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AngioDynamics, Inc. (NASDAQ:ANGO)

F1Q10 Earnings Call

October 6, 2009 4:30 pm ET

Executives

Doug Sherk – Investor Relations

Johannes C. Keltjens - President, Chief Executive Officer, Director

D. Joseph Gersuk - Chief Financial Officer, Executive Vice President, Treasurer

Analysts

Christopher Warren - Caris & Co.

Analyst for Jason Mills - Canaccord Adams

Jayson T. Bedford - Raymond James & Associates

Brooks West - Craig-Hallum Capital

Gregory Brash - Sidoti & Company

Thomas Kouchoukos - Stifel Nicolaus & Co.

Chris Zessin - AMIS Management

Operator

Good afternoon, ladies and gentlemen. Thank you for standing by. Welcome to the AngioDynamics first quarter earnings conference call. (Operator Instructions) I would now like to turn the conference over to Mr. Doug Sherk. Please go ahead, sir.

Doug Sherk

Thank you for joining us today for the AngioDynamics conference call to review the results for the fiscal first quarter of 2010 which ended on September 30, 2009. The news release announcing the first 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 Eastern Time this evening and will remain 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 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 statements about revenue and earnings for fiscal 2010. 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 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 has been provided in today’s new release issued by the company and is available on the website.

AngioDynamics uses non-GAAP measures to establish operational goals and believes that non-GAAP measures may assist investors in analyzing the underlying trends of 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 and has reviewed these measures as an 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 encourage callers to re-queue to ask additional questions. We appreciate everyone’s cooperation with this procedure in advance.

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

Johannes C. Keltjens

Thank you, Doug and good afternoon to everyone. Thank you for joining us for our first quarter conference call. With me today is Joe Gersuk, our CFO.

This afternoon we reported solid net sales growth of 13% from over the prior year and we estimate our organic growth rate to be around 9%, a strong number. It is encouraging to see that our growth was driven by strength in two of our areas of focus, our interventional oncology business as well as our laser vein ablation franchise. However, there remains a lot of opportunity and a lot of work ahead of us to achieve our goals. This is reflected in below market growth rates in our access and international business, as well as our gross margins and inventory levels. Joe will provide more detail on our financial performance in a few minutes.

As I mentioned during our last conversation with you back in mid-July, we have taken deliberate steps to focus the company on global market segments that allow a strong global growth. Those segments are venous intervention, oncology and dialysis access, and minimal invasive oncology. These segments offered a combination of growth opportunities for market share growth, favorable long-term demographics, and opportunities for leveraging our technologies, IP, and infrastructure.

During the quarter, our focus markets continue to be quite robust despite the overall economic environment and our healthy state was a factor behind our double-digit revenue growth.

VenaCure EVLT performed strong in the quarter with reported growth of 24%, which when adjusted for the Diamed acquisition about half a month into the year a quarter ago -- year ago quarter, would represent an estimated organic growth rate at least in line with overall market growth, if not beyond that.

The increased focus of our sales team, the introduction of strong marketing programs, as well as the fundamental clinical strengths of our new NeverTouch laser fiber system are driving this growth.

Dr. Lowell Kabnick, Director of New York University Vein Center and Associate Professor of Surgery at the Division of Vascular Surgery at NYU Medical Center, compared treatments of varicose veins with a bare-tip laser fiber against our covered-tip NeverTouch fiber. In the clinical study published in the July edition of Endovascular Today, Dr. Kabnick found the NeverTouch showed easier postoperative recovery and reduced bruising, amongst other benefits. These important findings distinguish NeverTouch in the marketplace and create the beginning of a strong clinical evidence foundation.

Peripheral Vascular sales were also aided by our Benephit renal infusion system acquired from FlowMedica in January 2009. The anecdotal clinical evidence continues to be very promising and true to our commitment of evidence-based medicine, we have started enrolment in the provide registry to study and our goal is to enroll a total of 2,100 patients over the next few years and have the results published.

During the quarter, Bioniche Pharma, our supplier for Sotradecol, a product which we distribute, received a warning letter from the FDA for certain promotional literature. AngioDynamics was mentioned in and copied on this letter and as a consequence, we have taken down relevant sections of our website. We do not expect that any of this will have a material impact on our financial performance as we continue to sell Sotradecol.

The oncology surgery business continued to generate strong growth during this first quarter, driven by all product lines, including RF ablation, [inaudible] and in particular, LC Beads. We are very pleased with our continued and consistent strong double-digit sales growth in the oncology surgery division and while this is certainly a tribute to the strength of our product lineup, I would also like to acknowledge that this platform, our sales and marketing team in my view, they are the strongest team in this space, in the interventional oncology space in the U.S.

The markets for our Access product line continue to hold significant opportunities for our company, but we’ve got work to do in this area as a relatively small sales increase in this quarter illustrates.

The pricing pressures we are experiencing are likely to continue to impact our sales growth as well as margins until we bring to market new products with a clinical advantage and lower cost. A prime example of this is our Duramax Step Dip Chronic Dialysis catheter, which was released for full sales earlier in the quarter.

