rates we’re seeing right now?

Jan Keltjens

Great question, sounds like you know me a little bit as well in the sense that we indeed do not give guidance yet for the following year. Let me make some holistic statements, and I kind of referred to that in my comments as well; I think we’ve got a lot of strength in various pockets of our business and I think if you take the entire portfolio, if you take our entire product line, certainly that is the goal we would have as such, but again at this point in time, we stay away from specific guidance and sometimes it may take a little while to get growth up to that kind of levels as well. This year, of course, we are heading at about 20% average, I think, year-to-date. That includes of course a favorable comparison because of the Diomed acquisition which we will lose in about a quarter, quarter and a half something like that, but the long-term aspiration certainly stays there.

Gregory Brash - Sidoti & Company

Okay, and then you touched on improving on some of the supply chain efficiency and narrowing down the R&D, just curious maybe when could we expect to see some of those changes taking place and where are we right now in the planned launch of the Centros Dialysis Catheter in addition to the Medron ports?

Jan Keltjens

The changes I’ve been talking about, it’s almost like a continual of change, and some of that started a few weeks ago already, pretty early on, is also facing into the reality that times have changed, developing products in the medical device field today takes a lot more effort than it used to, more regulations and all that, and I’m just of the strong belief that focus and picking the right programs in driving down with vigor is the right approach here. Specifically on Centros, we believe in the product and the teams are working on it and are picking the challenges that led to the recall a while ago. While doing that, they’re also improving some of the design details. We reviewed the program about 2 weeks ago; as I said, we’re very committed to that and there going to be a little while a wait before the product sees the market which is important to us, but it is probably more likely to see that in the second half of the fiscal year.

Gregory Brash - Sidoti & Company

How about the Medron ports, just to follow up, I heard something you guys acquired, I don’t remember, is 2 or 3 years ago, is that close to a launch yet?

Jan Keltjens

I’m not quite sure which product you’re talking about Greg, sorry about it.

Gregory Brash - Sidoti & Company

I could follow up offline.

Jan Keltjens

Is that the product with the light in it, the LED in it?

Gregory Brash - Sidoti & Company

You didn’t go into too much detail on what made these ports different than other CT ports, but I know it’s a technology purchased several years ago …

Jan Keltjens

That’s a wiser way I’d say. I think we can take the question offline as well Greg.

Operator

Our next question is from the line of Jayson Bedford - Raymond James.

Jayson Bedford - Raymond James

Just on the Dear Doctor Letter on NanoKnife, I was just wondering if you could give us a little more detail in terms of what’s the frequency of the arrhythmia issue and then kind of what’s the fix?

Jan Keltjens

I’m not sure if we called this as a Dear Doctor Letter, I mean this was induced by our sales, and that title has a very specific meaning in a regulatory environment. It was more routine conversation with our current users, the 18 users of the NanoKnife system. What we have seen is there have been 21 cases where we ablated tissue in non-prostate settings where non-prostate organs were ablated in the course of clinical practice and as part of clinical studies, and we saw events in 5 of those 21 cases, and all patients are fine, one patient did require a cardioversion, and that was pretty much it. So, it was enough for us to bring it to the attention of physicians. We also reminded users in the letter that this is part of our operator manual as part of the training program, is not something that is entirely unexpected, and again, I want to remind everybody with IRE, this is early in the game, to a certain extent what we’re doing is still research and early clinical development, this is part of the learning. The solution to this is fairly straightforward as what we call cardiac synchronization, which now is implemented, we have not seen it since and we’re validating this and plan to make this part of our standard offering.

Jayson Bedford - Raymond James

And then just as my second question on the finance side, Joe, the light wing business looked like it did, I think you said $8.3 million which was down a little bit from the prior quarter, was that reflecting any impact from the economy, I’m just trying to figure out why this sequential decline?

D. Joseph Gersuk

We do think the economy has had some impact on the capital equipment aspect of the business, and obviously, the laser boxes are in that category. The kit sales have been quite solid strong, but we had talked last quarter about some softness in the laser purchases and we saw some of that again in the third quarter as well.

Operator

Our next question is from the line of Jason Mills - Canaccord Adams.