The Morpheus PICC supply continued to be sub-optimal during the quarter and suppressed growth. As of today, we have been able to clear back orders and build critical inventory and going forward, we see significant opportunity following the launch of our redesigned PICC lines. This design work is progressing well and is anticipated to result in more stable supply, lower cost, and better clinical performance compared to the current products. The launches are planned for the second half of the current fiscal year.

Now we would like to turn our focus on innovation, the key driver of organic growth. Back in July, we committed to 11 new product launches for this fiscal year and we do remain on target to achieve that goal. The four product launches discussed with you back in July are performing well and this includes, amongst others, the StarBurst XLi-e Semi-Flex probe, the first RF probe designed specifically to deliver a 7 centimeter ablation of a tumor in a single placement. In addition, we also began shipping the DuraMax chronic dialysis catheter, which incorporates our new Curved Tip technology. And also we released a NanoKnife Software version 2.07, which includes the successful cardiac synchronization function and has proven to be successful in the clinical marketplace since.

Key new product launches including our Centros Curved Split Tip Permanent Dialysis Catheter, the [trip-alumin] Morpheus PICC and new [inaudible] are on track for launch in the second half of this fiscal year.

We also believe that international expansion is an attractive source of organic growth. In July, we announced the formation of a new business unit focusing entirely on our international business. I am very pleased to report we have recruited the leader for this unit who we will introduce later this month. This appointment is the first step towards building a strong international presence.

Turning now to IRE technology and our NanoKnife product line, since mid-July, physicians have [treated] an additional 20 patients in eight centers around the world and this is a phase of approximately two per week. To date, a grand total of 86 patients have received treatment in a total of five different organs, including prostate, liver, lung, kidney, and lymph nodes. And in all cases, the safety profile remained strong.

At the [CISA] meeting in Portugal two weeks ago, we held a scientific symposium that was extremely well attended by more than 270 physicians from all over the world. This symposium served as an excellent introduction to NanoKnife and its capabilities and was very well-received by the attendees.

The IDE clinical development program continues to make progress as well. The IDE for the focal prostate cancer study has been submitted to the FDA and we are responding to some of their questions. An IDE for the pancreatic cancer study is scheduled for submission to the FDA this calendar year and during [CISA], we also met with the investigators on the international liver tumor study and are finalizing the protocol.

Despite the increasingly complex regulatory environment, we continue to anticipate first patient enrolment in at least one of these studies before the end of calendar 2009. Pre-clinical work for pancreatic focal prostate and liver cancer studies have been completed and pre-clinical work for lung and whole gland prostate ablation is underway.

The full completion of all this clinical work is anticipated to take several years. However, we are pleased with the current increase in commercial interest in the NanoKnife system and anticipate sales to grow as we continue to roll out this system.

Finally, I would like to address our focus on operational excellence. Our goal here is to improve gross margin as well as supply chain, including inventory management. The transfer of the manufacturing of full medical benefit products from California to Queensbury is in full swing and production startup is now scheduled for late this calendar year. Albeit small, once completed this transfer should be a contributor to improving gross margins.

The increasing market penetration of DuraMax, our first internally developed and manufactured dialysis catheter, will also help improving gross margins in the balance of the year and once available, the newly developed PICC family will also lower cost, stabilize supply, and improve gross margins.

Longer term, we continue to drive the strategy of consolidation and vertical integration where and when it makes business sense.

The inventory situation it the last quarter was driven up mainly due to some supply agreement commitments; however, we expect to be able to start driving this down in the back half of this fiscal year.

We are also pleased that Shawn McCarthy, the new leader of our Peripheral Vascular Business Unit, is now on board and providing the leadership required to maximize a long-term peripheral vascular market potential, as well as bring a great new skillset to our senior leadership team.

In summary, we made good progress in the quarter but a lot remains to be done. Sales growth was a bit stronger than we were expecting and we have begun the execution of our manufacturing strategy. We are making tangible progress in demonstrating the effectiveness of IRE technology.

Clearly there’s a lot of hard work ahead of us. Revenue growth in the Access unit will remain challenging for another quarter or two. In addition, the gross margin and inventory situation will require a lot of work before we are satisfied. New products must be delivered to the market on time and with the most competitive economic and clinical benefits. We must continue to drive technical excellence and manufacturing efficiencies.

Our successful execution on these initiatives will enable AngioDynamics to deliver strong and profitable growth above the market rate. As I have mentioned before, our short-term target is to achieve revenue growth consistent with the market’s overall growth of 7% to 10%.

Over time, we have the aspiration to generate growth rates above the market rate and this will be achieved through focusing on those business areas which show above average growth, international expansion, strong pipeline execution on key programs like NanoKnife and others, enhanced by M&A activities where and when this makes business sense.

And we all know that we are committed to improving our operational performance as we drive this growth. We have a strong business focused on non-elective and disposable products for treatments that address large global, diverse, and growing markets. Our financial position is sound and we continue to generate solid positive cash flow.

Before we turn this call over to Joe, I would like to thank the AngioDynamics associates for their continued focus and hard work in delivering these first quarter results. I would also like to thank our shareholders and our board of directors for their ongoing support and confidence.

Joe.

D. Joseph Gersuk

Thank you and good afternoon, ladies and gentlemen. Today we reported first fiscal quarter sales growth of 13% to $50.1 million, or 14% growth on a constant currency basis. Our growth this quarter was led by our oncology surgery division, which grew 25% from a year ago and recorded its best quarterly growth rate since we acquired Rita Medical 2.5 years ago.

We also had a strong sales quarter in our peripheral vascular division with 14% sales growth led by our laser vein ablation business. We estimate the company’s first quarter organic sales growth rate at 9%, which is a marked improvement from the 2% organic growth rate in the quarter and 6% for last fiscal year. We calculate this rate by excluding in both periods the sales of all laser ablation products as a result of the acquisition of the Diamed business and the subsequent restructuring of the product line, as well as the sales of the benefit renal infusion system that was acquired in the third quarter of last fiscal year.

This quarter marked the first anniversary of our acquisition of the Diamed EVLT business and we are pleased to report that the integration process is complete from a sales, product, and manufacturing perspective. Since acquiring this business a year ago, we have right-sized the laser manufacturing facility in Cambridge, England to reduce costs. To enable us to standardize on the delta series laser, we have engineered the NeverTouch disposable to operate with the delta laser and we have trained our peripheral vascular sales force to sell the system.

As a result of these efforts, today AngioDynamics has the most comprehensive product set and the leading market position in the laser vein ablation business. Our gross margins in the EVLT business have also steadily improved over the past year and is the primary reason for the four percentage point improvement in gross margin that our peripheral vascular business unit achieved in the first quarter compared to the comparable quarter a year ago.

With this acquisition and successful integration, AngioDynamics is well-positioned to compete successfully in the vein ablation market in the years ahead. This is one of our key focus areas and our goal is to increase our market share of this attractive market.

Peripheral vascular business unit sales totaled $21.1 million in the quarter and included laser ablation sales of $7.7 million. This is a 24% increase in laser ablation sales from the $6.2 million reported a year ago. Also included in this business unit are sales of the benefit renal infusion system, which totaled $643,000 in the quarter.

Access business unit sales grew 3% in the quarter to $16.2 million, with competitive pricing pressures in the dialysis market and the supply issues in our PICC business limiting growth in the access unit this quarter. Johannes address both of these developments in our action plan during his remarks.

Sales in the oncology surgery business unit grew 25% in the quarter to $12.8 million, and were led by strong sales of LC Bead and included $74,000 from the same of NanoKnife disposables.

From a geographic perspective, 90% of the first quarter sales were in the U.S. and 10% or $5.1 million came from the international markets. The strengthening of the dollar over the past year meant that reported international sales were flat compared with the prior quarter a year ago and would have grown 5% on a constant currency basis. In the direct markets, which represent about one-third of our international sales and where we sell in sterling or Euros, sales grew at a double-digit rate.

While currency movements had a negative impact on reported sales, their impact was slightly positive on operating income due to the costs that we incur in sterling and Euros.

Continuing down the income statement, gross profit totaled $30.1 million in the quarter, or 60.2% of sales compared to 61.9% a year ago. There are a number of factors that caused us margin decline, including the product sales mix, the competitive pricing environment in which hospitals and other customers are aggressively seeking lower prices, cost increases on products we will be in-sourcing in the future, and the cost of transferring product production to Queensbury. We are working to mitigate the impact of these items and are taking a number of steps that we expect will improve gross margins in the second half of the fiscal year.

Operating expenses were $26.6 million in the first quarter, an increase of $3 million or 12% from the prior year. As a percentage of sales, total operating expenses were 53% in the quarter compared with 53.3% a year ago. Research and development increased to 9.7% of sales compared to 8.9% in the prior year, as we continued to invest heavily in the IRE program. Sales and marketing expenses increased to 30.7% of sales versus 29.5% a year ago due to the expansion of the peripheral vascular and access sales forces and related marketing activities.

As a percent of sales, the increases in sales and marketing and R&D were more than offset by leveraging G&A costs. G&A was 8.1% of sales versus 9.8% one year ago.

The total investment in the IRE program for the quarter was $2.6 million, a $700,000 increase over the same period last year. On an after-tax basis, the investment in IRE amounted to $0.06 per share in the first quarter, compared with $0.05 per share impact in the first quarter a year ago.

We reported operating income of $3.6 million in the quarter compared with $3.8 million a year ago. The reduced operating income reflects the reduction in gross margin and the substantial investment in IRE and sales and marketing costs associated with acquisitions and the transition to business units.

EBITDA was $6.6 million, or $0.27 per share in the quarter compared with $6.7 million, or $0.27 a year ago.

After other income and taxes are taken into account, the result is $2.1 million in net income, or $0.09 in diluted earnings per share, compared with $0.09 in earnings per share a year ago.