Jason Mills - Canaccord Adams

My first question is on IRE and you mentioned the change in the strategy which makes a ton of sense to me to go clinically to prove the efficacy and safety of the technology, but obviously you’re putting off perhaps some revenue that maybe you could have garnered over the next couple of years if you would have stayed the course in the previous strategy; I’m wondering if given this change in the strategy, does it change the expense plans for this development effort; I think Joe you laid out in pretty good detail in the past what you thought you would spend on IRE on an annual basis, I’m wondering if that changes at all given the changes in plans that you talked about just a second ago?

Jan Keltjens

I think frankly, just to generalize that, I think many of you have experienced with bringing the hi-tech new technology to the marketplace and I guess this kind of an approach is not as surprising from that point of view. I think the company has given guidance in the past on approximate expenses for the fiscal year 2009, and the current thinking is that we will certainly stay below that level. I don’t think that we will be giving guidance going forward, but our current thinking is that it’s well within the means of this company and that we should be able to do this the right way, and in a way also, with the other approach, if you want to call it like that, there were certainly also expenses associated with that and it’s more likely focusing us on the limited number of disease states but investing more in them individually as such. Outside of US of course we continued to have a fairly broad indication, a very broad indication, and we can continue our commercial development programs as originally planned as well. So, I think from that point of view, the impact should be very benign.

Jason Mills - Canaccord Adams

That’s helpful and just as a followup to my first question, I think while you haven’t given 2010 guidance and to be sure and I understand you won’t do that here today, I think most of us that have to model out 2010 have the expectation which we didn’t receive at least from the previous mention any pushback on when we published our models that perhaps the expenses would grow in 2010 as your effort and your commitment to IRE obviously continues to grow. So, I’m just wondering if qualitatively you could give some help to us as we model as you haven’t guided to as it relates to IRE expenses; generally speaking, are we talking about a new paradigm, new plateau in spending there as we move forward?

D. Joseph Gersuk

Well, Jason, we’re still ramping up on IRE, and as we said, we spent about $2.9 million this year on it, the impact on operating expenses and of course that includes the amortization of intangible element of that in this quarter, and we’re about $7.3 million in total year-to-date for the program and we do expect to spend more on it next year of course and to start spending money on clinical trials for that. So, certainly, it’s going to be a higher level than this year, but we will expect to have more revenue as well next year and that’s I think is much as we can tell you right now qualitatively about the direction we’re heading there.

Jason Mills - Canaccord Adams

That’s helpful, I appreciate that color, and then secondly, I just wanted to get an understanding of guidance, you walked through that very well as well as far as where you are lowering guidance and the reasons for that. Last quarter, on your press release you gave GAAP EPS guidance of 45 to 50 and you laid out for us very nicely that you would exclude $0.05 associated with the CEO transition; you’re seeing an additional $0.02 and that brings us up to a range on the last quarter’s guidance of 52 to 57 excluding that, and then $0.03 associated with the impact of interest rate swaps. So, that was giving us a range of 55 to 60; how do we juxtapose that guidance with this based on those very delineated line items you gave last quarter; if you could just help us out. I think what we’re getting to in our model in a way that most of the analysts are reporting the first call is that GAAP number excluding that $0.05, $0.03, and then the $0.02 extra this quarter in the CEO transition; so about $0.10. How do we look at your current guidance relative to that; 55 to 60 excluding all those things?

D. Joseph Gersuk

Yes, I would say that the previous guidance of $0.05 over the balance of the year, the third and fourth quarter, in terms of the impact of the CEO transition is now $0.07, all in the third quarter, and it won’t be any beyond this third quarter for that, and then our view is that there won’t be any further swap impacts, either gain or loss, in the fourth quarter, and that’s what’s implicit in the guidance that we’re producing now.

Jason Mills - Canaccord Adams

For the rest of it, the other one or two cents is just simply a little lower on the sales side I guess?

D. Joseph Gersuk

Exactly right.

Operator

Our next question is from the line of Thomas Kouchoukos - Stifel Nicolaus & Co.

Thomas Kouchoukos - Stifel Nicolaus & Co.

Joe, a couple of quick ones on some of the financials. I know on the past two of your 10-Qs, you have been able to quantify what Diomed’s contribution was. Can you give that number for this quarter?

D. Joseph Gersuk

I don’t have that. We’ve fully integrated Diomed and rationalized the product set if you will and having now completed that, I think, what you’ll see in the 10-Q is the total laser ablation revenue, and that’s the figure that I quoted, and that’s really the only way you can look at our business because of the rationalization of the product line.

Thomas Kouchoukos - Stifel Nicolaus & Co.

Real quick, to follow on that, can you quantify the FlowMedica contribution?

D. Joseph Gersuk

Very modest in the quarter. We acquired it in the middle of the quarter and we said when we did acquire it that it would actually have just a modest impact on our fiscal year sales. So, we don’t expect a lot in Q4 either, but we also said at the time of the acquisition that we would expect $3 million in sales next fiscal year, and that is still very much our expectation.

Thomas Kouchoukos - Stifel Nicolaus & Co.

One more for Jan, I wanted to ask you, if you look at the R&D pipeline; with the new leader with an outside perspective, if you take NanoKnife out of the picture and just look at the core business; coming in from the outside, how do you look at the pipeline and what’s your perspective on how healthy you think that is?

Jan Keltjens

When I look at the pipeline; it’s a great question by the way, and that’s why you got me thinking here for a second; when I look at the pipeline, frankly right now, I think, there is a number of good products in there, good opportunities; Centros as mentioned before. Obviously I had some questions about that myself coming in, but it’s absolutely worthwhile to pursue it and it will make a marked difference, and I’d say when I think about pipeline, I’m right now more upset in getting it going in terms of execution and adding a flawless transition into manufacturing, ramping up the volumes rapidly after appropriate marketing programs behind it so that we can harvest the maximum potential of these programs that we have in the pipeline. A more holistic pipeline review in terms of between IRE and call it the core pipeline if you will; is that enough to drive this business to the levels we think we need and the levels where we want to be, I don’t think we’re quite there yet. We’re also in the thick of the business planning cycle. We have a bit of an accelerated strategic planning cycle in parallel to that, which is, if you like, my personal curriculum to learn as well, and maybe next quarter, we’re in a better position to make some more qualified comments about that.

Operator

Our next question is from the line of Christopher Warren - Caris & Co.

Christopher Warren - Caris & Co.

Could you give us an idea for what the year-on-year organic revenue growth of the business model was in the third fiscal quarter?

D. Joseph Gersuk

It was about 9%; if you simply extract the laser ablation business out it, again because of the way we’ve rationalized the integration of the Diomed product set. So, if you take that out of last year’s figures and the $8.3 million out of the current year’s, you’ve come up with about a 9% growth rate on the rest of the business.

Christopher Warren - Caris & Co.

So just comparing that sequentially to the prior quarter, that was about flat and versus two quarters ago, is up a couple percent; is that about right?

D. Joseph Gersuk

Last quarter, I think, was 3%, and the quarter before that, the first quarter, it was 9% with a similar calculation.

Christopher Warren - Caris & Co.

Are you expecting that to be roughly, ballpark, about 9% for the fourth fiscal quarter embedded in the guidance or do you expect that to accelerate?

D. Joseph Gersuk

Give or take a bit.

Christopher Warren - Caris & Co.

Okay, now here’s my question; you’ve added 40% to your sales force on the peripheral side and I think most of those additions have been in the field now for three quarters. Can you help me understand where the return on invested capital is coming from in those guys and when we should expect to see that in terms of accelerating revenue?

D. Joseph Gersuk

It’s in both the peripheral vascular and access units together, was increased by that 40%.

Jan Keltjens

Maybe two bits I want to add to that is; one of course, the business is growing 20%. There is also supporting the acquisitions, all the acquired sales reps, etc., so that’s half, and it takes a little while for sales reps to get up to speed. I think we reached a plateau, I think the last open positions here was filled only 90 days or something like that, and things take a little time to get some traction there as well. You’re asking the right questions Chris and let me put it this way, be assured that we’re asking ourselves that kind of questions as well, and we’re stable now on the sales force and want to make sure those revenues continue to grow.

Christopher Warren - Caris & Co.

If I could just follow up there; are you seeing any incremental sales force turnover and what sort of implied return on invested capital do you assume in those investments made in your sales force?