The tax rate was 38% in the first quarter and consistent with the prior year. Of particular note, subsequent to quarter end, we received $1.7 million in cash as a tax refund related to a federal income tax audit for the fiscal years 2006 and 2007. As the refund was primarily related to costs associated with the acquisition of Rita Medical Systems, the accounting for the refund primarily impacted the balance sheet in the goodwill account. Nonetheless, the $1.7 million was most welcome, of course.

We previously indicated that we expect to achieve cash tax savings of $7.5 million from the use of Rita NOLs this fiscal year. That is not affected by the receipt of this tax refund.

Turning to the balance sheet and cash flow statement, we ended the quarter with cash and liquid investments of $68.8 million, compared with $68.2 million at the beginning of the year. We generated $1.1 million in cash flow from operations in the quarter, despite a significant investment in inventory. Net inventory has increased $7.4 million, principally relating to contractual purchase requirements and planned advanced purchases of product to alleviate supply chain concerns. We have established a goal of reducing the inventory balance by the end of the fiscal year to a level close to where we began the year.

Our accounts receivable remain in very good shape. DSOs were 42 days sales outstanding in the quarter, an eight day improvement from one year ago. Our balance sheet and liquidity positions remain extremely strong and we expect to continue to generate significant free cash flow.

And finally, as indicated in the release, we are increasing the low-end of the range of the guidance for fiscal 2010 in net sales and EPS. The net sales guidance is now $211 million to $215 million, a $2 million increase in the low-end, and EPS guidance is now $0.45 to $0.47, a $0.02 per share increase at the low-end. The guidance on gross margin, operating income, and EBITDA remain as before and as shown in the release.

I will now turn the call over to the operator to begin the Q&A session.

Question-and-Answer Session

Operator

(Operator Instructions) Our first question comes from the line of Christopher Warren with Caris & Company.

Christopher Warren - Caris & Co.

Thanks so much and it’s very gratifying to see you guys above the consensus for the quarter. My question is to what extent were maybe an extra selling day or two contributors to your results?

D. Joseph Gersuk

Not significant.

Johannes C. Keltjens

I think it’s like one or two days extra, something along those lines. It’s not material. I think when Joe quoted the -- you know, we estimate the organic growth rate to be approximately 9%, that would pretty much account for all that kind of stuff.

Christopher Warren - Caris & Co.

Perfect, and do you think there were any benefits or impacts this quarter from a smoothing out of what has historically been a bit of an unhealthy sales cycle where the fourth quarter number was particularly big?

Johannes C. Keltjens

Well, I think in the July conference call when I commented on the Q4 sales and we had to report a 2% organic growth rate, I think I said it was probably below where we really are as a company and I think with the 9% we did in the last quarter, we like that number a lot. I think it’s the right way to start the quarter and we are quite pleased with it. So we hope it’s real and we think it’s real.

Christopher Warren - Caris & Co.

And just one last question on the access side, are you seeing any change overall in the pricing for ports and PICCs?

Johannes C. Keltjens

Well, I think what we see in general, and I believe Joe commented on that, that if you want to summarize it, I’d say all products that are on contracts and on purchasing group contracts, stuff like that, there is increasing pressure. I mean, there is certainly a willingness from customers to focus and consolidate suppliers but they would like to see something in return for that, so that’s -- we are certainly seeing that and I think we saw it a little bit stronger in PICCs but I think PICCs, ports, are the kind of products you would expect to see that kind of pressure there, primarily.

Christopher Warren - Caris & Co.

Okay. Thank you very much. Nicely done.

Operator

Your next question comes from the line of Jason Mills with Canaccord Adams.

Analyst for Jason Mills - Canaccord Adams

This is Jamar [Ismael] for Jason. I have a quick question -- can you clarify the PICC supply issue? I mean, you said you were going to launch a new PICC in the second half of 2010, so that means you are going to be supply constrained until then or will you have an adequate supply of old PICCs before then?

Johannes C. Keltjens

Well, that’s a great question. Let me maybe reiterate some of the statements I made in the July quarter in the July call and extrapolate that to the comments I made today. So in July, we said that the supply of the existing Morpheus PICC line will be hand to mouth, hit and miss, whatever phrase you want to use there, until we launch a new generation PICCs, a new design PICC. That’s a high priority project which is progressing well, which I just said we’ll launch that in the second half of the fiscal year, not calendar year but fiscal year. And until that moment, you are going to have decent quarters -- you know, you may have a good quarter, you may have a somewhat disappointing quarter. I think this quarter, we are seeing growth -- growth is always good but I think the PICC market is more healthy than the growth we are reporting so effectively we have been losing market share. In the quarter, in our fiscal Q1, we have been battling supply constraints which suppressed growth. Clearly today we are in a better supply situation and right now we can ship whatever we sell.

Analyst for Jason Mills - Canaccord Adams

Okay.

Johannes C. Keltjens

Does that answer the question?

Analyst for Jason Mills - Canaccord Adams

Yeah, it does. My second question, can you talk more about the venous market? Give us maybe an estimate for what you think the market growth rate there is and are you seeing any pricing pressure, especially from the smaller competitors in that?