D. Joseph Gersuk

We’re not seeing as much turnover at all. So, there’s very little turnover of the sales force, and the way we track it would be what we’re spending on sales and marketing as a percentage of the revenue dollar and our goal is of course to have that number declining and so it’s certainly lower in the third quarter than it was in the second and it was lower in the second than it was in the first; so the trends heading in the right direction, but understand as well there is a learning curve there and a productivity curve, just because you hire and they don’t become productive immediately of course. So, there’s a matter of absorbing the learning curve impact, but nonetheless in the aggregate as I said the sale expense as a percentage of revenue has been going down all year long.

Jan Keltjens

So, we’re looking at sale productivities, as simple as that. If that gets better in some or fashion, the company gets better.

Operator

Our next question is from the line of Brooks West - Craig-Hallum Capital.

Brooks West - Craig-Hallum Capital

Jan, first of all, congratulations on your first call. Macro question for you; as you look at AngioDynamics, you look at the opportunities in front of you. What do you see this company becoming longer term and what’s the opportunity, and then, as a part of that, is interventional cardiology a part of that opportunity?

Jan Keltjens

With those kind of questions I now certainly want to meet you.

Brooks West - Craig-Hallum Capital

There’s enough rope to hang yourself there.

Jan Keltjens

Certainly is, and I was mulling this whole thing, congratulations on the good call. There’s a saying in my home country, “don’t praise the day before the sun will set,” and then when you throw that kind of question behind it. Listen, cardiology is a real genuine opportunity. The question is whether we want to go there or not. I use the word focus a lot and I would say right now shooting from the hip a little bit, that would go contrary to increased focus. So, be careful what you wish for, I don’t see us going into that space anytime soon. From a more macro point of view, this is a very very interesting company and I can be nice if I had to, but I certainly meant that I’m a lot of fun here, which is very intriguing. There’s a broad portfolio, we have different kinds of products, we got exciting stuff like IRE with very specific challenges about developing new technology, getting that into the market, developing the market, the reimbursement referrals, etc., etc., and yet business is a much more down-to-earth, roll-up-your-sleeves competition from that point of view, but all in healthy growing markets, and I think one of the opportunities for the company is make sure that we’re developing the appropriate capabilities to be successful in each of those areas; and again, that gets back to what I mentioned before, make sure we pick the right businesses to focus on, make sure we got a very effective and efficient innovation engine, and I think we can improve on the operational execution side and getting smoother there. It’s too banal to say at the end of the day we want to be bigger and better, but growth is a state of objective, and I always like to add to that profitable growth in some form or fashion over time, not meaning every single quarter, but as a trend line, we want to improve our financial ratios. So, that’s what I call profitable growth. We want to grow in the top line and increasing portion of that over time should drop to the bottom line and be available to shareholders as a value of the company. Was that holistic enough for 30 days?

Brooks West - Craig-Hallum Capital

There you go! A followup question on IRE; you mentioned 18 sites in the US; how many systems do you have out globally or was that 18 a global number, and then, what again were the specific indications you are pursuing in the US beyond prostate cancer and is there is a difference in what you’re doing OUS versus US?

Jan Keltjens

The 18 systems was actually worldwide, the majority of them being in the US, but it’s a worldwide number. The indications we’re pursuing in the US; prostate, absolutely set on that, we’re pretty much down the path on what the second indications are going to be, but I want to keep it to our chest a little bit at this stage in the game. We’re still mulling around one or two details on that, but I’m pretty confident that on the next call we can actually be pretty granular on that. OUS, some of the data on some of the work we do OUS may support and probably will support those two indications in US as well; however, it is quite likely that we will do some additional work on a third disease state outside US.

Brooks West - Craig-Hallum Capital

If I could follow up one more question on the prostate cancer indication; obviously a huge market opportunity, but also potentially a huge clinical bar in terms of getting a specific indication. Do you have associated timeframes that you can give us on a potential; your thoughts on getting an actual indication in the US for your first indications?

Jan Keltjens

I think you picked up correctly on the fact that these can conceivably be long-range programs and probably will be. It doesn’t mean there are no returns on those programs in the meantime, but at this stage, I’d probably want to stay away from getting too granular about the specific guidance. As I said, once, within a few months we should at a point these are approved, we may be able to start articulating how a protocol would look like, what endpoints could look like, and what kind of timeframes are associated with that.

Operator

Our next question is a followup from the line of Jason Mills - Canaccord Adams.

Jason Mills - Canaccord Adams

Actually I could have asked this in a followup conversation, but just in the quarter Joe, you said the tax rate was 30%; wondering if the tax rate was little bit higher just on pro forma earnings or for backing out the expenses, and I’m wondering what the tax rate we should use for the non-GAAP earnings in the quarter; something closer to the 37.5%?

D. Joseph Gersuk

Yes, indeed.

Jason Mills - Canaccord Adams

It doesn’t look like, to get to your $0.15, it was more like 34%; is that about right?

D. Joseph Gersuk

Yes, it was lower quarter, it was actually 30% in the quarter due to the R&D tax credit.

Jason Mills - Canaccord Adams

On the GAAP number. I’m wondering though on the non-GAAP number it looked to be like 34% or 34.5%.

D. Joseph Gersuk

Probably something like that, yes.

Operator

Our next question is from the line of Elizabeth Senko - Williams Capital Group.

Elizabeth Senko - Williams Capital Group

A couple of questions; first on the oncology business, if you go back through the reader notes and you go back through the previous press releases from you all, we hear a lot about growth in the LCB and we hear a lot about Habib, but we don’t really hear much about the core RF ablation business, and I’m wondering if you would give us some color on that; has that been stable, has it continued to grow in line with those other items, anything along that?

Jan Keltjens

I was looking at Joe while you were asking that question Beth, and some point you said you want some color. So, I’ll add that color. If you asked for numbers I would have given it to Joe here.

Elizabeth Senko - Williams Capital Group

I’d like both.

Jan Keltjens

Well, you got me. Sorry, you have the short stroll there Beth. The fact that we highlight the LCBs, I think you can derive from that is that it’s the growth driver in that business which means the rest is below that average, and that’s probably as granular as we want to get on that at this particular point in time. Joe, would you agree with that?

D. Joseph Gersuk

Indeed, yes.

Elizabeth Senko - Williams Capital Group

Then a followup; it’s probably more a followup to Brooks West. Again, recognizing you’ve only been there a month, but it struck me that given a company that’s $200 million in revenues, the company has such a huge portfolio, and I think that’s been one of the challenges from a management standpoint over the years; does it make sense to peel some of these businesses off maybe as you focus further on either the PCA products or something like that?

Jan Keltjens

You’re not exactly mincing your words there, are you?

Elizabeth Senko - Williams Capital Group

No, I don’t. It’s not myself, Jan.

Jan Keltjens

That’s fine. I want to meet you too. You’re on the list there as well. Listen, great question. It’s the only thing I can say. What I want to add to that is the following, and I think it’s appropriate that I say that here as well. I think 9 months ago this company restructured along the lines of strategic business units and that was done for no reason and I looked at that for about half an hour I’d say and then came to the conclusion that it’s the right thing to do because if anything it’ll drive the focus around these product lines. They are fairly diverse and a lot of synergy as well actually on the commercial side. Three weeks ago the SAR meeting was in San Diego and customers come by and they had as much interest in each of our three business units. It was a good kind of synergy on that end of it and through the business units we believe we can drive appropriate focus around those product lines and make sure that we stay competitive or become competitive in each and every one of those. So, we’re going to drive that forward. I’m very committed to that structure. I want to go on record as saying that and we’re going to do some fine tuning work in terms of what is the correct separation between things that are being dealt with in the business unit level, what is being handled at a corporate level, and make sure we continue to capture any leveraging opportunities and synergetic effects, but that’s the model we’re going to drive going forward.

Operator

Our next question is from the line of Chris Sessing - AMI Asset Management.

Chris Sessing - AMI Asset Management

I’m still a little fuzzy on the IRE refocusing as I missed part of the call, but it sounds like you’re going to continue to support the existing programs that are in place with the doctors, but tighten up on any new trials going forward; do I have that correct?

Jan Keltjens

Can you repeat that? I missed part of that, sorry about that.

Chris Sessing - AMI Asset Management

As far as all of the work that is currently going on throughout the world at various clinics, you’re going to continue to support those programs, correct?