Johannes C. Keltjens

Well, yeah but nothing unusual. We think -- we believe the market continues to be healthy. You know, one of the public companies that gave a lot of market intelligence has been taken off the grid, of course, recently so it is a little more difficult to track the market. There are some companies that report -- we do report. From what we see, we are quite pleased with how strong that market is holding up and we believe it continues to grow at a very good clip. One important indicator for us is the number of new customers we can open up to new laser installs, as we call it here, whether we sell the system or have lease program or amortization program, doesn’t matter. But the pace at which we open up new assembles is holding up very strong. We think and we know for our customers it’s a profit source, so they are quite interested in it and again we continue to like this market a lot and we have no reason to step away from the growth rates we have quoted in the past of mid-teens.

We believe it’s a good space. It’s holding up very well under the economic pressures and fundamentally, there’s a lot of growth opportunity.

Analyst for Jason Mills - Canaccord Adams

All right. Thanks a lot.

Operator

Your next question comes from the line of Jayson Bedford with Raymond James.

Jayson T. Bedford - Raymond James & Associates

A couple of questions here -- just on the oncology business, what’s really driving that? Meaning your portfolio seems to have been on the market for quite some time. Are there any new products there? Clearly the market is not growing that quickly, so maybe you could just pinpoint what’s the key driver here to what appears to be very strong oncology growth?

Johannes C. Keltjens

Well, and we agree with you -- there is very strong oncology growth and there’s not the first time and I think we got just a great team in place, you know, with a winning product portfolio as well and I think that combination again proves to be very effective.

You know, I think all product lines have been growing. I think we commented on that, so RF ablation, the [inaudible] knife, as well as LC Beads, each of those lines have been growing. You gain some share, you open some new accounts -- you know, it’s all attractive in combination. I think LC Beads in particular have been really driving the engine of growth for that whole unit and are outgrowing all the other products. It’s the fastest grower we have in the company as such. And in that, I think with the emerging clinical evidence, every single meeting -- I mean, I quote the [CISA] meeting in the context of the NanoKnife system, a lot of buzz over there on chemoembolization, more and more interest in the U.S., more and more centers converting to that kind of therapy. Within that segment, we are the clear number one and we are growing with that market and frankly picking up increasingly picking up share as well. So it’s one of those situations where all the stars line up from a revenue point of view and we are able to take share. We are growing the market and we are the leader in that whole segment.

D. Joseph Gersuk

We have also recently introduced a new RF product to ablate 7-centimeter lesions so we do have some additional product there and there are also some new application area, application work being done in the renal market as well with the HABIB surgical resectioning device. So we’ve seen strength outside of the LC Bead product as well in that business unit.

Jayson T. Bedford - Raymond James & Associates

Okay. Just jumping to gross margin, I’m a little confused by the weakness there, given the top line growth -- you mentioned mix but I look at mix, your highest margin segment is also growing the fastest and seems to be accounting for a bigger piece of the pie so I’m just a little confused as to why the margin is down sequentially year over year despite much higher revenue.

D. Joseph Gersuk

Well, in that, the fastest growing unit, the oncology surgery unit, the LC Bead product is not a product that we own so it has a lower-than-average margin in it, so that contributes to the mix in a negative way and then beyond that, there are other products in different margins and so forth. But it’s a combination of that mix plus the pricing pressure that we talked about in the access unit in particular, where ASPs are under some pressure and on the -- some of the purchased products that we buy, we have had material cost increases so it’s a combination of all of those factors as well as some utilization, under-utilization of the plant that have caused some manufacturing variances, so it’s a number of things in combination that brought it to that level.

Jayson T. Bedford - Raymond James & Associates

Okay. And if I could just squeeze one more in, you raised the low-end of the EPS guidance but you didn’t change your EBITDA guidance and I am just wondering what accounts for that? Is it just lower non-cash cost incorporated there?

D. Joseph Gersuk

Yes, slightly and we were fully comfortable raising the two that we did and not ready to raise any of the others at this time.

Jayson T. Bedford - Raymond James & Associates

Okay. Thank you.

Operator

Your next question comes from the line of Brooks West with Craig-Hallum Capital.

Brooks West - Craig-Hallum Capital

Joe, I just wanted to push a little bit more on the gross margin question. You know, looking at the 60.2% in Q1, you maintain the guidance of 61 to 62, and you gave us a couple of kind of scattershot reasons on how that is going to [inaudible] but can you point to a couple of major points that is going to bring that margin up to that range for the year? And then are we going to see that happen sequentially over the year or are we going to see a significant move here at the end of the next quarter?

D. Joseph Gersuk

We aren’t going to necessarily see it equally sequentially from here on. The improvements are going to be more in the third and the fourth quarter as we complete some of the transitions to building some products here and get above the learning curve. You know, initially when you bring a product, transfer production of a product, there are always some variances in the standard cost system until you get people fully trained on building the product. So the improvements will be more in the second half of the year but as we transition some of the products that we had been buying from other parties to building them ourselves, in every case when we do that we see a significant margin improvement once up to full production efficiency of them, so we will start to see those benefits through the balance of the year and you will notice, of course, in the guidance we didn’t change the gross margin guidance. We still are comfortable that we can get to that minimum level of gross margin overall for the fiscal year despite the 60.2% that we just reported.