Jan Keltjens

Yes, and that’s a great question. So, let me be very clear. We have indications in Europe and we have the generic indication in the US, and doctors are free to use our product, and it is pretty much at the discretion of doctors what they use it for, and under that umbrella, there will be commercial clinical work where the patients are being treated by the system today and going forward. That will not be affected. This is all about what we’re going to add to that and what we need to do to drive this system to a point in time where we can actually really harvest the potential it presents, and for that we’re adding to that a very focused, very specific clinical approach that will prove safety in a bigger setting, it’ll prove efficacy and with that we’re going to drive the appropriate approval programs, indications, as well as reimbursement of market development. Was that helpful, Chris?

Chris Sessing - AMI Asset Management

Yes, but I was under the impression you’re doing that anyway to begin with; I guess I am a little confused as to how this new strategy is all that much different from the old strategy.

Jan Keltjens

I think the big difference is that we’re now heavily committed to running company-sponsored IDE trials in the US, multi-center prospective trials as opposed to no trials or physician-sponsored trials as such, and yes, there are a few more details behind it, but that’s probably the single biggest difference in the approach.

Chris Sessing - AMI Asset Management

I think I did hear you mention that you don’t have a timeframe and you will have one once you get the trial protocols sort of hammered out in the next couple of months, but what is a typical product like this take? I am not going to pin you down on a timeframe, but obviously there are other products out there that are approved; what is the near typical timeframe? Is it 2 years?

Jan Keltjens

First of all, I don’t think we really want to go there, and the second thing is every situation is unique. I’ve been privileged in the sense that I’ve been associated with a number of companies where we’ve done this kind of trials a couple of times and every single one of them is different, and one reason why we also at this point don’t want to get too granular is in discussions with an FDA you talk about required followup periods, about times you want to track patients, and they can have a significant impact. You can also think of picking a certain disease state and inclusion criteria and endpoints as a different impact on when you can actually have conclusive evidence on whether this thing can be taken to the next level. So, lot of variable, and that’s why we don’t think it’s appropriate at this point in time to give particular guidance. In general, this can be multi-year programs, but again, I want to be clear, in the meantime we can deploy and are deploying commercial efforts to drive the adoption of the system in various markets in the US as well as outside the US, but on the more limited indications, our hands are tied to a certain point.

Operator

Our next question is from the line of Larry Haimovitch - HMTC.

Larry Haimovitch - HMTC

Two quick questions more mundane I should say; one is in the venous ablation business; we know VNUS Medical is doing very very well right now. You guys don’t seem to be growing as quickly. I’m just wondering if there are competitive issues there you want to comment there. I know you haven’t been onboard terribly long, so it might be a bit early, and then I’ll ask my second question when you take that one.

Jan Keltjens

We’re looking at that as well and we’re trying to get as much appendages out in the marketplace as possible. We’re of course in a slightly different quarter and things are changing rapidly in the marketplace in this day and age, I’d say, but we’re monitoring that carefully. I think that they got some financial advantages in certain areas which clambered into some economic headwind for us and we’re trying to understand that in more detail, I’d say. They got some more favorable reimbursements which sometimes is attractive to some of our customers although we also have a lot of individual successes in that area. There is also some competition in the low price range. Again, economic pressure also on healthcare providers is quite significant nowadays. We’ve seen them becoming a little bit more susceptible to low-price competitors out there that didn’t used to be as much of a factor as they seem to be today. So, again bottom line, we like the market space a lot; it seems to be growing healthy which is an opportunity we think. We think with the acquisition of Diomed we have created a business with enough critical mass for us to be very competitive today as well as in the future. We can compete with the sales and marketing effort with a healthy pipeline in place and we’re very committed to this space, and I think we’ll get there.

Larry Haimovitch - HMTC

Second question; Brooks West, I think, asked this question regarding interventional cardiology, someone that I can’t remember, I think it was Brooks, but in any case, actually from what I know about the product you acquired from FlowMedica, to me it looks like a very very good opportunity. I think it was a very sound strategic move for us, but my impression after being at SIR is that that product may actually more successful in interventional cardiology than in interventional radiology because of the number of procedures. So, here you have it again; now you’re facing interventional cardiology again. I just wanted to get your thoughts on that Jan.

Jan Keltjens

I think you are spot on Larry. I don’t think you heard me saying that we’re not going to follow the money. So, we do sell to interventional cardiology and we have sold to interventional cardiologists in the part; a lot of peripheral interventional procedures are performed by interventional cardiologists as well as by vascular surgeons by the way, and so we know them and we call on them and all that. The way I interpreted Brook’s question, I thought it was Brooks, was more like will we make a concerted effort to build an interventional cardiology business. On that one I gave hopefully a fuzzy answer by leaning towards denial.

Larry Haimovitch - HMTC

You agree that that clearly is the larger opportunity for FlowMedica?

Jan Keltjens

No, I didn’t say that necessarily. I said it’s also an opportunity and we have folks like Dr. Teirstein has been instrumental in putting TRT on the map. I know him from my cardiology days and we worked closely with interventional cardiologists in developing this. Today, I would not be able to say whether that’s the bulk of the opportunity or whether it’s a nice additional opportunity as such. Bottom line Larry, and I think I agree with you on that, I’ve become much more enthusiastic about TRT. I think the FlowMedica team is great, I think it meshes well with the company from the culture point of view. It gave us possess in the peripheral vascular sales force, and I think the entire team is quite excited about the opportunity.

Larry Haimovitch - HMTC

Yes, my checks are very positive on that product too. Good luck to you and look forward to hearing more good news in the future Jan.

Operator

Our next question is a followup from the line of Brooks West - Craig-Hallum Capital.

Brooks West - Craig-Hallum Capital

Just a followup on the IRE; Jan, on trying to quantify US plans versus OUS plans, and you mentioned in the release your approval for commercial sale in Australia and Canada; are you going to try to restrict the sale in anyway of IRE before some of this clinical work is done, OUS versus US. We’ve heard of some instances in the US where you might have physicians that are looking at out-of-pocket pay opportunities which is never a big market, but can you comment on that at all, and maybe plans for specifically OUS market?

Larry Haimovitch - HMTC

A very good question Brooks; I’d say typically restricting sales is a tricky word. What I’d say is this, you will probably hear me using the word sustainable more and more, and I think the one thing we certainly want to avoid, and I’m not going to say that we’re going to deny sales of people, but the one thing we want to avoid is complications through giving a NanoKnife system in the hands of a physician without us being able to train that individual or provide the appropriate clinical guidance and patient selection and stuff like that. So, I think you’ll see those two developed hand in hand. So we’re not restricting sales at all, but it’s going to be a very controlled release and we will only give this to physicians as part of a comprehensive program of supporting that individual clinical specialist on site, appropriate training, getting the person connected to our network of other users, and make sure we got the best possible clinical outcome first and foremost for the patient, but secondly also for the reputation of this technology. I am starting a group around the table here before us; good reputations typically come as a snail and go as a horse. So we’re still trying to build it, a step at a time here.

Operator

Our next question is a followup from the line of Jayson Bedford - Raymond James.

Jayson Bedford - Raymond James

Just a couple of quickies; on the laser business, I had in my notes that you guys had implemented a price increase earlier this year and I’m just wondering is that sticking and as well has that been rolled out through the entire user base?

D. Joseph Gersuk

Yes, we did. You’re exactly right, we did increase the prices at the beginning of the year following the settlement of the litigation, and the price increases have been sticking, but as Jan said that there is competition on the low end of that business and the space remains in litigation although fortunately we aren’t part of it, but some of the low-price competition that we see in the marketplace pays no royalties and is a subject of ongoing litigation VNUS Medical, and no doubt that that low-price competition is having an impact on the entire marketplace. We’re certainly hopeful that VNUS Medical continues to pursue the litigation there as they have already started with some of those players.

Operator

There are no further questions. Management, you may continue.

Jan Keltjens

Thank you all on the phone call for these excellent questions and your interest in AngioDynamics. We will be providing you with updates on our progress as developments merit and we genuinely look forward to talking with you again during our year-end conference call which is currently scheduled for July. Again, thank you and have a very good evening.

Operator

Ladies and gentlemen, this concludes the AngioDynamics third quarter 2009 earnings conference call. If you would like to listen to a replay of today’s conference, please dial 1-800-405-2236 or 303-590-3000 followed by the access code of 11128472#. ACT would like to thank you for your participation. You may now disconnect.

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