Johannes C. Keltjens

And maybe to add to that with two specific examples that we touched upon in our comments here between Joe and myself, so Duramax is a product that was released for [inaudible] sales at the beginning of this fiscal year. We think over time it will become the biggest product we have in the whole dialysis segment, replacing a product that we bought, are buying from a third party that will bring substantial advantage -- again, a simple reason to understand why the back half on that product line at least will be better than the first half. Another one, a little example but you know, that’s how it’s being built, is the benefit in the tail end of this year, we will be building benefit entirely from this location, from this facility, which brings us economic advantages compared to the beginning of the year and that’s why -- you know, there’s a couple of elements like that, there’s a few more that make us feel comfortable saying that the second half will be noticeably better than the beginning of the year and start picking up that curve.

Brooks West - Craig-Hallum Capital

Great, and then maybe if I could switch to the laser ablation business, that feels like a pretty nice turn in that business. And I’m wondering, maybe on a scale of kind of one to 10, I mean, is that anywhere near to where you think the potential of that business is? Or is it really just kind of back on a footing and you’ve got some opportunity ahead of you?

Johannes C. Keltjens

Well, there’s an old saying in my home country, I’ve got to throw in at least one, I guess -- they say spotting one sparrow doesn’t mean it’s spring yet. But we like this quarter a lot and we don’t think it’s a coincidence. You know, as I commented earlier on, we believe the market continues to be very healthy, very attractive. But I think also our sales force and our commercial teams, our marketing teams, our clinical teams, have regained their confidence, got some spring back in their step. I think we are dealing with competition, be it in the low-cost segment with bare fibers or be it at the more premium segment against RF technology with much more confidence and frankly much more success.

The 24% reported growth again includes I think it’s about half-a-month, I think 17 days or something like that, or 12 days, what is it, two, three weeks of favorable comparison because of the Diamed acquisition. So you net it down for that and it’s hard to do -- I think Joe explained this in one of the previous calls, that you can't quite -- when we acquired Diamed and integrated it, we discontinued some internal product lines so you can't really look at pro forma growth. But we feel comfortable saying that at least in this quarter, we have been growing at market rate and maybe even ahead or beyond that. And we think it’s a real number. We think it’s a real reflection of our performance there.

Brooks West - Craig-Hallum Capital

And then just if I could sneak one more in, in that you had talked about a head-to-head study or some kind of post-market study, laser versus RF, is that still in the works?

Johannes C. Keltjens

That is absolutely in the cards, yeah, it’s in the works, yes.

Brooks West - Craig-Hallum Capital

Great. Thank you.

Operator

Your next question comes from the line of Gregory Brash with Sidoti & Company.

Gregory Brash - Sidoti & Company

I believe it was last quarter you launched four new products, just curious how those are progressing -- did they have a meaningful impact on the quarter?

Johannes C. Keltjens

Yeah, well, meaningful to shareholders, meaningful to us. Let me take you through the four -- two of them are in the RF field, RF ablation field, so the XLIE semi-flex and the Starburst with pre-attached cable. The -- as Joe I think was alluding to that, the fact that the RF business has been growing in Q1 I think is partially also to be attributed to that kind of launches. They are not game changers but they are unique products in their own way. They make a difference in a very competitive landscape and help us to drive fair growth in the overall business and innovation is key and you’ve got to continue to do that to keep also a healthy business very healthy.

The third launch was Duramax and we like that product a lot. The more we sell, the better off we are in multiple dimensions. And strategically very, very important but I don’t think you have seen the full potential of that kind of product being reflected in our numbers. But if we would substitute the old product line, which Duramax is replacing with Duramax, I think it would have a significant impact on the business.

And then finally the fourth launch I think we reported on the first quarter was the 2.07 release of NanoKnife. You know, that was for us almost like the go signal, the green flag to go commercial with NanoKnife, very critical for us to incorporate the cardiac synching, addressing any issues we saw in the beginning of the whole clinical pathway there. It’s been working very well for us and probably the revenue number that we reported in the first quarter on NanoKnife doesn’t impress you all that much. You know, I got the privilege of spending a lot of time with physicians, being in the symposium in Lisbon at the [CISA] meeting. There’s a lot of buzz out there and we continue to feel very bullish and very strong about the potential of NanoKnife, yet at the same time also very realistic about what it takes in this day and age to get that commercial potential realized and materialized into real numbers.

So each and every one of them are very important launches, again to RF to keep a very healthy business healthy and going forward in a very competitive landscape, allows us to get out of the starting block with NanoKnife and then Duramax is an important portion not only from a customer point of view and great technology but frankly also from an internal operations strategy.

But I think you have yet to see the full impact of those launches.

Gregory Brash - Sidoti & Company

And you have six or seven more here for the rest of the fiscal year -- is that going to be spread out through the year or we should expect most of those near the end of the year? Just how do I think about that?

Johannes C. Keltjens

Well, I think we said on all of those it’s going to be in the back half of the fiscal year. I don’t want to comment really beyond that but we did allude to Centros as being a significant part of that, you know, some of the new PICC lines will come out, smart port extensions and all that but for competitive reasons in particular, we would like to abstain from getting too granular on launch dates.

Gregory Brash - Sidoti & Company

One more quick one, if I can -- St. Jude was pre-announced this morning, mentioned a little bit of slow-down in the hospital stocking of certain devices, just curious if you are seeing any of that.

Johannes C. Keltjens

Listen, we’ve been scouring the marketplace for any viable excuse but we can't use that one. Not in our product lines -- I’m not saying that St. Jude is not seeing it in a very different line of products. We are not being held back by that.

Listen, we noticed the economic environment, we noticed the fact that hospitals are short on money, we do realize shifting regulatory environments, but so far again we are trying to deal with it and prepare ourselves for whatever may come in the future but it has not been a factor in our business performance in the first quarter, I’d say.

Gregory Brash - Sidoti & Company

Great, thanks. And Joe, would you mind repeating the venous laser sale numbers in the quarter and then I’ll hop back in the queue?

D. Joseph Gersuk

Sure. They were -- for the quarter, the sales were $7.7 million in the first quarter, which was 24% growth on the $6.2 million a year ago.

Gregory Brash - Sidoti & Company

Great. Thank you.

Operator

Your next question comes from the line of Thomas Kouchoukos with Stifel Nicolaus.

Thomas Kouchoukos - Stifel Nicolaus & Co.

I just wanted to follow-up on the EVLT question -- [being on at TCT], you guys had a booth there which might have been one of the first times I’ve seen you at that meeting, you were showing that [next to benefit] and it seemed like they go hand-in-hand in kind of attracting the interventional cardiologist and I’m wondering, are you seeing a synergy between those two products? And then how -- talking to your rep, it seemed like they felt like they were getting some good interest on the venous product which historically really hasn’t been the call point. Are you seeing more activity from interventional cardiologists getting interested in this technology?

Johannes C. Keltjens

I’d say yes, Tom. The synergy is very pragmatic, very operational sales force. I mean, there’s no clinical synergy between the TRT and our EVLT product line but EVLT is -- you know, we see an emerging trend of interventional cardiologists being very interested in the whole segment. Again, as a source of personal income for them as well, very often done in private practice. It’s a great opportunity to see the patients. It’s not a difficult technique for them to learn. Capital investments are very limited so yes, we see that it is a very important segment and that was one of the two reasons for us to indeed show an exhibit the first time at TCT.

The TRT product line actually I think the original work FlowMedica did with their opinion leaders, the early opinion leaders weren’t interventional cardiologists and there remains a lot of interest in that space. I mean, a good chunk -- a large portion of the interventional procedures in this country and in the world are being performed by interventional cardiologists and again that continues to be a very attractive segment for us. So it was somewhat opportunistic. We found a cheap way to exhibit there without diluting and distracting ourselves too much. We held a symposium and a training session on the benefits of TRT, which was well-attended, albeit early in the day and we will evaluate this whole thing and see whether we do it again. But yes, you are absolutely right -- this is a relevant product for the interventional cardiology community.

Thomas Kouchoukos - Stifel Nicolaus & Co.

Okay, great. And then going back to your comments from the last question, looking at -- I mean, you’ve got a whole string of products coming towards the back half of the year, some of them which may already have approval, some may not -- I’m curious with there’s been a lot of noise around the 510K process. I’m assuming that’s probably -- all of these products would fall under that. Are you seeing anything different as you go to make your filings and do you have any concerns that there could be some push-back, given the FDA is under a lot more scrutiny these days?

Johannes C. Keltjens

Well, we always say fear is a bad advisor but we are at the same time also very realistic. We have not seen it. We notice -- I mean, we notice of course what is out there in the public domain -- you know, the statements that have been made through the FDA and on behalf of the FDA and we think there will be change. The good thing is going to be a level playing field -- you know, the change is going to be the same for all of our competitors but frankly for these remaining seven launches in the balance of the year, I don’t think we’ll see a major impact, if any. There’s a fairly straightforward products on [inaudible] 510Ks and again we’d be a little surprised if there is a significant impact in those areas.

Thomas Kouchoukos - Stifel Nicolaus & Co.

Okay, that’s good to hear -- and then one last one; you guys had mentioned the Sotradecol issue. I’m not too concerned about the details of that but I am curious -- you haven’t talked about this product in quite a while and I’m just wondering, it was billed a couple of years back as being a nice growth opportunity. Have you seen that market improve at all or is it more just an incremental add to your overall venous business?

Johannes C. Keltjens

I would say at this point in time the way we look at it, it’s more incremental, rounding out the product line, allowing us to do some bundling where and when that makes sense. But we’ve also noticed the very little appetite from physicians to pay a premium for an on-label product. And it’s just from that point of view, a bit of an up-hill battle. So it’s an attractive product for us, it works for many reasons but there is limited strategic potential, I’d say.

Thomas Kouchoukos - Stifel Nicolaus & Co.

Okay, great. Thank you very much, guys.

Operator

(Operator Instructions) Our next question comes from the line of Chris [Zessin with AMIS Management].

Chris Zessin - AMIS Management

I was wondering if you could talk a little bit about some of the patients that have been treated with the IRE to date -- are those going to be published in a peer journal? Is it up to the individual investigators responsibility? Maybe you can kind of clue us in on the update there.

Johannes C. Keltjens

Great question. The publications of patients treated thus far is entirely in the hands of and driven by the treating physicians. Why? Because they have not been treated under a protocol that is supported or sponsored or owned by the company. I know manuscripts have been submitted to certain journals. At the [CISA] meeting at the symposium, I know the key physicians have a lot of clinical experience gave an update verbally as well but again as I said, manuscripts have been submitted and we do recognize the value of getting publications out there, in particular also in peer review journals.

Once we go to company sponsored studies, in particular the three main studies, we will be more involved in driving those publications and more operationally involved as such.

Anecdotally, as I said, very important in particular from work that Ken Thompson has been doing in Melbourne, the safety profile of the technology is actually remarkable, I’d say quite impressive. A lot of patients take this procedure in an out-patient setting. We are not aware of any significant or serious complications, as such. And he is treating very, very difficult patients, you know, in many cases last resort therapies from that point of view. So increasingly comfortable with the safety profile -- as I mentioned before, the cardiac synching function performs very well and it’s good.

And then the anecdotal clinical outcome in terms of follow-up continues to be very promising and in many cases I would say exciting -- again, that’s a privilege of spending a lot of time with physicians also over the last two months in one-on-one settings and settings where they are very open or very direct and very honest. And as I -- I can only summarize by saying we continue to be very excited about the potential of this technology and are very committed to it.

Chris Zessin - AMIS Management

Okay. Just as a follow-up, everything that I hear is the safety is -- it seems to be there but the efficacy, you know, we’re going on about one year now, I think, since the procedures were first performed down in Australia so I was just wondering if there’s any plan data or if anybody has seen anything as to whether these tumors are actually returning or not over time.

Johannes C. Keltjens

Ken Thompson in Australia, he has submitted the follow-up and the initial results on the follow-up in a manuscript to a journal so hopefully that will come out and I would really hope and I think realistically also before the next conference call.

Some of the very early patient data that was done before we acquired this technology may not become available for publication because of some regulatory challenges around that whole set of patients. And again, since the initial strategy was based on an approach where this was not on the protocols, company protocols, it may be difficult to get all of that published. But the ones that’s available, again Ken Thompson at some point down the road, the prostate work for Dr. [Brazi] in Italy and a few other data, we are pushing hard to get it published and we absolutely understand the value of getting it out in the public domain not only for you guys to assess the risk associated with this kind of investment and the early performance but also in terms of commercial rollout, outside of the U.S. in particular. Very important and pushing hard.

Chris Zessin - AMIS Management

Okay, and last question -- how long should we expect the trials to take place? You talk about several years to getting those indications but do you have a firm timeframe on those and a firm number of patients yet or is that still to be determined?

Johannes C. Keltjens

Well, I’ll take the prostate study as an example. What has been submitted to the FDA is the IDE for a pilot study which includes a limited number of patients with limited follow-up which will just then set the stage for a pivotal study which will give us a much more definitive solution. Obviously internally we’ve got timelines and patient enrolment sizes, et cetera, et cetera that we think we need to prove our point. But I don’t think it would be good form to disclose that in public domain before we have agreed on that with the FDA. Now it’s not rocket science either, you know, the statistics we use are the same that the FDA uses. So if you [depart] from the same assumptions, you will end at the same answer. But I would say in particular in this environment, we want to do this in good form and good [inaudible].

Chris Zessin - AMIS Management

Appreciate it.

Operator

Thank you. And there are no further questions in the queue. I’ll turn it back over to management for any closing comments.

D. Joseph Gersuk

Just before we do, I want to respond to an earlier question with regard to the number of business days, and in the first quarter this year, we had 65 business days and a year ago, we had 64, so we had one additional business day in the current period which would be about 2% additional compared to the prior year.

Johannes C. Keltjens

Okay, thanks, Joe. Again, assuming there are no more questions, then I want to thank you but I also want to thank every one of you for your questions and your interest in AngioDynamics. We will continue to provide you updates on our progress as developments merit this and I do look forward to talking with you again during our second quarter fiscal 2010 conference call in very early January. Thank you, all and have a great evening. Talk to you soon.

Operator

Thank you, sir. Ladies and gentlemen, that does conclude today’s AngioDynamics first quarter earnings conference call. Ladies and gentlemen, if you would like to listen to a replay of today’s call, please dial 303-590-3030 or 1-800-406-7325. Enter the pass code 4159408. Once again, those numbers are 303-590-3030 or 1-800-406-7325, enter the pass code 4159408. Thank you for your participation and for using ACT conferencing. You may now disconnect.

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Source: AngioDynamics F1Q10 (Qtr End 9/30/09) Earnings Call Transcript
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